11 June 2024

Economic growth is possible – just look at America


As we draw closer to the election, both Keir Starmer and Rishi Sunak have said that they will prioritise growth. So with both main parties talking at least nominally about wealth creation, the important things to consider are precisely how wealth is created and who is most likely to deliver it. 

The Growth Commission (which I co-chair) has already presented two Growth Budgets, first in November of last year and most recently in March this year. 

We have noted that the UK has lost significant ground to the US in terms of GDP per capita over the last twenty five years or so. We are now poorer than the poorest US state, Mississippi, and our GDP per capita is around 70% lower than the US average. For some states, we are less than half as rich. 

This means the quality of life of the average British family is significantly worse than their American cousins. If we are to help the British people, it is imperative that we close this gap. Fortunately, the Growth Commission shows us how to do so.

In addition to lowering taxes and reducing the size of the state, which most on the centre-right agree are necessary, our new dynamic economic models show that improving a country’s regulatory environment is where the biggest gains to an economy can be made. 

Unless four critical areas of regulatory failure are gripped, it is hard to see how the UK will see meaningful growth in the future. 

First, we must embrace a regulatory environment in the energy sector which uses competition to drive down costs, increase generation capacity in all forms of energy and expedite planning processes for energy production. The UK’s energy cost of 44 cents per KwH for consumers is significantly higher than continental Europe and orders of magnitude higher than the US (where it is 17 cents per KwH). 

Second, it is vital that we drastically improve planning regulation by moving to a zone-based planning system, with expedited planning review (including utilising trusted developers to speed up applications). We must also review the role of statutory consultees who often have no interest in the growth potential of the development.

Third, apply more competition-based tools, and fewer interventionist ones, to deliver lower prices and better services in retail banking, transportation and other arterial sectors of the economy.

Finally, institute economic growth as a regulatory objective. The Government has taken some steps in this direction, but the recent consultation on the subject suggested including within the definition of economic growth other objectives such as sustainability and net zero. This makes a mockery of having a growth objective at all.

The purpose of the economic growth duty is to enable policymakers to compare the impact on economic growth in GDP per capita terms of specific regulation that is often prudential. It is therefore critical to separate the prudential components such as net zero and sustainability from the economic growth impacts for this to have any utility at all. Blending them together makes a nonsense of the process. This needs to be urgently corrected for such a tool to be remotely valuable.

Our two Growth Budgets highlight a number of other areas, but if these four alone were properly implemented, the resultant impact on UK GDP per capita would be significant.

We have computed that it would be possible to boost UK GDP per capita by 28% by 2044. This would help us close the gap with the US over that period, and put the UK on a sustained growth path.

Consider the massive difference to family livelihoods that could make. The additional money per household would go a long way, but the costs reductions caused by these policies would also be anti-inflationary, making each pound stretch much further.

Whoever wins the election must show the British people that the country is back on a path to growth. This is not just an academic argument – it relates to the actual experience of the average British household, lowering the cost of their weekly shopping and putting more money into their hands to spend or save as they choose.

A British family visiting an American one in the late-1990s would see an equivalently placed family with a roughly similar standard of living. The same family visiting now would find, in some states, that the American family is literally twice as rich with significantly lower costs. How long will the British people tolerate such a state of affairs?

Blame for this is shared between all political parties in the UK as the rot started in the 1990s. Now, the lessons have to be learned, and the next government needs to adopt the policies we suggest and put this era of stagnation behind us.

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Shanker Singham is Co-chairman of the Growth Commission, CEO of Competere and a former adviser to both the Secretary of State for International Trade and the US Trade Representative.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.