After last autumn’s budget, I asked “where is Rishi Sunak’s plan for growing the economy?”. In a lecture given on the day Russia invaded Ukraine, and two years into his chancellorship, he delivered much of the answer.
The annual Mais lecture is often an opportunity for current or future chancellors to set out their economic views. Sunak’s was worth the wait, even if many of his positions are exactly those you might expect of a UK chancellor. No one should be surprised by his support for sound money, rule of law and free trade – although it draws attention to how these values are under some strain in the current policy environment. His refusal to lend support to the cause of unfunded tax cuts was noteworthy given the popularity of that idea among Conservative backbenchers unhappy with the policy of the government.
Unlike, say, Nigel Lawson’s much-lauded 1984 lecture, Sunak’s speech does not cement a stark new direction for government policy. His diagnosis of the UK’s productivity ills reflected themes seen in last year’s Plan for Growth, which in turn reflects many orthodox views typical of the last 50 years. In this orthodoxy, what matters for growth are Capital, People and Ideas. Relabel them Investment, Labour and “total factor productivity”, and you have the basic building blocks of many growth models built after WWII.
Instead, what distinguishes this speech is a blunt refusal to be complacent about growth, and analytical clarity about why recent performance is not good enough. More than other recent chancellors, Sunak does not think improved growth will just turn up if we wait long enough. Something needs to change to break us out of what he called the “great slowing down”. This is a response to the call from the CBI to “go for growth”, as well as the more pointed attacks from Labour’s new shadow Chancellor, Rachel Reeves. 
Having set out where he thinks we must concentrate – productive capital, skilled people and new innovations – Sunak distinguished where within each category he thought the real problems lie. So, for example, on Britain’s poor rate of capital accumulation, the problem lies with business investment, not the government’s capital spending (which is high by historic standards). And business investment cannot be blamed on having the wrong sectoral mix, but perhaps on tax incentives for investment. With skills, the problem lies neither with schools nor our world-class universities, but the adult skills system. On innovation, the Chancellor took the side of the optimists over those who see nothing in modern technology to match the impact of the 20th century’s breakthrough inventions.
All in all, it was like a talk delivered by a bright new executive brought in to rescue a failing company, breaking the problem down into more manageable chunks to be targeted for special treatment.
The data supports his chosen focus – to a degree. Weak business investment is indeed a longstanding problem. ONS analysis suggests that insufficient “capital deepening” is responsible for a quarter of the 26-percentage point gap in productivity that has opened up since 2008.  The ever-lower corporate tax rate achieved between 2010 and 16 cost a great deal without appearing to work, as Sunak acknowledged. This suggests that any improvements to incentives may arise through better capital allowances – maybe, something like the CBI’s proposal of a Permanent Investment Deduction. 
Weak skills, while less directly responsible for the sudden slowdown in productivity growth, are key to any explanation for geographical imbalances in earnings and productivity . The chancellor is right to draw attention to relatively neglected adult skills, with the bold promise to make education “a central experience through your whole life”. However, solutions may not match the promise. A plan to tidy up the thousands of qualifications and review the Apprenticeship Levy will be welcomed by business, but does not signal a step-change.
The chancellor ascribes the rest of the UK’s underperformance to the catch-all term, “multi-factor productivity”; effectively, it captures how cleverly the economy uses its endowments of capital and labour. Again, solutions are not obvious, although the government’s large increase in R&D spending and efforts to bring the private sector along are the right way to start.
The speech was as interesting in what it downplayed or rejected as it advocated. There was little reflection on how this productivity problem really mushroomed since the financial crisis of 2008-9. Slow-moving factors like skills, investment and technology do not suddenly go into reverse – yet that is what charts of productivity growth imply. The opposition Labour party is less reticent on this point, suggesting that a ‘lost decade’ of weak demand growth (abetted by insufficient government support) was the culprit. With the UK now close to its supply limits, the chancellor may not think this is relevant debate. But if the Ukraine crisis triggers another serious slowdown, government fiscal support for the economy will return as a hot topic.
Nor does the chancellor dwell on the UK’s weak trade performance since the Brexit referendum, or on the damage likely to result from reduced access to the huge market on our doorstep. This is understandable in political terms, but quite an absence in such a pro-free-market speech. Any plan to achieve higher growth surely needs to tackle the question of UK’s underperforming exports, too.
The chancellor appears to reject active industrial strategy, or what he called the idea that “government should decide which sectors will be important in the future”. This marks a dividing line not only with the opposition, but also elements of his own government. The Innovation Strategy from BEIS contains phrases like “key sectors likely to transform our world in future” and talks about identifying the key technology families. The Levelling Up White Paper is also more interventionist in tone, appearing far more bullish about government’s ability to kickstart innovation and growth around the country, for example.
Finally, there was little discussion of the quality of the UK’s economic institutions as a cause of weak productivity – such as the competition system, utilities regulation, labour market rules or how the financial system works. Given that Brexit was meant to represent an opportunity to govern Britain differently, this was a surprise. Does the chancellor think there are few deeper structural problems in the UK that stronger skills, more R&D and better tax incentives for investment might not fix? More charitably, it may reflect the difficulty of covering too much in a single speech.
In conclusion, Rishi Sunak is pushing himself towards the heart of the government’s efforts to address the problem of flagging long term growth. This is welcome – the consequences if the country must live with just 1% growth as the norm are very disquieting. By most accounts, Sunak is academically omnivorous, open-minded and cares about what actually works, not just what sounds good. This showed, and on the strength of this speech, he means to bring Treasury analytical rigour to the task, allied with an attention to the details of growth policy that you do not often see in a chancellor.
That is the good news. Against this, critics will see here a very “Treasury view” account of the UK’s struggles – an account that has been dominant throughout the years of productivity disappointment. Despite his acknowledgement that focussing on the foundations “will not accelerate growth in and of itself”, what he set out so clearly is still very much a high-level foundational philosophy (you do not get much more high level than People, Capital and Ideas). But the crises and challenges of the past few years will demand a much more muscular, directive approach. Sunak’s non-interventionism risks becoming too distant from a new orthodoxy that sees a clear need for government direction in many aspects of the economy: the shift to net zero, the push for more resilient supply chains, and more focus on national security to name three. A series of regulatory reviews is not enough.
The Treasury mind resists this, pointing out that the evidence for all this new interventionism being growth-enhancing is spotty and selective at best. That is fair; our work at the Institute for Government confirms that massaging Britain’s sectoral shape would do little for growth. But intervention and structural change for the UK are coming, whether the Treasury wills it or not. Even before the eruption of the Ukraine crisis, governments in the USA and the EU were committing hundreds of billions into programmes intended to transform their economies, not just shore up their foundations. No matter how excellent this foundational analysis, what the government needs from its preeminent economic department are some positive ideas about how to go about it, not just cultured resistance.
- https://www.cbi.org.uk/articles/go-for-growth-a-challenge-to-the-government/ “Go for Growth: a challenge to the government; https://labour.org.uk/press/rachel-reevess-speech-setting-out-labours-plan-for-a-stronger-economy/ “Rachel Reeves’s speech setting out Labour’s Plan for a Stronger Economy”
- https://www.cbi.org.uk/media-centre/articles/a-super-deduction-successor-could-trigger-40bn-a-year-boost-for-uk-business-investm… “A super deduction successor could trigger £40bn-a-year boost for UK business investment” – 22 Feb 2022
- Made clearer in this blog by Professor Henry Overman than in the 200+ mentions of skills in the Levelling Up White Paper https://blogs.lse.ac.uk/politicsandpolicy/levelling-up-the-governments-plans-arent-enough-to-promote-economic-growth-and-tackle-…