This webinar follows on from our recent pre-election webinar and an event hosted by the Knowledge, in which we discussed the likely policy direction.
As expected, the new government has made clear its focus is on boosting economic growth. That is welcome and even though it is often said that all governments want growth, I agree with the decision that it will explicitly be the central focus, and from that other economic and financial policies flow.
At the start of the year, in the FT annual survey of economists one of the questions was, “Which single policy change after the next election would do most to boost the UK’s long-term growth?”. I answered, “Implementing credible and ambitious planning reforms to build more homes and business sites. Institutional change could also be explored, such as splitting HM Treasury into growth and finance departments.” Planning reform was cited by close to half of the respondents.
With that in mind, it was encouraging to see the Chancellor unveil changes to the planning system in her first major policy speech. Executing this will be the next step, as often hurdles are put in place at local level. I would be loath to say it is not ambitious. It is, but the scale of the challenge is considerable, and if it proves achievable then it may then be necessary to increase its scale.
There is already a large shortfall of properties, and the population is continuing to rise significantly. As I have written previously, it is not just new properties that are needed, but increasing turnover in the secondary market is necessary, too. Moreover, it is not just about supply, but also demand and availability of finance, plus building the right type of household units in the areas where people wish to live.
Boosting infrastructure, before housing is put in place, and ensuring public services can cope are also part of the equation, highlighting the need for joined-up thinking and the right incentives being in place to allow the private sector to respond. Also, in terms of housing, there may be changes to taxation, with constant rumours of council tax band valuations being brought up to date. The UK currently taxes housing more than other OECD countries but the focus is on high stamp duty rates, which does not help turnover.
The other change I mentioned in that FT survey was institutional change. This, too, has figured prominently, although not in terms of splitting HM Treasury into separate budget and growth departments, which has been my preference. But the Chancellor has already proceeded with one of the plans she announced in opposition: bolstering the growth unit within the Treasury. Whether this is sufficient to change the mindset remains to be seen. Also, it is possible there may be further institutional change, aimed at ensuring cross-departmental alignment in addressing certain themes.
The only major change is the creation of a National Wealth Fund (NWF). The UK has had an investment shortfall since the 1970s, and achieving net zero is a central focus of government policy. Addressing low investment merits many policy options and it is already clear the government will seek to tackle this, with its NWF and industrial policy part of their approach.
The existing UK Infrastructure Bank will oversee £7.3 billion of additional NWF investment over five years, into the green economy, focused on five sectors including ports, gigafactories, carbon capture, clean steel and green hydrogen. This is alongside the new state-owned GB Energy and there will be changes to the British Business Bank to help institutional money be directed into low-carbon areas.
While the government can play an important role, the success of these new institutions will be if they manage to crowd-in private sector investment. The fear often is that too heavy a hand of the state will either crowd-out the private sector or, as we saw with previous PFI initiatives, attracting private finance can come with a very expensive price tag for future taxpayers.
The aims are good – more investment and addressing the green agenda; the key is execution. Much of the focus looks set to be on channelling more money from UK pensions and institutions into such UK investment.
When it comes to the private sector, more generally, we know the factors that are needed to improve investment, and these include: more finance and lending for small firms, sound macro policies, a lack of bureaucracy, the level, simplicity and predictability of tax, plus future expected demand.
Addressing the UK’s growth problem is paramount and underpins everything when it comes to public policy. It is also critical for the fiscal sums. Previously I have stated that markets, globally, are likely to move from a focus on inflation, to a focus on growth, which is where we now are, and will then move to a focus on debt.
Debt levels are high globally, and the UK’s debt picture is already a valid concern. Economic growth is the best way to reduce the debt to GDP ratio, and it is evident the Chancellor is keen to keep the markets on side, with clear messaging.
Latest economic data has been encouraging, with growth likely to reach, if not better, the 0.8% growth forecast for this year from the OBR, which underpins present fiscal plans. While that could deliver some more room for fiscal manoeuvre by this autumn, it’s important to note that a solid growth performance is already built into current fiscal plans.
At the time of the March Budget the OBR was forecasting growth of 0.8% this year to be followed by 1.9% next and 2.0% in 2026. That compared with the Bank of England’s forecast at that time of 0.2% (2024), 0.6% (2025) and 1.1% (2026).
When it comes to the fiscal sums there are five options: growth, borrow, tax, curb spending or reform. Inflate the debt away is sometimes cited but is not an option really. The government is right to focus on growth; plus reform around health is to the fore.
Yet with a spending review and Budget this autumn, there may be additional upward pressure on spending. Given the little room for manoeuvre permitted by the present fiscal rules, and with borrowing already high, the markets are already anticipating higher taxes, perhaps on property and on capital gains. Otherwise, existing reliefs may be trimmed back somewhat, with pensions potentially being an example.
Please note, the value of your investments can go down as well as up.
