Published:

Bim Afolami is MP for Hitchin & Harpenden.

In the wake of another Budget, I have been wading through the Red Book and the other documents. One word keeps coming to my mind. Growth.

Why has it been stubbornly weak? What can the Government do about it? What are the political consequences of low growth over the medium and long term?

Growth has been stubbornly weak across most of the Western world since the financial crisis. Britain’s economic performance has been even worse than those of our main competitors, such as Germany, the US and Canada.

Between 1979 and 2010 (including three recessions), growth averaged 2.3 per cent each year and, if you exclude the major recession years of 1980, 1991, and 2009, growth averaged 2.8 per cent.

But since the financial crisis up and until Covid hit in early 2020, growth has averaged 1.8 per cent – with no recession during that time. If you look at the Office for Budget Responsibility’s forecasts for the coming years, you will see that it predicts the medium term outlook for growth is 1.7 per cent per year, in line with the post-financial crisis growth pattern. Why do we accept this?

I am boring you with these statistics to evidence a simple point. Our growth is a lot lower than it used to be: roughly 30 per cent to 40 per cent lower than it used to be, every single year. There are lots of purported reasons for this low productivity – and hence low growth: over-reliance on foreign labour, preventing investment in automation; regional inequality; poor skills in middle management and SMEs; the over-allocation of wealth in housing; low private capital investment levels; weak exports; poor numeracy, poor transport infrastructure, and many more.

The Chancellor is acting to fix the problems. The Help to Grow scheme is specifically focused on improving the management capability and outcomes for thousands of SME owners across the country. We are investing record amounts into R&D and reforming R&D tax reliefs, taking us forward to being a science and tech superpower. We are continuing to deliver on our promise on investing record amounts in infrastructure. We are maintaining such tax reliefs as the Enterprise Investment Scheme and Seed Enteprise Investment Scheme, which encourages those with capital to invest them in fast-growing British businesses, rather than buy property or land. The Chancellor launched a new £500 million scheme, Multiply, designed to target one of the biggest complaints from business owners:the poor numeracy of many staff entering the workforce.

I strongly support what he is doing. We should hope that all of these measures have an impact over the medium term. However, I have a nagging sense that, despite our best efforts, these policies alone will not move the dial on growth sufficiently. Let me explain why.

A few months ago, I finished the books of the brilliant economic historian, Deirdre McCloskey, whose trilogy (Bourgeois Virtues, Bourgeois Dignity, Bourgeois Equality) incessantly remind us of the exceptionality of economic growth.

The three books comprise an intellectual journey which aims to answer the great riddle of modern economic historians: why did the Industrial Revolution, with its immense economic growth, take off precisely when and where it did? Why Britain? Why the eighteenth century?

Her answer is that it was culture that needed to change so that the economy eventually could tpp. Materialistic enrichment had non-materialistic causes. She argues that “talk and ethics and ideas caused the innovation”. In particular, “ordinary conversation about innovation and markets became more approving”. Wealth could be created on a grander extent than ever, but only as soon as wealth creation was no longer deemed a filthy purpose by the educated elite.

It was the championing of innovation (not merely capital accumulation) which fundamentally transformed our economic prospects as a nation, and we led the world. Ideological and societal changes were the sine qua non of transformative growth of the eighteenth and nineteenth century, not tax policies nor our legal system nor stable national institutions (though these were all undeniably helpful).

Margaret Thatcher’s governments understood the importance of boosting economic growth and dynamism in that era. Nigel Lawson’s Chancellorship was pivotal for the pro-enterprise policies and tax rates that he introduced. However, a huge element in our success during the 1980s was the social change that saw innovation and enterprise and getting richer as an unambiguously good thing – particularly for the working classes.

This social change was partly driven by the atmosphere, rhetoric and tone of the Government, backed up with concrete pro-growth policies. Looking at a very different society to ours – China – one sees that the 40 year explosion of its economic growth was not just about legal and policy changes.  The Communist Party allowed a new spirit to sweep the country: soon after Mao Zedong’s death, Deng Xiaoping declared that “to get rich is glorious” and “it doesn’t matter whether a cat is black or white – so long as it catches mice,” which was indicative of his view that socialism was not incompatible with a market-economy. These sentiments had a huge impact.

We need two things if we are to have a hope of reviving our growth rate.

First, on the technical side, we are going to need to continue the many pro – growth policies that this Chancellor has introduced and, in addition, significantly reduce the tax and regulatory burden for SMEs – which are far too high at the moment.

Secondly, we will need to shift the whole focus of the Government’s energy towards a pro-growth mindset overall, not just a redistributive one with regards to levelling up (important though this is). Conservative politicians should champion the nobility of wealth creators, work with those in universities and civic society to promote a more positive image of innovation, and praise these things because they are a good in themselves – not just because their taxes help the Exchequer.

Perhaps by linking innovation to the green agenda, and the unifying cause of saving the planet from gradual decline, we can actively argue that more economic innovation is a social good because it enriches society.

What would all this look like? It could mean a reshaped honours system – to champion innovators and wealth creators much more. It might mean Government policy in all areas being publicly changed to optimise for growth as the primary goal above all else (i.e: universities policy and regulatory policy). It could mean a shift in the national curriculum to teach children the positive virtue of setting up a business with clear, ethical goals, and that this is a positive way to help your community.

If we fail to significantly lift our growth rate, we will have a growing list of problems. There will be an ever-increasing tax and debt burden, because demographic changes mean that our public services (particularly NHS) will need more money every year. It would mean the failure of levelling up, because redistribution of a stagnating cake is not politically sustainable in the medium term. Finally, it would mean continuing generational inequality, because the tax rates of working (younger) people will be so high that they will have no ability to build up capital assets; and any attempt to tax older generations to a much greater degree than today will be politically tricky.

Much higher growth is the necessary condition for us as a country to be successful in the future. This Chancellor has diagnosed the problems, and is acting to fix them; but the Government overall will need to take a lead to make this the central rhetorical, atmospheric, policy focus of the country as a national mission.