If this week’s Budget proved anything, it was that Budgets don’t actually matter that much. As Robert Colvile pointed out for CapX, the most important part of Hammond’s speech wasn’t a pledge to cut a tax here or raise spending there. It was the section on productivity, in which he reported that “our productivity performance continues to disappoint”. That is putting it rather mildly. The numbers are dire; and will, according to the Resolution Foundation, mean average annual pay will not return to 2007 levels until 2025. Seventeen lost years.
Everything else in the Budget pales into insignificance compared to these horrifying numbers. And Hammond understands the scale of the problem. Which is why his speech left so many scratching their heads, wondering why it contained no measures more newsworthy than a basically pointless change to stamp duty.
Yet the fact that so many were so desperate for something bigger and bolder betrayed an important problem with our politics: our preoccupation with fiscal policy. In many ways, this is understandable. We are rightly interested in how much we are being asked to cough up and what that money is spent on. And from a politician’s point of view, a promise of money is the easiest answer to a difficult question.
But some problems are not the result of a lack of Government money and so aren’t going to be fixed by Fiscal Phil’s chequebook alone. Anaemic productivity growth falls squarely into that category.
On Wednesday Hammond also announced an extension to the National Productivity Investment Fund, which he launched with £23 billion in last year’s Autumn Statement. It has been expanded to provide £31 billion to help build a “dynamic and innovative” Britain. Another £2.3 billion will be spent on research and development. These were, he said, the “first strides towards the ambition of our Industrial Strategy to drive up R&D investment across the economy to 2.4 per cent of GDP.”
There will be a lively debate about the efficacy of industrial strategy next week, when the Government publishes its white paper on the subject. But the question of whether or not this slate of policies will represent money well spent is beside the point. Because if the Government wants to fix the UK’s productivity problem, it has far more powerful tools than fiscal policy.
It gets to decide on the rules that regulate the economy. Markets aren’t just governed by these rules, they are the product of them. Tweaks in those laws and regulations can be transformative. They also have the advantage of costing nothing. Take, for example, the all important housing market. The Government can spend money fixing the problem. Or it could simplify and scale back planning laws to allow the market to correct prices on its own.
Given the nature of Britain’s productivity problem, Hammond’s emphasis on spending on research is particularly perplexing. Yes, there is a chronic investment problem and pledging money to bright new ideas is hard to disagree with – and certainly a recipe for positive headlines. But that money would go to the cutting edge, where there isn’t much of a productivity problem to speak of.
Instead, the issue is the long tail of the British economy, made up of laggard firms who aren’t just reluctant to invest in new and more efficient ways of doing business but slow to catch on to the bright ideas of their competitors. Tweaks to, say, competition law and intellectual property would give those laggards the jumpstart they need.
These happen to be two areas in which the Government really will take back control once the UK leaves the EU. That is why yesterday’s news that Michael Gove has triumphed in an important Cabinet tussle over the shape of Brexit is so significant. According to The Sun, the Environment Secretary has persuaded Theresa May to take a stand over the amount of regulatory harmonisation the UK will need to have with the EU as part of a future trade deal.
In other words, Britain will push hard for Westminster – not Brussels – to set the rules of the game for the British economy. This will come at an obvious cost, of putting us out of step with the Single Market. But it also gives us the freedom to change the rules. And it is the changes we make, not what the Chancellor spends our money on, that will determine the UK’s economic future.