Make Britain grow again

Growth, or rather a lack of it, has become the political issue of the moment. Keir Starmer came into government last July with a promise to make his top three priorities “growth, growth, growth” (a reflection of Tony Blair’s “education, education, education”). Yet six months on a lukewarm recovery has cooled, and the economy is flatlining.

With impeccable timing, Jon Moynihan, venture capitalist and now peer of the realm, has written a two volume treatise on how Britain can clamber out of its slough of despond. The situation, he says, is worse than it at first seems thanks to the Office of National Statistics’ practice of publishing raw GDP figures when it would be more enlightening to publish figures for GDP per capita. With net migration of over 700,000 a year that is a serious failing: whilst the economy appears to be growing — just about — output per person has been falling for several years. In other words, we are steadily getting poorer — no wonder so many workers feel so aggrieved that their pay packets are failing to keep pace with inflation (although unions bleating about falling real pay are wrong to assume that it is only their members who are affected, as it is impossible for the majority to have real-terms wage rises when GDP per capita is falling).

The years since the pandemic have been especially grim, yet Britain’s low-growth problem pre-dates Covid. Over the past two decades, GDP per capita in Britain has averaged 0.7 per cent per year. In the US the rate has been twice that, with the result that GDP per capita in the US is now 45 per cent higher than it is in Britain. Not that this prevented disillusioned Americans dumping the Democrats in the 2024 elections largely in protest, it seems, at high inflation eating away at their earnings.

Moynihan’s diagnosis and prescription are straightforward in broad terms, even if, as he admits, his views are not currently in fashion. The UK state, he believes, has become a bloated monster, taking too much of our money in taxes, and yet still managing to splurge cannons-full of borrowed money on top — with the result that 11 per cent of public spending is now simply servicing government debt. The government is frittering money on pointless quangos, a socialised healthcare system, excessive welfare and disability benefits to people who don’t need them, and on an oversized civil service whose numbers have mushroomed since 2016. At the same time, the UK state has drained the life out of the private sector through over-regulation. Moynihan identifies what he calls a “quasi government” sector which sits between the public and private sectors and is made up of businesses which are doing the state’s bidding without market forces really being involved — privatised train companies, which hoover up public subsidies, have fewer and fewer commercial freedoms and whose services are now due to be renationalised under Labour, might be an example. The quasi-government sector, Moynihan calculates, makes up a rapidly-growing 28 per cent of the economy, with the genuine private sector down to just under half the economy.

Moynihan knows what he is talking about, not least in the matter of how wealth is generated

These are weighty tomes in the literal and metaphorical sense — my regret is that their bulk precluded me stuffing them in a pocket, or even a bag, and reading them on a train. But the glossy pages do allow for a multitude of revealing graphs in glorious technicolour. Some are disarming in their simplicity. One, for example, shows a strong inverse correlation between the proportion of a country’s economy made up by the public sector and its economic growth since 1960. Moynihan assures us there is plenty of evidence which shows a causal connection, too.

Moynihan’s prescription follows from all this. His target is to shrink the public sector’s share of the UK economy back to 33 per cent — down from over 40 per cent as it is at present. Whilst this might sound dramatic, it would merely take us back to where we were in the early days of the Blair government — when the economy was growing much more strongly than it is now. That would allow wealth-destroying rates of tax to be lowered, and allow entrepreneurship to rebound.

There is no avoiding the issues here: Moynihan has presented us with a detailed budget of spending cuts and tax cuts. I beg to differ on some of his proposals. There may be some logic to extending the scope of VAT so that the 20 per cent rate can be lowered, but I wouldn’t want to be the Chancellor who announced that they were extending VAT to food. Nor am I a fan of abolishing capital gains tax or inheritance tax. Rather I would favour flattish taxes which treat all kinds of income the same: ie a pound be taxed in exactly the same way (as low as possible) whether it has been earned through work, gained through rent, dividends or capital growth in investments, or inherited. It seems to me that that is the best route to a simple and fair tax system, which eliminates loopholes and perverse incentives.

Nor do I think Moynihan gives sufficient consideration to one of the underlying factors behind the growth in the state: an ageing population. It would be difficult in practice to return to the state we had at the beginning of this century because we have far more people claiming pensions and requiring health and social care. Moynihan does have a partial solution: what would be a deeply-unpopular — but right — move to increase the pension age eventually to 70, and to do away with the triple lock. But that doesn’t help deal with the problem of providing social care to the growing population of nonagenarians.

These volumes are a lively and invaluable contribution to the debate of the future direction of government policy, which should give the current administration plenty to reflect upon. Moynihan knows what he is talking about, not least in the matter of how wealth is generated and how easily entrepreneurship can be diverted to other shores through greedy and obstructive behaviour by the state. The one thing neither the ONS nor anyone else can measure is the quantity of extra economic activity we would have were entrepreneurs not put off from setting up shop in Britain. But just look at the US for a clue and ask: why does it have all the tech giants, and a long-term rate of economic growth that is twice Britain’s?

What, though, are the chances of Moynihan’s ideas making it into government policy? Alas, polls show that public support for an all-encompassing state which involves itself in all our day-to-day problems has increased markedly since the pandemic. Even a political earthquake in which Reform UK turned Labour out of office would make little difference in some respects, given that the upstart party has started to dabble in the notion of nationalising iconic industries like steel. The UK’s economic situation, opines Moynihan, will in all likelihood have to get even worse before there is finally any impetus for the solutions he recommends here. Think Javier Milei and his chainsaw, which finally seems to be saving the economic basket-case of Argentina — and hope that things don’t have to get quite that bad before Moynihan’s carefully-reasoned and well-evidenced diagnosis of our ills starts to sink in.