Jeremy's Blog 28th October 2022: Growth Remains the Challenge
This article by Jeremy Moody first appeared in the CAAV e-Briefing of 27th October 2022
The change of Prime Minister and the coming Medium Term Fiscal Plan gives a moment to take some lessons from the last few weeks.
With interest rates across much of the world returning to historically normal levels while energy prices and inflation rise, the Financial Statement of 23rd
September and the way it was presented provoked a fast and sharp market reaction. While now abated, that showed all countries, many increasing their borrowing, that strained debt markets are precarious at the high levels of borrowing that low interest rates have allowed to develop. The derivatives used by UK pension funds will not be the only possible trigger in the world for another crisis. There is more risk: it must be priced and that will have consequences. The world as well as the government is now on greater notice.
While working to restore our finances, we must not lose sight of finding the economic growth we have not seen for 15 years. That will not be achieved by magic, wishes and gestures but hard work and persuasion. The desire for comfort will only see the management of decline, making everything harder. Almost all the suggested tax cuts may have been irrelevant to this but the promised statements on topics from planning to agriculture should still come to pave the way. A new Prime Minster may bring new credibility to this hard task.
Growth is about the long run capacity of the economy to produce the profits and wages that pay for all and ease inevitable change. Improving productivity, the efficiency of producing outputs from inputs, is the way to that for agriculture and the wider economy. The stark illustrative contrast is between South Korea and Sierra Leone, both with the same GDP/head in 1960. South Korea now with a life expectancy of 83 years (UK 81 years) is in the G20; Sierra Leone has a life expectancy of 55 years and a GDP/head around $600/year. If UK agriculture had matched US performance between 2000 and 2013 it would have more than tripled its ex-subsidy net income.
Removing barriers to businesses starting and growing, making business easier, is essential; that is what “supply side economics” means. A reformed and stable tax framework supporting investment, work and skills, assistance for research and development and ensuring fair dealing in produce markets will help farming. More importantly, having an open land occupation market will give opportunities to those who want to do better, making the best of the new technologies to create value.
Tackling planning restrictions is part of that, whether for slurry stores, enclosed farming, renewable energy or the facilities for the UK’s important life sciences sector, as is answering the shortage of housing.
Genuinely useful new infrastructure should be protected from public spending cuts; it is all too often their first victim. If we are to do less long run damage to growth, the choices may now be about government functions, not dropping the infrastructure that would provide the capacity for the future economy.
The energy price shock, following years of low growth, has made us a poorer country and shows that bad things can happen in the west. We need to put ourselves out for the growth that will pay for what people want. The political work in this will be hard, challenging comfort and entitlement, but the reward will be prosperity. That is for political leadership, explaining change to the nation.