It is important for Conservatives to give credit where credit is due, and not to simply oppose everything the Government does for the sake of opposing it. This is a mistake that many opposition parties make. It can have long term consequences – such as when Republicans opposed the Trans Pacific Partnership, which was originally a George W Bush initiative taken up by President Obama. The forces unleashed conspired to cause the US to drop out of CPTPP, a major geostrategic error.
We should take at face value that the Prime Minister has said that economic growth, by which he means wealth creation (as he has averred himself) will be the centrepiece of the new Government. So far, so good. If wealth creation in the UK is the goal, and indeed all five of Labour’s new missions are aimed at creating wealth, we know empirically how that can happen.
First of all we need to have a common understanding of what we mean by ‘wealth’. There are certain fundamental rules here. First of all, wealth is what is created when willing buyers and willing sellers meet in voluntary exchange. Wealth is the realisation of ideas – money is the byproduct. No ideas are realised when the government turns on the spending tap, although GDP does include government spending. Wealth – the realisation of ideas – can be created or destroyed. The Government recognises this much, which is certainly an advance on those who believe in zero sum economics, where distribution (equality of outcome) is the only concern. But importantly it is much harder to create than to destroy. Bad policies have destroyed vast amounts of wealth throughout history, killing those ideas before they are even born. Finally competition is the most powerful force we know to create wealth.
For example, we know that improving a country’s trade openness directly correlates with increases in GDP per capita. We know that the more pro-competitive a country’s regulatory system, the greater the GDP per capita. The more a country protects property rights, the greater the GDP per capita. And what is GDP per capita? It gives us a sense of household income – the higher the GDP per capita, the better your life chances and standard of living are. In a virtuous cycle, competition also reduces the cost of the things you buy, giving you a double hit of more income and less cost. When governments get it wrong, they deliver less income and more cost.
The sluggish growth in the UK over the last twenty five years has a huge impact on the British people, and I am surprised they are not more angry about the policies that have got us here. Back in 1997, the US GDP per capita was only slightly larger than the UK’s. Now it is 75% or so bigger. That means a lower standard of living for equivalently placed UK households, a fact that is only too obvious when Brits take their kids on holiday to Disneyworld.
So what can the new Government do to make good on their promise of increasing wealth? Fortunately, the Growth Commission which I chair shows the way. We have done two reports so far on the UK Budget, and will release another on October 22. Like Rachel Reeves, I am not going to give a preview of that now, but we will continue to say that planning reform is a huge mover of the economic needle. About a third of the growth we project if the UK does everything right comes from planning reform alone.
And here the early noises are good. Already Labour has taken strides in this area, and we must all hope that they can succeed where previous governments have failed. It is profoundly depressing to witness the cognitive dissonance of yet another Conservative MP extolling free markets on the one hand and proudly lobbying to block development in their constituencies on the other. If Labour succeed over Conservative objections, they could well rule for a generation.
However, there are areas where policies which have the aim of creating wealth actually have the effect of destroying it. Nationalisations and the creation of State Owned Companies (about which we protest when it is the Chinese state doing it) will destroy, not create wealth. Keir Starmer’s Government must also be very careful about labour market reform. The minimum wage has already risen to two-thirds of median income, higher than any other OECD country. Putting it up still higher will damage growth prospects for the country. As our economic modelling has shown, labour market flexibility is a big driver of economic growth – the Government must be very careful not to break the economy with inflexible labour rules. This does not mean there should not be a minimum wage – it all depends on what it is set at. Too high, and growth will be compromised.
Labour’s plan for a Regulatory Innovation Office ensuring that new regulation does lead to more and not less innovation is welcome, But such an office should evaluate new regulation on the basis of its impact on market competition, and make those costs explicit so policymakers can make informed decisions.
It is too early to say whether the policies of the new Government will lead to net wealth creation. It looks like planning reform is doing a lot of heavy lifting here, and that other policies may take away what planning reform gives, even if it is successfully implemented. The Growth Commission will continue to advocate for wealth-creating policies, and calling the plays as a dispassionate referee would. For the sake of our welfare and that of our children, we must hope this Government succeeds in delivering the wealth creation it has said is paramount. Our message to His Majesty’s Loyal Opposition is to oppose vigorously those things that destroy wealth, and support those things that create it. Opposition for the sake of opposition has never been a successful strategy.
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