The writer was chief of staff to Sajid Javid as chancellor and a special adviser to the prime minister 2015-2016
To change a chancellor and his advisers is easy; to change economic reality is a lot harder.
The UK economy has a lot going for it, but economic growth in this country is held back by several mutually reinforcing challenges. At its core lies a structural challenge of lagging productivity and regional inequality, compounded by prolonged economic uncertainty. The most recent example of which is coronavirus. All of this is happening as the UK goes through three, voluntary structural adjustments: new trading relationships with the rest of the world (including Brexit), a changing labour market via a new immigration system, and going carbon neutral by 2050.
Against this backdrop what should the new chancellor, Rishi Sunak, do?
First, naturally, much of the next few months will be about managing the economic effects of Covid-19. Making sure that the National Health Service has the funding it needs to handle the response is clearly number one. On the business side, we can apply lessons from the Brexit no-deal response and Budget, which I was heavily involved in (although with important differences). The combination of tax and payment holidays and a Bank of England-backed scheme of preferential loans should carry over most viable businesses who experience temporary cash flow problems. The government is right to start there.
If the reasonable, worst-case medical assessment is correct, an outbreak will last for several months with a few weeks of heavy social and business disruption. During this period, demand side — consumption — and supply side effects will feed into each other to a far greater extent than under a no-deal Brexit, with a significant share of the population neither working nor spending that much.
But the dip should also be shorter. If it is needed, any demand-side fiscal stimulus, like cutting VAT, should be done when infections have peaked — not now. After all, 20 per cent off your restaurant bill doesn’t help much if you’re in self-isolation and no one is around to deliver the order.
As with any decision-making under uncertainty, the holy grail of the economic response to this outbreak is to identify as many “no regrets” actions as possible. Ministers should avoid spending money on policies that help in one possible scenario but are wasted in others. For example, a full business tax break on capital investment — tech, automation, machinery (known as full expensing) — for 12 months, would help both to mitigate short-term disruption and boost long-term productivity.
Looking beyond a temporary dip, Mr Sunak should remain focused on improving the UK’s structural productivity. The UK economy collectively achieves in five days what Germany’s achieves in four; the productivity gap between different parts of the UK is at its greatest level for over a century. This is the main threat to medium-term economic growth.
The problem, like the solutions, is complex and multi-dimensional. The government must resist the temptation to make announcements that give them a quick headline; it must pursue a programme of targeted, evidence-based and long-term policies that deliver tangible outcomes for people on the ground.
Infrastructure investment will be very important, but the single biggest factor behind closing the productivity gap is improved skills: that is the path to better-paid jobs. I would strongly encourage the chancellor to continue the work that was begun by my former boss Sajid Javid on a long-term plan for skills and human capital. This should include better provision of good quality early-years childcare and education, and much clearer vocational paths to technical professions. A full 80 per cent of the people who will make up the workforce in 2030 are currently already in employment. Radically boosting the opportunities for people to broaden and improve their skills — what we labelled a “right to retrain” — is essential if this country is to improve its productivity and “level up”.
“Levelling up” should include continued reform to the composition of the state and its underlying tax system. The UK taxes both businesses and families at the wrong stages of their lives. We charge business rates before a company has traded its first pound, we charge stamp duty on many first-time buyers, the list goes on. We must, surely, tax families and businesses less when they’re trying to get on, and within reason. We should transfer more tax on to accrued wealth. This should include reviewing the 1,100 or so tax reliefs in the UK — many have no obvious social or economic benefit — in favour of a simpler and flatter tax system.
As to the fiscal rules, those we designed hit the sweet spot between sustainable finances and the need to invest in productivity-enhancing projects on the other. Any further fiscal expansion — for example a greater role for the state in social care — will either mean more borrowing for day-to-day spending or higher taxes. There needs to be an open debate about that.
Finally, with so much uncertainty, it’s absolutely essential that the voluntary structural adjustments that are within the government’s control — trade, immigration and decarbonisation — are designed to be cumulatively growth-enhancing. In practice, this means: a highly ambitious and liberal approach to trade deals with the US and EU; an immigration system that maintains a vibrant labour market and avoids skills shortages, particularly in sectors like construction and social care; and decarbonisation policies that also facilitate the levelling-up agenda and new technology (more carbon capture storage investment in the north, for example) and R&D investment in the next generation of renewables.
If we can manage all of that, the UK economy will come out of all of this much stronger.
