Peter Franklin: Only one thing can get Britain growing again – and you’re not going to like it

Peter Franklin is an Associate Editor of UnHerd.

Labour’s been so busy dragging this country into moral bankruptcy that it’s easy to forget the party’s parallel record on the financial front. Indeed, the latest monthly growth figures – which showed a 0.3 per cent fall in GDP – were barely noticed. But what’s a little economic shrinkage between friends?

Of course, averaged over time, the growth rate does matter. The numbers we achieve in the decades ahead will determine whether we continue down our present path to national insolvency or if we might rise again to realise the Anglofuturist visions I wrote about in my previous column.

So no excuses then: we must go for growth. But how? The fact is that conventional economic policy just hasn’t delivered. Ten years ago I was writing for ConHome about Britain’s “productivity puzzle“, i.e. our long-term failure to recover from the banking crisis of 2008. A decade on, that puzzle still hasn’t been solved.

As Gavin Rice and Nick Timothy document in a must-read report for the Future of Conservatism project, we’ve essentially stopped getting richer as a nation. What little GDP growth we’ve seen since 2008 is in large part due to population growth fuelled by uncontrolled immigration, as opposed to improvements in output per capita.

Combined with post-covid inflationary pressures, out-of-control housing costs and overburdened public services, millions of us feel (and often are) poorer than we were ten or twenty years ago. Certainly we’re not growing at anything like the rate required to fund the demographically-driven demands on the state – which, according the OBR, will break our national finances before the end of the century.

The reasons for Britain’s economic decadence are complex, but they can be boiled down to three words: lack of investment. As Rice and Timothy put it: “UK businesses do not invest enough in innovation, technology, fixed capital and business growth.” The same goes for the public sector, where successive governments have allowed current spending to outstrip capital investment, guaranteeing diminishing returns for the money we do plough into public services.

This is a problem across the western world, but Britain is consistently a poor performer even by the low standards set by the most comparable nations. What can we do to improve this situation? For decades, the conventional Conservative prescription has been to cut taxes and red tape. But is this still the right medicine?

Despite a rising tax burden, we still get off more lightly than most of our competitors. Nor are we comparatively over-regulated. That suggests that our terrible record on investment is a better explanation for our productivity problems.

It’s also worth noting that when George Osborne tried to target tax cuts to boost business investment, i.e. by slashing away at corporation tax, the results were disappointing. The same goes for Liz Truss’s tax cutting shock therapy. As for Jeremy Hunt’s more cautions cuts to National Insurance (combined with subsidies for childcare), those didn’t work either, either politically or economically.

Even when the overall tax burden was falling (for about a decade during the Thatcher and Major years) there was no lasting impact on business investment levels, which have been trending downwards since the 1960s.

For fifty years, the big economic debate in this country has revolved around the balance between the public and private sectors. The Right has argued for a shift to the latter (mostly achieved through tax cuts and sometimes through austerity) while the Left has tried to pull it back the other way.

But what if both sides are wrong – which they can be if they haven’t even been asking the right question. Instead of public versus private, what we should have focused on is the balance between consumption and investment.

By consumption I don’t just mean what private consumers buy, but also the current government expenditure on things like the NHS and benefits. If we want to increase the percentage of our GDP that we devote to investment, then by definition the percentage that we consume must decrease.

So when I express my heretical opposition to (overall) tax cuts it’s not so that the state can fritter away more of our money. Rather, I’m arguing against lower taxes and against higher public spending.

Given that voters are notoriously fond of both, am I setting out an electorally suicidal policy platform? Well, without a purpose the Conservative Party is doomed anyway. So let’s make it our mission to stop pandering; tthe truth is that Britain must invest or die.

For proof that a nation can prosper by prioritising investment over consumption we only have to look east. China has hauled itself out of poverty and into economic superpower status by investing on a truly gargantuan scale. This is the nation that poured more concrete in the three years between 2011 and 2013 then America did over the entire 20th Century.

It’s easy to dismiss the Chinese success story as a function of cheap labour, low standards, and predatory trade practices. Top those off with a ruthless government unencumbered by democratic norms, and its clear that the PRC enjoys advantages that we couldn’t and shouldn’t replicate.

Yet that is not the whole story. When the Chinese are moving ahead of the West in fields from fintech to military drones, it’s clear that theirs is not just a bargain basement economy.

For instance, why is it that Chinese firms are able to manufacture hi-tech goods like solar panels, batteries and electric cars more cheaply than any other country? Is it solely because their overheads are lower? No; as the data scientist Hannah Ritchie points out, the leading Chinese companies are able to outperform their domestic competitors too.

The reason for that is investment in state-of-the-art automation. When robots are doing most of the work it doesn’t really matter what you pay your human employees.

So forget China’s sweatshops. They still exist, but the real threat to the West is an advanced Chinese manufacturing base that is leaving our factories behind in the last century. Or to put it another way: the most compelling argument for Anglofuturism is that Sinofuturism is already happening.

The great irony of China’s investment-led economic supremacy, is that it is being part financed by excessive western consumerism. There’s an old taunt ascribed to Lenin that “the capitalists will sell us the rope we will hang them with.” Today, it’s more a case of the Chinese selling us the rope with which we’re hanging ourselves.

We mustn’t give in to despair. New technology holds out the prospect that seemingly unassailable economic advantages can be rendered obsolete. Just look at the way that the second industrial revolution – powered by oil, electricity and production lines – allowed Germany to catch-up with and overtake Great Britain as the workshop of the world. Or to take a more recent example, look at how electric vehicle technology has allowed China to bypass German mastery of the diesel engine.

Needless to say, all sorts of things must change to put Britain back in the game. We need to sort out our energy supplies, our transport infrastructure, our planning system, the housing crisis and our trade policies. But above all we must become an investment-led economy again.

A Conservative economic policy that doesn’t start from this reality, hankering instead for tax cuts we haven’t earned, isn’t merely out of date, it’s downright pathetic.