Glasgow Labour's Rachel Reeves delivered the 36th Mais Lecture on Tuesday. This is a very high-profile engagement for the Shadow Chancellor of the Exchequer. Top politicians, central bankers and economists have given this lecture to the City of London over the years from Valery Giscard D’Estaing to Mervyn King and Friedrich Hayek.
Ms Reeves’ lecture set out very clearly how, as a Chancellor-in-waiting, she is planning to strengthen the role of some of the key UK economic institutions, such as the Treasury and the Office for Budget Responsibility (OBR).
She also confirmed an intent to favour public investment in Labour’s future fiscal rules, and to restore the Bank of England’s responsibility to focus on the impact of climate change on financial markets.
The UK is suffering from an economic malaise which dates back to the great financial crisis in 2007-08. Between 1990-2007, the UK had the third fastest growth in the G7 intergovernmental political and economic forum, which consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
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As shown by the independent Scottish Fiscal Commission, Scotland's productivity is around 6% lower than that of the UK on aggregate and its recent growth has been similarly lacklustre. Re-booting UK economic growth is absolutely essential if we are to deal with the pressure on public services without making the country uncompetitive in terms of the overall tax burden.
This is easier said than done.
The work of the Productivity Institute, which the University of Glasgow contributes to, highlights that the UK’s slow growth has multiple causes, from low business investment (also known as ‘capital deepening’) to what economists call ‘total factor productivity growth’.
These in turn are instigated by a variety of causes: from low levels of digital, software and other intangible investments and the slow diffusion of new R&D into companies; to chronic under-investment in our public infrastructure which often complements and ‘crowds-in’ private business investment; to a lack of human capital and skills investment and managerial expertise to embed new ideas and innovations.
There is also a regional and devolved dimension to the UK’s dreary growth performance.
Compared to many other OECD countries' ‘second tier’ cities, major UK city regions like Birmingham, Manchester, and Glasgow lag in productivity behind London and the South-East. That variation between high- and low-productivity regions in the UK also holds the whole country back.
Whether you call it ‘levelling-up’ or regional development, the UK will lose out in overall economic prosperity unless it can grow together, across the nations and regions.
Most economic historians know that strong institutions matter in driving economic success. Solving the UK’s ‘wicked problem’ in terms of productivity growth will only happen if government and the public sector can encourage greater private sector investment and maintain a focus on the long term.
In this context, Ms Reeves’ commitments to strengthen the fiscal institutions are very significant. She signalled the intent to bolster the Enterprise and Growth Unit in the Treasury to ensure greater focus on growth in departmental spending plans, ensuring the Treasury would become more of an economic ministry in future spending reviews and not just a finance ministry.
Prof Sir Anton Muscatelli (Image: free)
The Office for Budget Responsibility (OBR) will also be charged with looking at public investment levels and their impact on growth. This more active role for the OBR, together with a fiscal rule which is more focused on public investment rather than current spending, would place a greater focus on growth. It was also positive to hear her emphasis on key R&D institutions such as universities and an intention to go beyond three-year spending review horizons for R&D investments.
There is also a message for how the UK government works with Scotland and the other devolved administrations. Ms Reeves emphasised the importance of the regional dimension of Labour’s growth strategy. It must be recognised that UK national pro-growth policies cut across the borders of regions and nations. It therefore follows that devolved and national policies must work in sync.
If Scotland, Wales and the northern English regions are successful in re-booting growth, then the overall UK strategy will succeed.
This requires better co-ordination of spending (and consequent taxation decisions) across the UK and the devolved nations. Investments in areas such as national infrastructure, research and innovation, and specific strategic investment policies designed to foster regional economic development (Labour’s successor strategies to City Deals, investment zones and innovation accelerators) must be done in partnership across levels of government.
Ms Reeves rightly points out the need to decentralise economic decision-making further, but that must go hand-in-hand with a desire to co-ordinate policies across devolved areas. This will also reduce uncertainty for business and investors which is one of her stated objectives.
The focus on the long term is positive but still leaves one major issue unanswered: the massive short-term demand for public services with a fiscal rule which will mean that the scope for additional spending is limited, unless taxes are increased in 2025-26. The suggestion from both the main UK parties is that they will not do this.
That will make for some very difficult spending choices in the first spending review of the new parliament.
Professor Sir Anton Muscatelli, Principal and Vice-Chancellor of the University of Glasgow
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