21 April 2021

What Britain can learn from big spending Biden

By

The situation for the UK economy is so positive it is, in fact, a ‘black swan’ event. But instead of heralding bad news nobody saw coming, such as 9/11, the financial crisis, or Covid, my view is that this black swan signifies exceptionally good news. Britain is about to have the greatest economic boom any of us will experience in our lifetimes.

Rishi Sunak based last month’s Budget on forecasts of 4% growth this year. But upgrade after upgrade from respected independent forecasters have come through showing that the economy is recovering far faster than that. Oxford Economics, for instance, reckons 7.1% is more likely.

Unemployment actually fell in the three months to March to 4.9% of the workforce, annual pay rises were barrelling along at 5.6% and the number of vacancies shot up 16%, according to the latest labour report from the Office for National Statistics.

We can ascribe this good fortune to the resilience of the private sector, faster than expected roll-out of the vaccines, the measures taken by the chancellor during the pandemic, an abundance of money provided by central banks, and the savings people have put aside in the last year.

But there is one other reason: President Joe Biden. He has launched not one but two massive stimulus programmes in the United States, worth a combined $4 trillion. He describes his latest package, the American Jobs Act, as a “once in a generation investment in America”, upgrading everything from power networks, to roads, bridges, broadband and social care.

What is more, the US Federal Reserve has joined in. The American central bank has said it is prepared to tolerate inflation rising briefly above its traditional 2% target, and the new chairman Jay Powell, has subtly evolved its mandate to consider equality issues such as hourly earnings of black people.

Mr Biden’s largesse is anathema to many conservatives, who correctly argue that much of the money may be wasted and it will lead to tax rises, but there is method to it. Anyone who has visited the US in the last few years will tell you there are obvious signs of dilapidation in its infrastructure. By contrast, there has been an abundance of business investment, which is why US stock markets are at record highs and it leads the world in technology.

What should Britain learn from Mr Biden? We cannot ignore his policies; they are too vast and have too much impact on ourselves.

I would argue we should learn two lessons. First, that he has a big, politically credible economic strategy, akin to President Eisenhower’s investment in interstate highways or Ulysses S. Grant’s reconstruction after the Civil War. Second, we are, in many ways, in the opposite position of the America. We have plenty of public investment, but we have trailed the G7 in business investment in the last decade.

Rather than sit out the current boom and fritter away the benefits on higher consumption and house prices – the default British policy position – we should take advantage of these times of plenty to fashion our own Biden plan tailored to our own circumstances.

A British Biden plan should be a market-based programme, designed to stimulate business investment, rev up our sluggish underlying rates of productivity and growth, and improve infrastructure. We should do this because we have a great deal of catching up to do, relative to our competitors, and because we know from history that booms like the one Mr Biden is presiding over almost certainly end in inflationary busts. Better to raise the money now, when capital markets are open and interest rates low, in order to spend it carefully over coming years when the cycle may turn against us.

Ask yourself, what is the long term economic strategy of the Government? I always thought it was to get Brexit done and then to embark on a wave of investment. But the proposal to raise corporation tax from 19% to 25% in two years time, announced in the Budget, puts that into doubt.

A British Biden plan would start by shelving the corporation tax rise and instead encourage investment in the UK. These might include a new generation of growth and resilience partnerships between the public and private sectors to deliver broadband, rail electrification, road pricing, upgraded energy networks and social care.

It is also a sad fact that the UK investor base is rather conservative and overly reliant on poorly performing income and value funds which have lost the growth mindset. If they had been around in the eighteenth century the Industrial Revolution would never have happened, and the likes of Watt, Arkwright and others would never have been able to finance their ideas.

The Treasury should ginger them up by the crowding in investment by seeding a new generation of investment trusts, floated on the London Stock Exchange, to invest in tech, infrastructure and innovation. And we should create our own sovereign wealth fund to invest in UK assets, as the Conservative MP John Penrose has suggested.

Retail investors are also keen to invest in the UK growth and recovery but seem to be too frequently thwarted or ignored. Rather than endlessly reducing the amount people can invest in their pensions, the tax benefit should be reduced to a flat 20% for all, but the lifetime cap quadrupled to £5m, with £1m reserved for UK assets. The Enterprise Investment Scheme should also be expanded.

I can almost feel free marketeers and Treasury insiders start to twitch at the mention of a British Biden Plan. Well fine, disagree, but what do they propose?

In October, the Government is hosting a Global Investment Summit in London which is a major opportunity to encourage international investors to return to the UK after being frightened off by the shambolic handling of Brexit. Let’s have a really exciting story to tell them.

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George Trefgarne is founder and CEO of Boscobel & Partners consultancy.

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