B.Ritain’s economy is at a turning point. Growth is slowing, with the possibility of a recession rising, inflation is at the highest level in 40 years and is expected to reach 11% this fall, as the country suffers an economic storm earlier and more painful than the most other nations.
That it was considered big news that the Governor of the Bank of England was explaining these uncomfortable household truths this week was perhaps surprising given the regular trickle of economic pain that has brought confidence among consumers to its lowest point since the 1970s.
However, the important question is how we react. And therein lies a problem. For the government, it is not so much where Britain will go, but what can be done to save Boris Johnson’s shaky leadership.
As much of the UK struggles with rising costs of living, rival Conservative factions are pushing their own agenda. A growing list of ideas has been launched, often with conflicting demands: Priority should be given to tax cuts, but calls for more military spending; the public sector is going to be cut, despite the promises of equalization, as well as more teachers, nurses and police officers. Last fall, Johnson wanted a high-wage economy, now he warns against further wage increases.
All of this suggests the lack of a coherent economic plan, which is bad enough for a government in normal times, but in the midst of the biggest blow to living standards since the 1950s it is a dangerous abdication of responsibility.
This month, Johnson and Foreign Minister Rishi Sunak are expected to relaunch their economic policy in a joint speech. After announcing £37bn of financial support for households this year, the focus is likely to be on the long-term plan to tackle cost of living reductions.
High on the list should be plans to insulate homes, invest in reliable green energy and get the British economy moving again through productivity gains, the latter of which is vital for boosting living standards to long term and could help the country escape persistently higher rates. of inflation
The problem is that under the conservatives there has been scant evidence of success in improving productivity over the past decade.
Any gains have lagged behind other leading economies, exacerbating Europe’s biggest regional divisions.
Maintaining Britain’s productivity growth from before the 2008 financial crash would have generated an extra £5,000 per worker each year, according to the National Institute for Economic Social Research. Meanwhile, London has moved ahead of the rest of the country, indicating deep structural problems, with productivity 50% higher than the national average, compared to 40% in 2002, according to the Resolution Foundation.
All of this is testimony to a wasted decade of austerity that has made our situation more painful to the stomach and more difficult to escape.
Well-targeted investment is key to escaping the inflation trap and increasing productivity. The good news is that Sunak acknowledges this, using his Mais lecture at London’s Bayes Business School to explain his thinking on investing in “capital, people and ideas” – three things economists agree would help. It is unclear where this investment is coming from and how exactly it is being directed.
Sunak’s preference is to use the power of the private sector, offering tax breaks to companies to invest in projects that increase productivity. It is expected to announce plans to take advantage of its £29bn “super deduction” scheme launched last year, which gives businesses 130% relief on their tax bills for qualified investments until April 2023.
The Treasury completed a consultation last week that looked at ways to replace the scheme, including the full expense option for investments. This would allow businesses to deduct the full cost of qualified expenses from their tax bill and cost the treasury £11bn in lost revenue.
Sunak is believed to prefer to wait until the fall budget to lay out his plan, but he will likely feel pressured to announce something in the joint speech with Johnson. Business leaders know this and are putting pressure on it.
Allowing such a tax cut would have to be carefully watched to guard against abuses of the system and the likelihood of the government supporting questionable corporate priorities. However, after a decade without success in increasing business investment, changes in thinking are required.
Unlike his predecessors, Sunak believes that simply slashing the general corporate tax rate to encourage investment doesn’t work. Even though corporate tax was 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 corporate tax to 25% next spring while offering investment relief to companies, in a carrot-and-stick approach to boost investment.
Holding firm to this position could be a challenge, as parts of the Tory party push for a striking cut in corporate tax in a bid to restore favor with business leaders, while preventing the overall tax burden from reaching levels highest since Clement Attlee became Prime Minister.
However, companies understand the chancellor’s approach and are seeking a generous investment relief package instead.
Providing an incentive to invest is only part of the picture. Despite the presence of last year’s super deduction, concerns about the pandemic, Brexit, skyrocketing costs, supply chain disruption and chronic staffing shortages have weighed heavily on companies’ investment plans. .
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 ready to invest, too. A coherent economic plan that includes support for businesses and households would help Britain escape our low-growth, inflation-ravaged economic malaise.