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The growth symposium: “Arbitrary fiscal rules aren’t working”

Jim O'Neill, Mariana Mazzucato and Sebastian Payne on the policy environment we need to foster sustained growth.

By Spotlight

Both main parties say they want to see much faster growth rates for the UK economy. Higher growth, in their telling, leads to higher government revenues, better services, higher living standards and better options for a Treasury whose spending power is now highly constrained. But the UK’s growth record since the 2008 financial crisis has been weak, productivity and real wages have remained stagnant, and there are divergent accounts of the policies necessary to see us out of our current malaise. Spotlight approached two esteemed economists, Mariana Mazzucato and Jim O’Neill, as well as the director of a leading think tank, Sebastian Payne, to canvass their views on the policies needed for growth. Their responses are recorded below.

“Arbitrary fiscal rules aren’t working”

Jim O’Neill, Life peer, former minister and ex-Goldman Sachs economist

The UK’s central growth problem is weak productivity, and with it, probably persistently weak investment by both the private sector and the government.

In my view, we need to get away from standard thinking about how to stimulate investment to try and change this, because most political figures and most conventional economists are stuck in the past 40 years of mainstream thinking that hasn’t really helped. In particular, the standard textbook theory that boosting investment comes from strong profits, low interest rates and favourable taxes hasn’t worked. Yet it seems to still dominate.

There are many unknowns as to why it hasn’t worked, but it is to some extent because the quoted corporate sector became obsessed with free cash flow, “rewarding” leaders and shareholders, and the rise of the share buyback.

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We need to change the risk-reward ratio for business leaders, and allow for really strong rewards for genuine investment and profitable returns, but stop or discourage savvy balance-sheet management. As far as the government and public sector is concerned, I am a proponent of giving the Office for Budget Responsibility and the National Infrastructure Commission a greater role – akin to the independent members of the Bank of England’s Monetary Policy Committee – that would allow for much more ambitious state investment in areas with clear, positive, lasting multipliers. You might call it a new, modern, more sophisticated “golden rule”. We certainly need to get rid of this nonsensical game of some arbitrary fiscal debt-to-GDP rule for a few years into the future that achieves nothing, without being actually met or contributing to productivity enhancing GDP growth. There is an irony: our demographics have been so much stronger than most other G7 nations, yet because of limited ways of thinking, our investment and productivity has been so weak. We need to break free from this, in a transparent, credible way that financial markets respect.

“We need to be sustainable, inclusive and innovative”

Mariana Mazzucato, professor of economics at UCL and author of “Mission Economy and the Entrepreneurial State”

On the UK’s growth path, or lack thereof, there are three key issues: first, we had consumption-led growth, led by private debt, so the ratio of private debt to GDP is again dangerously high. Second, growth relies heavily on ecologically unsustainable activities. And third, growth in the UK has not been shared, with the richest 1 per cent now wealthier than the poorest 70 per cent of the population combined. We need a reset to innovation-led, sustainable and inclusive growth. Not just any growth.

We are lagging behind most of the G7. Brexit has reduced the market size for businesses, reducing overall investment, and austerity means lack of finance for R&D, training and education – all key drivers of productivity. The government has reacted by making 2.5 per cent growth its target. Similarly, Keir Starmer vowed to secure the highest sustained growth in the G7 as one of his missions. But this logic is flawed. While an important policy priority, growth is not the goal or mission, it’s an outcome. It only arises if both the public and private decide to invest, and the best way to do so is with ambitious goals in areas like climate or health. Before committing to particular targets, the government should focus on deliberating its direction. What good does high growth do if it builds on poor working conditions or an expanding fossil fuel industry?

The country needs to revive an entrepreneurial state with an industrial strategy. One-off, ad-hoc deals won’t cut it. They must be part of a broader plan to align investments with commitments to decarbonise transport and supply chains. Done right, mission-led strategies hold the potential to maximise long-term public benefit – allowing innovation-led growth to also become inclusive growth. Ultimately, refocusing and designing capable public organisations around ambitious missions – instead of obsessing over narrow growth targets and outsourcing capacity – will be crucial for getting the rate and direction of growth to meet what is needed in the 21st century. 

Unlocking regional power is key

Sebastian Payne, director of the Onward think tank and former “Financial Times” Whitehall editor

It is blindingly obvious, but it needs repeating: there are no quick fixes to faster growth. Sugar-rush tax cuts have been tried and failed. So too would trying to borrow our way back to growth. What is needed instead is a longer-term plan, with sustained political delivery, that tackles a combination of our supply-side bottlenecks while addressing the UK’s over-centralisation. First, there needs to be a relentless focus on unblocking sectors of the economy. We need to build more homes – no one can argue that the property sector is presently in a healthy condition. But this can only be done if voters are taken on the journey, which means building in a sustainable way, with the right infrastructure, and where local people want them. None of this is easy, but low housebuilding lies at the heart of low growth.

We need to seriously think about inactivity in the labour market. With 5.3 million people economically inactive, getting even a small chunk back into work can ease inflation and reduce net migration. Looking at the benefits system is key: all of the laudable reforms achieved by Universal Credit have been undone by the pandemic. We need to focus on creaking infrastructure and decide what can be built most efficiently. We need to look at boosting skills – particularly in technical education, which has eluded governments of all stripes since the Second World War.

The second component to better growth is a rejuvenated levelling-up agenda. It should be about providing equality of opportunity in every corner of our island and mustn’t be seen as a historic bugbear – as some in Whitehall sadly do. The UK needs more directly elected mayors, with more powers on tax and planning to encourage greater private-sector investment. Boosting growth must begin with giving people a greater say in their own destiny – real devolution instead of top-down management from Whitehall. None of these prescriptions are glamorous or bombastic, but they provide a sustainable way to a better economy.

[See also: The £92,762 gender wealth gap that is hurting the economy]

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