Long Read  

The economic challenges facing Liz Truss’s government

There followed a series of short-lived, weak governments until 2019. The election of Boris Johnson promised a shift to a new, more decisive economic policy backed by a strong political mandate. But Covid-19 saw to that, and caused a spike in global goods prices too, just to twist the knife. 

 

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Then Russia invaded Ukraine. Amid the suffering caused by that brutal and pointless act, one of the lesser consequences was higher energy prices everywhere, but especially in Europe, including the UK, which saw sterling tumble against the dollar again. 

In coming months, Truss will need to deal with the cost of living crisis and the widening gap between private and public sector pay. But it is the long term I am concerned about. 

The UK economy is approaching recession with GDP probably still 2.5 per cent below its pre-Covid level. And all the drivers of UK growth are absent except for macroeconomic policy, which is poison for productivity growth in the long term. 

Truss might feel it would have been better if we had not started from here: but here we are.

How do we find a better path?

It is not about the size of government. Economies with small governments and large governments (expressed as the tax take as a share of GDP) can both grow rapidly, and many in both camps reliably outperform the UK. 

It is not about bringing monetary policy back under the control of the Treasury. There has been no meaningful gap between what the Treasury or an independent BoE would have done with monetary policy for a decade at least. 

It is about innovation. How can the UK economy create a culture of innovation? There is no magic bullet. But we could start by learning from others.

The French, for example, are a lot more productive than the British per hour worked. They work fewer hours than we do, but they produce more. How? 

They have a larger stock of both fixed and intangible capital per employee than we do. The parts of people’s jobs that involve ‘doing’ have, to a larger extent than in the UK, been replaced by machines or by innovative processes.

But you can not just magic investment like that up out of nowhere. Capital accumulation follows a culture of innovation, it does not create it.

The task of government is to cultivate innovation, in part by celebrating and prioritising thought, reflection and ideas over repetitive ‘hard work’ or graft.