We’ve had three weeks of political and market turmoil. But with a new government now in place and a government department dedicated to Industrial Strategy might we be on our way to three years of some policy certainty?
The market maelstrom following the referendum was initially matched by almost hourly change of personnel in the Westminster village. Some of this has had tangible impacts on businesses – swings in Sterling affecting pricing and costs, stock market valuations, the uncertainty about activity in the real economy. And the big ‘what happens now?’ question added another dimension to the unpredictability of business planning in the UK.
In some respects both have calmed down, somewhat. We’ve avoided a summer of leadership campaigning (the Conservatives) and have a new cabinet together with some potentially significant machinery of government changes.
The creation of a new International Trade Department puts a renewed emphasis on boosting the UK’s trade performance and will play a leading role in the important task of securing new trade agreements with the rest of the world. And the new Business, Energy and Industrial Strategy department (not the most shorthand friendly name, BEIS/BENIS…. or just plain BIS?), will hopefully bring together the policy levers that can really drive UK competitiveness.
Obviously, there’s still loads of questions around Brexit negotiations, what are the new domestic policy priorities, what will Industrial Strategy mean in practice, how will or should the new government respond to a sharp slowdown in the UK economy (or worse). We’ll be trying to answer some of these as we engage with the new government over the coming months.
Setting the ambition
For now, though, I wanted to set out a few thoughts on what good might look like. Yes, at the end of this parliament we’ll (probably) be able to judge whether we secured a mutually beneficial deal with European partners, we can look at metrics such as labour market performance, living standards and economic growth to assess how well we’ve weathered any Brexit storm. But if we were being a bit more ambitious about the economic outlook over the next few years, what else might we be shooting for?
Yet we have long had a problem with productivity in Britain. So I want to make its improvement an important objective for the Treasury. Theresa May, 11th July
Starting with something modest – productivity growth. We haven’t had much of it recently and pre-referendum this was a source of some angst amongst policy makers. It still should be. The recent tool launched by the Productivity Leadership Group is a great example of business taking a lead in driving up performance. But government has a role too, lowering barriers for companies trying to develop talent or make the necessary investments to improve efficiency, for example. Success might look something like the chart below; instead of carrying on our current path of virtually no improvement in productivity, we get back on our pre-recession (2008/9) growth path. Obviously closing the gap that has opened up since then, will require growth to be Herculean in the next few years.
A better research and development policy that helps firms to make the right investment decisions. Theresa May, 11th July
Edging up the ambition curve slightly and linked to productivity performance is the UK’s record on innovation. The European Innovation Union Scoreboard classifies the UK as an innovation follower, behind leaders such as Germany, Sweden and Denmark. Government, business and the research base all need to keep their foot on the investment gas. If we want to join the leader ranks, we might start by aiming for Business R&D (BERD) as a % of GDP catching up with the OECD average of 1.6% - we’re currently at 1.1%.
Our best estimate suggests this would require sustained increases in spending of around 9% per annum. This is not unheard of, businesses have achieved this rate of growth in three out of the past ten years.
Thirdly, and perhaps the most ambitious and uncertain is boosting exports and net trade. This is pretty imperative – it’s been some time since net trade made a positive contribution to growth and turning this around would certainly aid the process of rebalancing the UK economy.
Remember when we had an export target? £1 trillion of exports by 2020. We always saw value in having a target, in that it could galvanise the appropriate policy response to get more companies exporting for the first time and get more exporters to venture into new markets. But, it’s not happening. If we managed growth of around half of what would be required to hit the trillion that would still be a marked improvement on our current central forecasts over the next few years.
Uncertainty doesn't have to be the new normal
The last few weeks haven’t evolved as most had expected and we can expect to be living with a fair bit more economic and policy uncertainty over the next couple of years. Having a few clear goals in sight will help to frame some of these policy trade-offs and even provide something of a signal to businesses (here and elsewhere) about what the UK will be striving for in the next few years.