Britain needs to rediscover its economic spirit of adventure

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The writer is the author of ‘Growth: A Reckoning’ and an economist at Oxford university and King’s College London

The British economy is in trouble. Growth is non-existent. Productivity, which already sits below the US, Germany, and France, is falling. Real wages have barely moved for 16 years, their worst run since the Napoleonic Wars. And investors are starting to wobble, pushing borrowing costs up to a 16-year high.

How did Britain get in this mess — and how does it get out? It is hard to think of a more important question for the country. Yet the new Labour government has still not provided a persuasive answer. Instead, their focus has been on a handful of economic messages that have created unhelpful traps for themselves and actively harmed growth.

In opposition, the message was “no taxes on working people”. Perhaps this was politically useful, a defence against warnings that they would raid voters’ pay packets. But its presentation was botched, bogging Labour down in weeks of esoteric argument about the true meaning of the word “working”. Worse still, keeping the promise in power has held the economy back.

This is not a good moment to put the bulk of a mammoth £40bn tax rise — the largest since 1993 — on to business. Small companies are in decline. The number of new start-ups has been falling for five years. Worklessness is stubbornly high. And the aftermath of the eventual national insurance hike — surveys suggesting higher prices and lower wages to come — looks, in effect, like a tax on workers.

In office, another message took hold: Britain faced a “black hole” in its public finances. This could have been cast as fiscal irresponsibility, requiring new borrowing rules and transparency measures. But instead, Labour presented it as fiscal overspend, repeatedly stressing the vastness of the shortfall (“£22bn”), contorting themselves in unconvincing argumentative gymnastics to avoid the obvious solution to their own framing — more austerity.

And again, none of this helped growth. Week after week, we were told about the catastrophic state of Britain, how “difficult decisions” and “tough choices” lay ahead. All that unrelenting pessimism crushed the country’s stirring animal spirits.

“The government,” noted the former chief economist at the Bank of England and FT contributing editor, Andy Haldane, “has generated fear and foreboding, uncertainty . . . which is unfortunate because just after the election there was a sense of refresh, a sense of renewal.”

The closest the government has come to a diagnosis of what has gone so wrong is their most recent message: we must “fix the foundations”. It is true that Britain does fail to do the basics. We have a backlog of several million houses that need to be built. The application process for the Lower Thames crossing — a tunnel under the river — cost more than twice what it actually cost to build the longest road tunnel in the world in Norway. We haven’t built a nuclear power plant for three decades and our next — Hinkley Point C — is six times more costly than those in South Korea.

In the pursuit of prosperity, however, it is not enough to simply fix the foundations. Britain must build the future as well.

The little we know about growth is that it comes not just from old-fashioned investments in roads and houses, but from new ideas, innovation and technological progress. This points towards a deeper diagnosis of what has gone so wrong in Britain: it is not simply that those old-fashioned investments are stagnant, but these other growth-promoting parts of economic life are languishing as well.

Businesses are struggling to innovate, filing far fewer patents than rivals in Europe and elsewhere, with private R&D now falling as a percentage of GDP. British universities are not helping, doing a wonderful job of producing academic research (57 per cent more publications per capita than the US) but being consistently poor at putting those ideas to productive use.

The City of London, a traditional source of British vitality, looks exhausted. While the total value of companies on the London Stock Exchange fell since 2007, the value of American stocks trebled. What’s more, the industries choosing Britain are dated. The five largest companies in the UK by market capitalisation are mostly from old-school sectors: oil, mining, finance, chemicals. In the US, it is Apple, Nvidia, Microsoft, Amazon, Alphabet that dominate.

And we know that the technology sector really matters for growth. In the US, it is almost entirely responsible for the country’s astounding productivity performance — three times the pace in the Eurozone and the UK since 2008-09. That is why this week’s AI “action plan” for the UK is encouraging: AI will be the most important technology of the 21st century and the UK has the most valuable AI sector in Europe. It must now build on it, deploying the political leadership and financial resources required to turn the 50 recommendations in that plan into reality.

Three hundred years ago, Britain thundered ahead of its rivals because a fresh spirit took hold — risk-taking, entrepreneurial, aggressive in discovering new ideas about the world, single-minded in putting them to practical use. It is that spirit we need to nurture once again.