Britain’s economy is at a turning point. Growth is slowing, with the growing risk of recession, inflation is at its highest level in 40 years and is expected to hit 11% this fall as the country experiences an earlier and more painful economic storm than most.
That it was considered big news for the Governor of the Bank of England to utter these uncomfortable truths this week was perhaps surprising given the steady drip of economic pain that has sent confidence consumers at its lowest level since the 1970s.
The important question is how we react. And therein lies a problem. For the Government, it is not so much a question of where Britain is turning, but of what can be done to save Boris Johnson’s faltering leadership.
As much of the UK grapples with soaring costs of living, rival Tory factions are pushing their own agenda. A long list of ideas has been floated, often with conflicting demands: tax cuts must be prioritized, but funds for more military spending are demanded; the public sector must be reduced, despite promises of upgrading, as well as more teachers, nurses and police. Last fall Johnson wanted a high-wage economy, now he’s warning of bigger wage increases.
All of this suggests the absence of a coherent economic plan, which is bad enough for government in normal times but in the midst of the biggest hit to living standards since the 1950s is a dangerous abjection of responsibility.
This month, Johnson and Chancellor Rishi Sunak are expected to revive their economic policy in a joint speech. After announcing £37billion in financial support for households this year, the focus is likely to be on the long-term plan to tackle the cost of living squeeze.
High on the list should be plans to insulate homes, invest in reliable green energy and revive the UK economy through productivity gains, the latter of which is vital to improving living standards in the long term and could help the countries to escape ever higher rates. of inflation.
The problem is that under the Conservatives there has been little evidence of success in improving productivity over the past decade.
All gains have lagged other leading economies, exacerbating the biggest regional divisions in Europe.
Maintaining UK productivity growth before the financial crash of 2008 would have generated an additional £5,000 per worker each year, according to the National Institute for Economic and Social Research. Meanwhile, London has pulled ahead of the rest of the country, indicating deep structural problems, with productivity 50% above the national average, up from 40% in 2002, according to the Resolution Foundation.
All of this speaks to a decade of wasted austerity that has made our current situation more painful to the stomach and harder to escape.
Well-targeted investments are key to escaping the inflation trap and boosting productivity. The good news is Sunak acknowledges this, using his But lecture at London’s Bayes Business School to explain his thinking about investing in “capital, people and ideas,” three things economists agree would help. The origin of this investment and its exact targeting remain unclear.
Sunak’s preference is to use the power of the private sector – offering tax breaks to companies to invest in productivity-boosting projects. It is set to announce plans to build on its £29billion ‘super-deduction’ scheme launched last year, which gives businesses 130% relief on their tax bills for qualifying investments until April 2023.
The Treasury completed a consultation last week which looked at ways to replace the scheme, including the option of handing over all investments. This would allow businesses to deduct the full cost of qualifying expenditure from their tax bill and cost the Treasury £11billion in lost revenue.
Sunak is believed to prefer to wait for the fall budget to outline his plan, but he is likely to come under pressure to announce something in the joint speech with Johnson. Business leaders know this and do a lot of lobbying.
Allowing such tax relief should be carefully monitored to guard against abuse of the system and the likelihood of the government supporting questionable corporate priorities. However, after a decade of no increase in business investment, changes in mindset are needed.
Unlike his predecessors, Sunak believes that drastically reducing the overall corporate tax rate is not enough to encourage investment. Despite the corporate tax cut from 28% in 2010 to 19% today, business investment has barely budged and the Treasury has been deprived of billions in revenue.
Under Sunak, the plan is to raise corporation tax to 25% next spring while offering investment relief to businesses, in a carrot-and-stick approach to boost investment.
Holding this position firmly could be difficult, as parts of the Conservative Party are pushing for an eye-catching corporate tax cut in an effort to restore favor among business leaders, while preventing the overall tax burden from reaching the highest levels since Clement Attlee was prime minister.
However, companies understand the Chancellor’s approach and are instead seeking a generous set of investment relief.
Providing an incentive to invest is only part of the picture. Despite the presence of the super-deduction for the past year, concerns over the pandemic, Brexit, soaring costs, supply chain disruptions and chronic staff shortages have weighed heavily on plans. business investment.
Official figures show that business investment fell again in the first quarter of this year, while the overall level remains 10% below pre-pandemic levels.
To put serious firepower behind a plan to increase productivity, the government must show that the state is also ready to invest. A cohesive economic plan including support for businesses and households would help Britain escape our inflation-ridden, low-growth economic malaise.