Build, Baby, Build: Four things the next government must do if it’s serious about growth

Both parties say they will go for growth, but they are ducking some of the really big questions about how we get there, says James Vitali

Both main parties are conscious of how precarious the UK’s public finances will be over the next Parliament. Both are hopeful that a significant uptick in the UK growth rate might extricate them from having to make some very difficult decisions on taxation or public spending. Yet in their respective manifestos released last week, Labour and the Conservatives have produced markedly different visions for how that growth might be achieved.

When it comes to growing the economy, Policy Exchange’s has argued strongly for a greater sense of political strategy and prioritisation. What, then, are our priorities at this election, and how far have the two main parties addressed them? If we had to choose, we would say there are four: supply side reforms to make it easier to deliver housing and infrastructure; measures to support savings and investment; a simpler tax code that better supports work; and reforms to the civil service to get a grip on the ballooning size of the state.

Housing and Planning

If a government could do just one thing, we would want it to be planning reform. The current regime inculcates uncertainty, delay and vexation, and dampens the entire supply side of our economy.

Both parties have put forward sensible suggestions to get more homes built. The Conservatives have pledged to densify existing urban areas, regenerate estates and support self and custom housebuilding – all policies advocated in Policy Exchange reports like Homes for Growth and The Property Owning Democracy. We are also pleased to see a commitment for scrapping nutrient neutrality rules which are holding up hundreds of thousands of homes in areas of demand, and a pledge to deal with planning obstacles to non-residential development.

Labour too has offered sensible proposals to deliver housing near our cities, particularly on land near transport infrastructure on the green belt which is lacking in any environmental or aesthetic value.

And we are delighted to see both parties highlight the importance of widening property ownership in restoring the moral legitimacy of our economic model in the eyes of younger generations and how architectural beauty can help secure local support for new development – two things we have written about extensively.

But questions remain. For the Conservatives, the latest data for planning applications shows a seven per cent year on year plunge. With the scrapping of targets and changes to the NPPF, is there any reason to think that this figure will improve with their current proposals? When it comes to Labour, higher affordable housing requirements upon developers are likely to slow the actual delivery of homes in the short to medium term.

Savings and Investment

Britain’s low investment rate is the subtext of our economic malaise, as we set out in our report Economic Transformation: Lessons from History. It is why our businesses are not getting more productive and it is why our infrastructure is increasingly tired and dated. And what investment we do have is often funded from overseas, which puts pressure on our Current Account, and eventually the UK’s fiscal position. Of all the important macroeconomic indicators, our savings and investment rates are where we lag the most internationally.

The Government should be commended for its efforts to increase business investment, particularly the last Chancellor’s introduction of full expensing. And broader attempts to reduce the tax and regulatory burden will be supportive of business investment. But the Conservative Manifesto did not offer any powerful inducements to support savers, nor any reforms to incentivise investment in UK capital markets, which we believe is a missed opportunity.

Labour has made increasing investment a central part of manifesto pitch, particularly “catalytic” public investment. The case for greater public sector investment is strong indeed, but how it is to be funded is a thornier subject. With the state already larger than at any other point in peace time history, Labour is not pledging to finance that increased investment by rebalancing day-to-day spending, but by altering the fiscal rules to create room for borrowing for the purposes of investment. If Labour’s stated aim is to make the UK economy more resilient and more robust, this is the wrong way to think about funding an increase in the investment rate.

Taxation

Let’s start with the good. The Conservatives have maintained their pledge to cut employee National Insurance Contributions and eventually scrap them, reducing the tax burden on earned income. This is certainly a positive, pro-growth move, and will make a material difference to household finances (even taking into account frozen thresholds). Smoothing the cliff edge on VAT is a sensible move too, as is moving child benefit to a household basis.

The business rates system is outmoded, and fails to account for the vast shift towards online commerce. Labour’s commitment to reform it will support high streets and future proof revenues.

But beyond this, both parties’ policy platforms on tax have shortcomings. With an urgent need to bring down the tax burden as a proportion of GDP, it is entirely right for the Conservatives to scrutinise Labour on whether they might add to that burden.

But unfortunately, this contest to look the most hawkish on taxes has also led them to rule out reform in areas of the tax code where it is badly needed. Council tax is still based on valuations set when John Major was Prime Minister. Some of the homes which have seen the greatest capital gains in this time have the lightest tax liabilities.

Moreover, the Conservative commitment to scrap self-employed National Insurance Contributions at a cost of £2.6bn is a poor way to incentivise entrepreneurship and widens the wedge between employed and self-employed income.

Of far greater concern is the fact that the Labour party does not appear to see reducing the tax burden as a priority at all, nor to reconfigure the tax code to be more supportive of growth. Instead, lumping VAT on private schools may end up reducing the number of good school places in the UK and thus hamper one key driver of productivity – that is, skills and education.

Cutting the Size of the State

The driver of a higher tax burden and of anaemic productivity growth is the size of the state. Reducing government expenditure as a proportion of the economy is critical if we are to build a more dynamic economy.

It is on this subject perhaps where the difference between the two manifestos is starkest. The Conservatives have committed to a £12bn reduction in the welfare bill, and efficiency savings through reducing the swollen number of working-age benefit claimants post Pandemic, reducing spending on “EDI training”, consultancies, and “quangos”, and reducing the number of non-frontline NHS employees.

Labour, by contrast, have said there are no such savings to be had on the welfare bill. And it has made clear its commitment to a larger, more active state as part of its vision for “securonomics”, with new publicly owned companies, and an undertaking for more government intervention in labour markets. Growth, Labour argues, will be driven in large part by a “smarter” state. But while securonomics taps into a widely held desire for greater economic security, there is little reason to believe that their plans will leave households more resilient or robust. Indeed, higher taxes and greater dependency on state support will have the opposite effect.

We should welcome the fact that this election is being fought on growth, and that both Labour and the Conservatives are seeking to outbid each other on how best to enlarge the economy. That is the right conversation for our country to be having. But some tough choices are required to futureproof the government’s balance sheet, and to deliver per capita prosperity in the UK. And it is fair to say that both of these manifesto’s broadly duck or defer the really important ones.

Dr James Vitali is Head of Political Economy at Policy Exchange