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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chair of Frontier Economics and a former cabinet secretary who served three UK prime ministers
Whoever is UK chancellor after July 4 will face unsustainable public finances and horrible short-term choices. Increasing growth to ease these choices in the medium term by generating higher revenues must be a priority — and trying to do so by raising productivity rather than increasing already high levels of net migration.
Every government for decades has talked about the UK’s dismal productivity record. So what could be done differently? A braver policy stance towards innovation could be an important ingredient. There is a growing body of evidence that countries with higher rates of innovation see faster growth. Asian “tigers” that relied on export-led growth are shifting to innovation-led strategies as per capita incomes approach those in Europe. On these and other scores, the UK record is ripe for improvement.
The new chancellor will need to get the best out of existing, innovative companies of all sizes in the UK. Many previous government drives to do this by “deregulating” or achieving “better regulation” have ground to a halt under pressure from lobbyists or too narrow a regulatory focus on competition. But ministers should take heart from the transformative evidence that is there for those who care to look.
Take the 1751 Gin Act which made small-scale distilleries in London illegal. Its repeal in 2007 stimulated an explosion in the creation of new gin brands, with the ONS recording over 1,000 distilleries in the UK. It is now an industry worth almost £2bn a year and generating over £700mn of exports.
Or there’s the 1989 Electricity Act, which required the regulator to protect “the interests of consumers”. In 2008 the two words “current and future” were added before “consumers”. This made all the difference, empowering the regulator to think about the innovation needed to create a system that can serve households and businesses in the future.
This kind of forward thinking needs to be framed in a long-term context. To embark on major investment, business decision makers need both clarity and certainty. Whatever incentives a new government wants to put in place should be set in fiscal plans that span the next two parliaments.
Longer-term thinking should also extend to our regulatory system. Sector regulators for water, energy, financial services, digital and media companies — as well as the overarching competition regulator — need to be refocused on stimulating the investment needed in so many areas of our economy. And that needs something more than simply adding “innovation” to their laundry lists of objectives.
To counterbalance the pressure from short-sighted lobbyists to play with regulation for particular ends, an independent Innovation Unit could help to identify barriers to development. However, this will only work if government stands behind it, ready to give legislative clout to its findings. Another overdue area for review is the work of the National Audit Office, which is exacerbating risk aversion among regulators and government.
Key to a step-up in the UK’s innovation performance is the successful adoption of generative AI. Of course this poses societal risks that need to be managed by effective regulation. But at the same time, policy needs to be focused on encouraging the creation of companies that are able to transform the latest AI innovations into tools more readily suited to the average business. Targeted support for innovation here could help the UK correct its previous failures to ensure that new technologies boost productivity.
To repeat: there is no magic bullet that will automatically hit the productivity target. There are other policies that are also needed, such as an overhaul of our education system. But small steps to remove barriers and get things moving could work like an early evening gin and tonic — a welcome aperitif before a hearty three-course meal.