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The Research Brief: We need investment-led recovery to solve the productivity puzzle

Your weekly dose of policy thinking.

By Spotlight

Welcome to the Research Brief, where Spotlight, the New Statesman’s policy section, brings you the pick of recent publications from the government, and the think tank, charity and NGO world. See more editions of the Research Brief here.

What are we talking about this week? Ending Stagnation: A New Economic Strategy for Britain, a paper by the Resolution Foundation, Centre for Economic Performance and the Nuffield Foundation.

Who? The paper is the final report of the “Economy 2030 Inquiry”, a collaboration between the Resolution Foundation and the Centre for Economic Performance at the London School of Economics, funded by the Nuffield Foundation.

The Resolution Foundation is an independent but left-leaning think tank led by economics buff Torsten Bell, focused on improving the living standards for those on low to middle incomes. The Centre for Economic Performance carries out policy-focused research on economic growth and effective ways to create a fair and sustainable society.

What’s the gist? Based on rigorous analysis, including seventy reports and extensive conversations with citizens and policymakers, Ending Stagnation is a rather damning indictment of the state of the British economy.

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It suggests that British workers may be missing out on as much as £10,700 a year (yes, really) following over a decade of weak economic growth, stagnating productivity and high inequality.

Ouch. So what’s the solution? The authors urge policymakers to rethink the UK’s economic strategy to reverse the living standards gap and years of low growth and high inequality. Focusing on overcoming decades of under-investment, the report argues that both private and public sectors must mobilise behind achievable visions of the future, and unlock the UK’s strength as a services superpower. It says we should be investing in transport in major cities to improve their currently dismal productivity levels, prioritising good quality jobs, and calling for a fair distribution of rewards and sacrifices through tax and benefit systems, including by uprating benefits in line with wages. Acknowledging the challenges of Brexit and the net-zero transition, the report emphasises steering economic change to support widely shared prosperity.

While acknowledging that that is easier said than done, the report asserts that ending stagnation is essential for shared prosperity, urging Britain to adopt a new economic strategy beyond the twin poles of “boosterism and fatalism”.

Key recommendations include: increasing public investment to 3 per cent of GDP, making cities the centres for high-value service industries, increasing pay, and reforming the tax system so that the burden does not fall disproportionately on workers, with new and higher taxes on unearned income.

Is it case of spending more, or spending wiser? Currently, you’re taxed more if you get paid £40,000 by your employer than you would be if you earned £40,000 from rents, dividends or capital gains. The Resolution Foundation wants a tax system in which this kind of wealth and earnings is taxed more and workers’ incomes are taxed less. But this is something both parties are nervous of pursuing. No one wants to look like they are taxing ambition, and Labour in particular has worked hard to shed its image as high-taxing spendthrifts.

Another eye-catching finding in the report is that public sector investment in the UK is not only significantly lower than the average industrialised country in the OECD but is also the second-most volatile among advanced economies over the past 60 years. This volatility, the report authors say, hinders forward planning and increases the costs of executing investments. Even when increases are planned, a substantial portion of the allocated budget often goes unspent. The tendency to cut investment in response to economic pressures, as seen after the September 2022 mini-budget, reflects a short-term focus.

The report therefore advocates reform of fiscal rules to ensure sustained and consistent public investment, aiming to eliminate feast-and-famine cycles. The emphasis should shift from quantity to the quality of public investment, requiring the Treasury to focus on improving investment effectiveness.

So what do politicians think? The report is damning for the Conservatives, picking apart the last fifteen years of relative stagnation since the financial crisis – the majority of which have been under Tory rule.

For Labour, the report presents an opportunity. Speaking at the Resolution Foundation’s launch event today, Keir Starmer supported the premise of the report. He said that economic growth was now an “obsession” for Labour and promised that a Labour government would focus on “stronger growth”, “rising incomes” and “creating the wealth we need to fund our public services”.

However, the Labour leader has been very clear that his party would not “turn on the spending taps”, explaining that the Conservatives have “salted the earth” and limited much of what Labour would be able to do in government. Reflecting on his time as director of public prosecutions, Starmer explained that Labour would focus on reform over spending: “I ran a public service in the days of austerity. I know how hard it can be. But I also know you can always find ways to improve delivery. Change your practice, your behaviour, reform your approach.”

This is where Starmer and the report diverge. The report insists that higher (and smarter) taxes are needed to “raise investment, rescue public services and repair public finances”. But Labour has thus far ruled out tax rises. As a result, many remain concerned that Starmer’s solutions to the growth and productivity puzzle – courting investment from business, creating a competitive tax regime, reforming planning laws – may not be enough to restore a battered public realm.

In a sentence? All inequality and no growth makes the UK an unproductive boy.

Read the full report from the Resolution Foundation here.

If you have a report, briefing paper or a piece of research that you’d like featured in the Research Brief, get in touch at spotlight@newstatesman.co.uk.

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Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team.
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