Long ReadOct 13 2022

What's stopping the UK economy from growing?

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
What's stopping the UK economy from growing?

Economic growth drives wellbeing. It puts more money in the consumer’s pocket and drives increased tax revenues for the government – which can then fund more housing, education, healthcare and infrastructure.

But growth in the UK has stagnated, despite a 40 per cent depreciation in the British pound against major currencies. The UK is the only G7 economy to remain at pre-pandemic levels. 

I have spent the past 25 years running the Aquamarine Fund – an investment partnership with a global mandate. My work has given me some insight into what it takes to deliver wealth and prosperity. 

For too long the policies of the UK have been beholden to ideology.

When I started that journey, like Liz Truss I was a big fan of Margaret Thatcher and thinkers like Milton Friedman, Adam Smith and Robert Nozick. I also thought tax cuts, small government and free markets would take care of most economic problems. That somehow Adam Smith’s invisible hand would take over, and all would be well. 

The approach worked in the Thatcher era. But it won’t today. 

Investing in the future

These days, it is not the low-tax, small-government countries that are the best places to find long-term growth, wealth and prosperity. Rather, they are to be found in places where there is a mindset that invests in the future – creating the infrastructure for growth

When it comes to corporations that create long-term wealth, I focus on companies like Amazon and Costco in the United States; Nestlé, Schindler or Roche in Switzerland; or Novo-Nordisk in Denmark and Ikea in Sweden. These companies reinvest a large proportion of their current income – not just in new technologies but in their supply chains, their distribution networks, their local communities and even in their consumers. 

Their countries of origin – the USA, Switzerland, Denmark or Sweden – are not predominantly low-tax. They are all stable social democracies, where the government has a healthy share of the economy and there is a high degree of trust between the government and the population. Their citizens are willing to carry a high tax burden, because it comes back in healthcare, education, infrastructure, social security and quality of life. 

Jeff Bezos, for example, has said that “if you are long-term oriented, customer interests and shareholder interests are aligned”. Why would it not be the same for a government and its citizens? Elsewhere he stated that he supported Joe Biden’s plan for an increase in the tax rate, stating: “We support the Biden administration’s focus on making bold investments in American infrastructure.”  

Switzerland – which is where I live and where my business is based – is not a particularly low-tax place. Income taxes here amount to around 50 per cent for most people. But it is a great place to invest because the taxes are efficiently recycled into government services that enable the economy to function well.

I have an American friend who has to pay taxes in both the US and Switzerland. He told me how he always sought to reduce the amount he paid to the US and increase the amount going to Switzerland, because in Switzerland he knew and trusted where the money was spent and that it was coming back to him.  

So, despite a high cost of living, and high salaries, companies like Roche, Novartis and Nestlé base their corporate headquarters there, as do Google and Meta for their European headquarters. 

Swiss entrepreneurs and CEO’s often refer to this as the Swiss 'economic model'. It is well understood that we are trying to create a virtuous cycle – one where government supports the needs of business by providing good infrastructure, along with an educated, law-abiding, socially secure workforce. And where growing and successful businesses support the government by paying high wages for high-quality workers and by paying their share of taxes. 

Small government, big problems

The problem, by contrast, with low-tax, small-government countries is that they are far more volatile. When more people are left to fend for themselves there is less trust and more envy. Crime goes up. More people are dissatisfied with the status quo and fewer people feel like they are part of the system. The threat of social upheaval lurks ominously in public discourse. Such places usually do not rank high on measures of economic development or of happiness. 

And whether it is a portfolio investor like myself or the corporate investment arm of a multinational, such environments are unattractive. 

By contrast, we are looking for a stable environment with the rule of law; where there is no social unrest, where the population is educated, and where everybody gets enough of what they need. That might cost more in terms of taxes, but it is far outweighed by the benefits. 

Singapore is an exception in that it has low taxes while still being unusually attractive for business. But it is not a model that Britain can follow: Singapore has access to a very large pool of low-cost labour that comes to the country on very restrictive visas and does not really benefit from the system created for citizens.

Additionally, Singapore’s government can continue to deliver a low-tax regime because it has carefully thought through and solved problems. It did not get there by cutting taxes and shrinking the government without really addressing the underlying problems the government was seeking to address.

Perhaps, therefore, one should not be surprised that some of the world’s most successful enterprises are located not in low-tax, small-government jurisdictions, but in those where a well-funded government plays a meaningful role in supporting business. 

Investors like myself are looking for such jurisdictions and regions – where there is a government that takes intelligent decisions and allocates resources rationally. 

The UK used to be such a country. But increasingly it is deviating from that path. Despite having a well-educated labour force, plenty of capital and the intangible infrastructure of a developed country, it is slipping down the ranks. 

Some developed countries – like Switzerland, Denmark and Sweden – have income per head numbers that have continued to rise while the UK has stalled. The country used to top the rankings. Now it stands behind Israel. 

But rather than have a national discussion over how to turn this around, about what will make the country more competitive, the country’s politics have been dominated by a series of red herrings: whether or not to be a member of the EU; whether being a member of the European Court of Justice infringed on UK sovereignty; whether Scotland should secede. And a left-right debate over small-government libertarianism vs high-taxing big government and the so-called 'anti-growth coalition' would be similar red herrings. 

These are arguments over yesterday’s issues. I have learnt that, usually, the best way is the middle way. It is not that one side has to lose and another has to win. The best solutions to today’s issues combine the best ideas from the right with the best ideas from the left.

Sorting through what makes sense requires careful discourse, attention to detail and working through problems one by one, finding a pragmatic solution that works for all. 

The last thing that Britain needs today is yet more ideology – more debates over big ideas that are hard to translate to practical action on the ground. 

What does that mean in practice? Here are a few ideas. 

NHS

Rather than see the national health service as a cost – a drain on national resources – the NHS should be seen as a contributor to national productivity. Every single person the NHS takes care of is someone’s brother, sister, mother, father or child. And it is hard to be productive if you are worried about a loved one. The NHS is not just a social cost, it is a partner in Britain’s growth. By taking care of the weak and the sick, the NHS frees up others to work and produce. The one helps the other. 

When it comes to the NHS, remember that Lee Kuan Yew – the founder of modern day Singapore – is famous for having said: “If Singapore is a nanny state, then I’m proud to have fostered one.” 

Infrastructure

In 2010, Israeli Prime Minister Benjamin Netanyahu told a conference, “There is no reason why we should live with an outdated transportation network when we could easily design a multi-year plan to turn the country into one of the most advanced and interconnected in the world”.  

The same goes for the UK. It is a key element of national productivity and competitiveness. The UK needs to go to work on developing its transportation networks to allow the most people access to the most job opportunities within a reasonable commute.

Crossrail is excellent, but it is only a start. The UK needs far better transportation links between regions, not just with London. The key is not high-speed travel from city centre to city centre, but the average speed across the system.  

That means the rail service should focus less on big headline projects that reduce travel time from, say city to city. Rather, the focus should be on reducing travel bottlenecks, ensuring that transfers between different modes of transport at main stations and airports are efficient and reliable. 

Free trade

It has been well understood for the longest time that removing barriers to trade is one of the best actions a government can take to boost long-term growth. While the country is sick of the debate over Brexit – which is a done deal – the exact nature of the UK’s evolving trading relationship with the EU, its largest and most proximate neighbour, is always going to be an important topic. If Truss and Kwarteng want to deliver growth, they simply have to start removing the many barriers to trade that were erected by Brexit. 

Switzerland, for example, is not a member of the EU and is just as jealous of its sovereignty as the UK. But it is also pragmatic in recognising that, by far and away, the best relationship with the EU involves the free movement of people and low barriers to trade. The United Kingdom can do the same without joining the EU. 

Not doing so would be irrational. For too long the policies of the UK have been beholden to ideology. The UK has had enough of ideology. What it needs is prudent, sober pragmatism. To do what works. Britain ought to be good at it, but it has not been for the last few years. 

Guy Spier is the manager of the Aquamarine Fund and author of “The Education a Value Investor.”