Invest, Devolve, Liberate

To ensure inclusive growth in the wake of Britain’s momentous decision to leave the European Union we need a total economic reset, argues Claudia Wood.

The impact of Brexit on the economy we’re was not the implosion some were expecting. Predictions of an immediate recession haven’t come to pass, initial market instability and the dip in consumer spending have steadied out. The Chancellor’s recent economic update and growth forecasts were all quite reassuring: while not a boom, then certainly not an economic meltdown. What, then, does this mean for the Government? Is it simply a case of keeping the economic ship steady as it navigates through our withdrawal from the EU?
The May Government’s first Autumn Statement made it clear that they are under no illusions that a “keep calm and carry on” approach to economic policy will cut it in the medium to longer term. Infrastructural investment, reducing the deficit and stimulating productivity were all major themes: confirming that these issues had all been dragging the UK economy down long before the referendum. They need to be tackled urgently if the UK is to secure itself against the instabilities, but more importantly make the most of the opportunities, that Brexit could present.

With this in mind, Demos recently invited economists and business-people in London, Liverpool and Birmingham to discuss five long term, economic problems we identified: a persistent budget deficit, low investment, sectoral and regional imbalances, low productivity and a large current account deficit. Crucially, we wanted the assembled experts to consider ways to tackle these not with Brexit as an additional weight to bear, but as a potential opportunity for an economic policy reset – a chance to fundamentally rethink how our labour market functions, how our trade and industrial strategy reinforces geographically balanced growth, and so on. The groups made several recommendations – some, encouragingly, were front and centre of the Autumn Statement. Some were partially recognised, while others had but a passing mention.

Infrastructure

The Autumn Statement’s focus on investment infrastructure is a very welcome development. Many of the experts Demos consulted spoke of the need to raise public spending on infrastructure towards the OECD target of 3.5% of GDP, and that this should be devoted to transport, housing, energy, and technological assets such as high-speed broadband, particularly outside the South East of England. Such investment would help offset any short-term demand shock caused by the triggering of Article 50, as well as remedy the fact that private business investment remains too low and in the atmosphere of uncertainty created by Brexit is likely to remain low for a prolonged time. Public investment is needed partly to replace it, but also to stimulate private sector spending. Since manufacturing is a capital intensive industry, and makes extensive use of the transport system for the movement of inputs and final products, it is also likely that such investment will benefit that sector disproportionately and help rebalance the economy.

Productivity

The UK’s low productivity was a universal worry among those we consulted – R&D and technological innovation are, as the Chancellor confirmed, vital to improving this. But our seminars painted a more nuanced picture, which the Government’s productivity strategy may not yet have grasped: productivity hinges on technology transfer, ensuring the productivity gains leading firms create through innovation are spread to other firms in the market. The OECD found that recent productivity slowdowns across most Western economies are not because successful firms are innovating less, but rather because those innovations are not spreading quickly enough to ‘laggard firms’ in the same industry. This may be because new technologies are enabling a firm to corner a market, or because laggard firms cannot exploit the new technologies due to regulatory barriers and insider knowledge. Increased product market competition and a reduction in market power of leading firms in key sectors may, therefore, be a vital means for increasing productivity. Accordingly, the government should examine whether and to what extent competition policy could be reformed – making use of the new powers Brexit will give us in this area – in key markets to better support technology transfer.

Skills and industrial strategy

There are also some issues and solutions raised by the economists and business experts Demos engaged with which the government has yet to tackle with serious intent. Investment in skills was only given a passing mention in the Autumn Statement, an awkward omission for a strategy focused on productivity. Dwindling adult skills budgets remain a problem, in spite of the boost for apprenticeships. Post Brexit, industry access to workers from overseas could be limited, making Further Education is a critical sector -– and yet England is one the few countries where are young people have worse skills than those about to retire. Experts felt that skills development ought to be placed squarely with the Department for Business, Energy and Industrial Strategy, to coordinate FE investment with sectoral skills shortages on a region-by-region basis.

The decision the UK has taken to leave the EU is a watershed moment for British economic policy, creating both opportunities and risks in the months and years to come. As we reset our relationship with our European partners, now is the time to reset our economic policy. The government could do well by being guided by three principles: invest (public investment in infrastructure and skills, particularly outside London), devolve (more rapid devolution of powers to city-regions with new economic plans for city-regions and stronger links with universities), and liberate (reform competition policy and business rates).