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In her first major speech as Chancellor of the Exchequer, Rachel Reeves underlined the new government’s firm focus on achieving long-term economic growth, Declaring it A “national mission”. With productivity sluggish for more than a decade, however, promises to boost growth are far less important than the plan to achieve it. Labour’s growth strategy is still in its early stages, although its manifesto and early announcements give a sense of its plan. One essential element is unlocking investment. Without a sustained increase in public and private capital spending, Labour’s national mission will remain a pipe dream.
The United Kingdom has languished in the Bottom of the G7 The table shows total investment over 24 of the past 30 years. Investment is needed to modernise roads, railways and energy infrastructure, and to boost innovation. This drives productivity and wage growth. Britain’s investment problem is multi-faceted and no single lever can solve it. But three catalysts will give Labour a strong chance of success: stabilising the political environment, creating investment opportunities and mobilising money.
To some extent, the government is already delivering on the former. “Stability” was a central theme in its campaign message, and its large majority also makes Britain look more attractive to investors, as political uncertainty continues in its peer countries. Quick appointments and early policy announcements give investors confidence.
However, many investors still need clarity on other aspects of Labour’s agenda before making commitments. One is how it plans to improve relations with the EU. The second is how planned new bodies (including an Office of Regulatory Innovation, which is intended to speed up regulatory decisions) will work in practice. Investors are also seeking reassurance on the government’s plans for capital gains tax, which some fear will rise.
As well as stability, Britain needs to open up investment opportunities. The government has made a promising start in this regard. On MondayReeves highlighted efforts to reform the country’s clogged planning system, including laudable plans to elevate the importance of economic benefits when assessing development plans, provide support to more planning officers, and revise the National Planning Policy Framework. If this helps to streamline the system, it would remove a major barrier to cross-sector investment. Another obstacle is the shortage of specialized personnel, which requires the government to design a more flexible training system.
Finally, to boost investment, the government must better channel financial resources. Reeves used his speech to warn about the sorry state of public finances, which only reinforces the importance of tapping into private sources of financing for investment.
The £7.3bn National Wealth Fund, which will provide core funding to support private sector investment, is encouraging. The fund’s working group on Tuesday suggested expanding investments to “broader sectors” beyond the initial focus on decarbonisation, and entrenching the government’s operational independence. As long as this does not result in scattered, small-scale investments, it seems sensible. The government should simultaneously make efforts to free up the country’s huge pension savings for capital investment. Another source of funding is foreign investment. In this case, a “concierge service” could help potential investors navigate regulatory issues and increase the country’s attractiveness.
To overcome decades of underinvestment, the government will have to do many things. It has made a decent start, but if it is to fund the renewal of public services through economic growth, delivering on all aspects of the investment agenda will be crucial.