A new prime minister and wealth creation

The UK is to have a new Prime Minister. Tax has dominated the debate between the leading candidates. True Conservatives, it appears, are committed to cutting taxes.

How are these to be paid for? The conversation has turned to that long neglected question: how does government increase productivity and improve growth?

So far in the campaign we haven’t heard. So I looked back at earlier speeches.

Both Liz Truss and Penny Mordaunt see salvation in free trade and the entrepreneurial energy it will stimulate.

To Liz Truss the answer is simple. She describes our country as

a ‘nation of Airbnb-ing, Deliveroo-eating, Uber-riding freedom fighters’ which is being held back by ‘a thicket of regulation and control which is holding back business’.

Speaking to an American audience about a new trade agreement Truss said:

‘After Brexit we have a huge opportunity to turbocharge freedom, unshackle entrepreneurs, build a more dynamic economy and a new relationship with the US. We’ll make the modern Anglo-American dream happen for a new generation.’

Meanwhile Mordaunt, who is currently Trade Secretary says

‘The only path to victory at the next election lies through the arch of economic growth and our citizens being able to live well. That means a modern economic framework that promotes and enables wealth creation and opportunity. It means access to GPs and dentists. It means household budgets keeping pace with bills.‘

But what is that economic framework?

Penny Mordaunt sees

‘a global battle now between two very different versions of capitalism.‘

‘On the one hand, we have what for the most part applies in the UK, US, and its allies – free market capitalism, where competition is the organising principle.‘

‘On the other, there is a state-led version of capitalism where government distortion to seek specific ends is the chosen path…‘

‘After all, free markets and democracy walk hand in hand. Their relationship is reflexive – one serving the other….

The consumer purchase is a proxy for democracy. It rewards the best. It directs resources. And trade responds faster. It is more finely calibrated towards consumer needs. It allocates resources more effectively.‘

At this point one might ask Britons and Americans how well this analysis works with health services. If we compare the results achieved by the insurance-based, profit driven US version with those achieved by the UK’s admittedly under=funded state-led version, we might conclude that there are some very large areas in which the consumer purchase is not a proxy for democracy.

I might also ask Penny Mordaunt how exactly the climate crisis is to be tackled though competition. And ask Liz Truss how a repeat of the tragedy of Grenfell Tower is to be prevented without strong and rigorously enforced health and safety regulation.

Richie Sunak has been more cautious about tax cutting. He has also looked beyond deregulation and free-trade for sources of improved growth. Delivering the Mais lecture in February he said

‘So in accelerating growth, I have three priorities ….that ….will foster a new culture of enterprise and deliver a higher growth rate. The first is to encourage greater levels of capital investment by our businesses. Second, we need to improve the technical skills of the tens of millions of people already in work. And third, we want to make this the most innovative economy in the world by driving up business investment in research and development.’

Sunak acknowledges that

‘Even in the decade before the global financial crisis, capital deepening grew UK productivity by …less than half the OECD average. And this is a longstanding cause of our productivity weakness internationally.’

‘Why is investment so low? My analysis is clear: the problem is no longer the Government; businesses simply aren’t investing enough.’

This sounds familiar. In 2016 Tomorrow’s Company said

‘For the last few decades the corporate sector, rather than borrowing money to invest, has been a net saver in the economy. …To compensate for this, the government has had to perpetually boost the economy. …Despite these measures, the economy is still stalling, and entering the next recession, the government will have few policy levers left to pull.’

The Tomorrow’s Company analysis reinforces Sunak’s point about failure to invest, but whereas Sunak merely mentions fiscal incentives, Tomorrow’s Company points to the systemic factors which together create a short term focus. For example, the three largest listed house-builders chose to return £840m to shareholders instead of investing more of that capital in tackling the housing crisis. In a later publication with the All-Party Parliamentary Corporate Governance Group Tomorrow’s Company described a coherent set of government policies. that would encourage investment and build healthy companies. These included

1. Simplifying the investment chain
2. New opt-in stewardship investment vehicles to Increasing the influence of ‘patient capital’ in the system
3. New stakeholder panels to strengthen accountability around Section 172 of the Companies Act
4. Simplifying corporate governance codes to declutter the boardroom

Sunak’s two other priorities are also in line with the Tomorrow’s Company critique. One is investment in skills. The other is the encouragement of R&D.

So here are my wealth creation questions for the remaining candidates.

1. Do you accept that policies for wealth creation require a systemic approach embracing entrepreneurship, investment institutions, the company sector, skills, technology and R&D?
2. What contribution will your policies make to the wellbeing of our grandchildren? In particular how will your policies protect them from the current climate emergency?
3. How are your policies going to improve productivity?
4. What policies will you adopt to encourage greater investment by companies?
5. How will you improve skill training, especially for those pupils not motivated by academic education?

We have bid farewell to the PM who said ‘F*** Business’. Let’s find out what we have got in his place. Before it is too late!

Mark Goyder is Founder of Tomorrow’s Company and Senior Advisor to the Board Intelligence Think Tank. He is the author, with Ong Boon Hwee, of Entrusted – Stewardship for Responsible Wealth Creation, published by World Scientific in 2020