The growth agenda

At ConservativeIntelligence’s ‘Going for Growth’ conference yesterday, David Willetts MP (the Business, Innovation and Skills minister) outlined the government’s approach to getting the economy going. He made a number of interesting points, to which my responses are indented below.

Firstly, he pointed out that business investment fell as a percentage of GDP even when the economy was booming, dropping significantly from 1998 onwards. He also pointed to International Labour Organisation statistics that showed youth (18-24) unemployment remaining virtually static throughout the boom years, at around 10 percent.

Of course, you would expect the opposite to have happened in a strongly growing economy, and the fact that it didn’t underlines how much of Britain’s economic growth in that period was illusory, flowing from easy money and cheap credit and the asset bubbles they inflated, rather than from genuine, investment-driven productivity growth. For me, that has a couple of implications: one, we need to be much more alert to fake booms in future; and two, we shouldn’t be too sanguine about the underlying strength of the UK economy – as John Redwood MP pointed out at the conference, the UK’s trend growth rate has likely fallen from 2.5 percent to 1.5 percent, and shifting it back is going to take a lot of work.

Secondly, Willetts explained how the government was going about developing its growth policies. Basically, it is looking at six policy areas (including regulation, competition, and planning) where it thinks it can introduce reforms to promote growth. At the same time, it is looking at six particular business sectors (including advanced manufacturing, life sciences and the creative industries, amongst others) and looking to see how it could make life easier for them.

This systematic, strategic approach has much to commend it, just so long as sector-by-sector reviews of barriers to growth do not end up becoming an exercise in picking winners. Willetts assured attendees that they would not, but this is nevertheless a possibility that we should remain alert to. Another interesting point came up in the Q & A, when it was put to Willetts that ‘picking winners’ is precisely what the government is doing in the energy market. It was also suggested that the government’s environmental policies would lead to a huge real terms increase in energy costs, and that this would place a big burden on businesses, especially in the manufacturing sector. The minister did not have a particularly satisfactory response.

Thirdly, Willetts spoke about two particular issues that he thought were key to the growth agenda. One was skills – he said that although we produced a respectable number of science graduates, employers frequently complain that they lack practical skills and are not lab- or business-ready. The other was ‘clusters’ – the idea that concentrations of particular types of business (think Silicon Valley) could be strong drivers of economic growth.

On both these issues, I can’t help thinking that there are fairly straightforward free market reforms that would deliver the desired objectives much more easily than any interventionist approach. On skills, wouldn’t university graduates be much more ready to put what they’d learned to use if science degrees and departments depended much more on business and industry for their funding? That is undoubtedly what would happen in a liberalized higher education market. As for clusters, the obvious thing to do to facilitate their growth would be to radically liberalize the planning system, so that they can be established and grow much more quickly and cheaply than at present. Crucially, businesses would then be able to establish clusters where they made economic sense, rather than where central planners thought they would have the greatest social impact. The government is doing some good things on higher education and planning, but they are also getting a lot wrong. A more principled, free market approach in both areas would do much to help them deliver their growth agenda.

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