Treasury Committee calls for a renewed, coordinated focus on long-term growth to bolster the UK economy
13 July 2022
In a report which will make essential reading for the new Chancellor, the cross-party Committee of MPs expresses concern at the ‘chop and change’, a risk of fragmentation and lack of long-term thinking in economic strategy, following the abolition of the Industrial Strategy and its replacement with the Plan for Growth.
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- Find all publications related to this inquiry, including oral and written evidence
While warning another wholesale change in policy would exacerbate this lack of long-term planning, the Committee calls for renewed coordination of growth strategy across Government departments and says it is not clear how the Plan for Growth offers an advance on its predecessor.
Following a substantial inquiry into ‘jobs, growth and productivity after coronavirus’, and addressing the fall in the number of people looking for work since the start of the pandemic, the Committee calls for additional resourcing for ‘long covid’ treatment, to enable those suffering from long-term sickness to re-enter the workforce in greater numbers.
While the outgoing Prime Minister has suggested that immigration is not the solution to labour and skills shortages, the Committee outlines that the current level of vacancies could hold back growth and stoke inflation, and calls on the Government to prioritise addressing skill gaps and ease labour shortages.
The MPs also call for the Treasury to help those most adversely impacted by changes in trade with the EU, and for the Government to more clearly identify the economic opportunities that may arise from Brexit.
Examining the UK’s ‘productivity puzzle’, the Committee outlines that business investment has fallen since 2016, and while a focus on reforms to tax incentives is a good start, wider economic certainty, coherence and stability in the Government’s growth policy - which is currently deficient - will be key to improving investment.
The MPs conclude that a significant part of the country’s productivity shortfall is due to a 'long tail' of low-productivity firms, usually small businesses, with relatively poor digital adoption and management skills.
The Committee also reiterates its disappointment over the decision to push back the target to spend £22 billion on research and development, and warns against further slippage.
The report summarises evidence received on how macroeconomic policy can facilitate growth and tackle the outbreak of inflation, amid uncertainty over whether the era of zero interest rates is drawing to an end.
Commenting on the report, Rt. Hon. Mel Stride MP, Chair of the Treasury Committee, said:
“We have a new Chancellor and shortly will have a new Prime Minister. Getting a grip on productivity will be key to kickstarting economic growth and stimulating greater business investment in the UK. The evidence that we received suggests there needs to be greater stability and long-term certainty in Government policy making.
“It’s also imperative that the Government takes action to help the large number of people suffering from long-covid, many of whom are likely to wish to return to work. Prioritising investment in this area is likely to have a tangible benefit on the UK’s tight labour market, which will help in the fight against inflation.”
Summary of the report’s key conclusions and recommendations:
The Industrial Strategy and Plan for Growth
- Witnesses were mostly unpersuaded by arguments for the abolition of the Industrial Strategy and its replacement with the Plan for Growth. The Committee is particularly concerned at the ‘chop and change’ and lack of long-termism in growth strategy and policy (Paragraph 18).
- Witnesses suggested there was no overall strategic vision of what the UK’s economic problems were, how they should be prioritised, and what policies and interventions were therefore effective. It is not clear to the Committee how the Plan for Growth offered an advance on the Industrial Strategy (Paragraph 24).
- The Committee does not believe that the Plan for Growth should necessarily be discontinued, let alone the Industrial Strategy revived, as another wholesale change in policy would exacerbate the lack of long termism and consistency in policymaking. Nonetheless, there needs to be a renewed effort at a co-ordinated growth strategy across Government, with clearly defined and measurable metrics for success (Paragraph 45).
Productivity after coronavirus – the key challenges facing the UK
- The Treasury should explain how it is identifying and helping sectors most adversely affected by changes in UK-EU trade, as well as more clearly identifying the economic opportunities that may arise from Brexit (Paragraph 72).
- A significant part of the UK's productivity shortfall compared to other countries is due to a 'long tail' of low-productivity firms, usually small ones. Relatively poor digital technology adoption and management skills are seen as key interlocking causes (Paragraph 85).
- The former Chancellor is correct to pinpoint business investment as a component of the UK's productivity shortfall. The UK's record in this area has worsened since 2016. In addressing this investment shortfall, the focus on reforms to tax incentives is a good start, but wider economic certainty, coherence and stability in the Government's growth policy, which are currently deficient, are also important for getting businesses to invest (Paragraph 100).
- The target to spend 2.4 per cent of GDP on research and development (R&D) is an important aspect of growth policy. The Committee reiterates its disappointment over the pushing-back of the target to spend £22 billion on R&D, and warns against any further slippage (Paragraph 105).
Jobs after coronavirus
- The Treasury must consider allocating resources to address the fall in the number of people looking for work since the start of the pandemic. That may mean additional resourcing for 'long covid' treatment, to enable those suffering from long-term sickness to re-enter the workforce (Paragraph 121).The Prime Minister has suggested that labour shortages should not be resolved through immigration, as part of a drive for a high-wage economy. At most, witnesses thought this could have a small effect on wages. But labour and skills scarcity could hold back growth and stoke inflation. The Government should prioritise addressing the gaps in the UK’s skills and taking steps to ease labour shortages (Paragraph 131).
Summary of the key points made to the inquiry on macroeconomic policy issues:
- Global energy prices and supply chain disruptions arising from the pandemic are the main factors behind the outbreak of inflation. But second-round effects, in the form of inflation expectations among the public, and domestic factors in the UK, such as a tight labour market, Brexit, and weakness in sterling, could mean that inflation will not go automatically back to the two per cent target once energy prices stabilise or fall back.
- There were mixed views on whether the Monetary Policy Committee should have raised rates earlier. Some former Monetary Policy Committee members now advocate steeper rises than the current Committee appears to have in mind, and there was concern that the Bank may need to do more to prepare people for the possibility that interest rates rise by more than currently indicated by its forecasts and guidance.
- Interest rates are currently on a tightening cycle, but there was disagreement in the evidence we received over whether interest rates and inflationary pressures would continue to rise or would return to the low levels of the period between the financial crisis and recession. However, there was a general agreement that it is desirable to have interest rates away from zero and to have quantitative easing wound down.
- Several witnesses thought that the current fiscal framework was too restrictive of investment. In particular, the net zero transition may need substantial public investment, and they thought the Treasury had been wrong to rule out financing this through borrowing. Witnesses also thought there was not currently a pressing need for tax rises (Paragraph 190).
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