An AI boom could save Britain’s finances

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Reports earlier this week suggested that there have been ‘robust cabinet discussions’ over the Government’s approach to AI. The Financial Times reports that those discussions have yielded seven core principles, signed off but not yet published, including that ‘control and sovereignty matter’ and ‘infrastructure must serve a national purpose and deliver for communities’.

Missing from the coverage was an obvious question: what does all this mean for the Chancellor and how ministers pay for the new Prime Minister’s vision for Britain? What does the Treasury think?

At times it can feel like the debate over AI and the debate over the state of the UK economy and its public finances are happening in two different countries. The debate over AI too often assumes that the UK can regulate the technology without worrying too much about the economic and political consequences. That we can afford to collectively shoot ourselves in the foot by being the only major economy that has failed to protect AI training in our copyright regime, for example.

Meanwhile, it is clear to everyone that the fiscal debate is going to involve some very hard choices: how to ensure long-term fiscal stability; how to balance immediate tax and spending priorities; how to pay for major commitments such as the rise in defence spending to 3.5% of GDP or a National Care Service.

The penny is starting to drop, though: these are not separate questions. Each comes down to growth – and the official forecasters increasingly think AI is part of the answer. First, the official estimates for growth during July were better than expected, with the Office for National Statistics (ONS) pointing to sectors heavily involved with AI as a key component in that apparent overperformance. Then we had the International Monetary Fund (IMF) citing AI as a justification for upgrading its own forecast for UK growth, describing the UK as one of the better-placed countries to benefit from the new technology.

Finally, the Office for Budget Responsibility (OBR), just last week alongside the Budget, said ‘advances in artificial intelligence’ were a key factor that might offset or reverse weak growth.

None of this should surprise us. AI is best understood as a general-purpose technology like steam, electricity and the original implementation of information and communications technology (ICT). While it often takes time, these technologies have a strong track record of translating into stronger economic growth. However, the pace of consumer and business take-up of AI tools is faster than any of those earlier technologies, even ICT in the 1990s, and so it is not unreasonable to expect to see green shoots sooner rather than later.

That translates pretty directly into improvements in the Chancellor’s fiscal position. The OBR’s report included three scenarios for the impact of AI. A central scenario based on the mid-point of two adoption curves (an S-curve and a J-curve) and already embedded in their forecast: a boost of 0.2 percentage points a year to productivity growth. An ‘optimistic’ scenario where that number is 0.5 percentage points a year. And finally a transformative scenario at 0.8 percentage points a year.

CCIA’s Chief Economist, Trevor Wagener (former Deputy Chief Economist at the US Department of State), ran the numbers and, even in the central scenario, the fiscal headroom created in 2029/30 (the vital final year of the current forecast) is £4.8 billion or a full one-third of the Chancellor’s fiscal headroom.

That fiscal headroom created rises to £35.5bn in the optimistic scenario. That is roughly equivalent to the cost of funding the defence pledge. No one has argued the case for greater defence spending more forcefully than the Chancellor, when he left his prior role as Defence Secretary, and here is how he can square the circle with the need to manage pressures on the Budget now.

In the transformative scenario, still far from science fiction, the fiscal headroom created rises to £52bn. It is hard to overstate how transformative this would be for UK politics. That growth would also mean higher real wages and improvements in public services. Not just more money for the Treasury. Alongside action on other priorities such as planning it could help to end the stagnation that the UK economy has faced since the global financial crisis, exacerbated by the fiscal impact of the Covid-19 pandemic.

Why has Britain had seven prime ministers since 2016? Why are governments across Europe struggling to deliver to the point that voters are considering extremist alternatives? The trade-offs that come with low growth are hard, and politicians struggle to make them. If the AI contribution to economic growth helps ease those trade-offs, it can support political stability.

Delivering this does not require major fiscal commitments and no voter priorities need to be trampled upon. The first priority is regulatory reform: easing barriers to embedding AI in popular digital services and challenging new regulatory proposals to ensure they do not impede AI adoption. The second priority is digital infrastructure, delivering on both the community benefits and the accelerated approvals and grid connections promised in the new Data Centre Covenant announced at the Budget.

Governments need to show voters light at the end of what has been a long, dark tunnel. That is why, around the world, they are working to seize the opportunities raised by AI. If the UK can get some key policy calls right, we should be well-placed to do so.

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