Reeves is not short of advice on how to boost the growth rate

Like a weary pilgrim who has finally made it to Santiago de Compostela, or a marathon runner who has negotiated “the wall” and now has the finishing line in sight, I am glad the journey is now nearly complete. I am relieved to say that this is my last pre-budget piece, for this budget at least, and you may be relieved too.
For this final curtain-raiser, I don’t want to talk about what rabbits Rachel Reeves might pull out of the hat, or the not-so-fluffy things we will hear about very soon. Rather, I want to try to answer a question I get asked a lot: where will the growth come from?
There are two points to make on this. The first is that painful though they may be for some, tax hikes are not all that this budget will be about. The very fact that Reeves intends to borrow to invest tells us something too.
Fiscal multipliers are what economists use to assess how much “bang for the buck” different policies have. Pretty well every economic model shows that multipliers for public investment are significantly higher than those for tax changes. Individual tax hikes may be damaging and unpopular but a budget that provides a meaningful boost to public investment should be associated with stronger medium and long-term growth. Public investment generates jobs and economic activity while under construction, and later adds to the economy’s ability to grow. I would not overemphasise it, but the advance characterisation of the budget as a growth-destroyer may be wide of the mark.
The second point is that in seeking to raise the economy’s growth rate, Reeves is not attempting a miracle cure. The UK economy has grown by an average of 2.5 per cent a year since 1949, but only by 1.1 per cent since 2007. Getting back to 2.5 per cent growth, the target adopted briefly by Liz Truss, will be difficult but should not be impossible. Growth before the financial crisis averaged 2.8 per cent annually.
The period of weaker growth in the 2010s and beyond has not been an idle one for experts seeking faster-rising prosperity, and the chancellor has some of those experts close at hand. John Van Reenen, chairman of her Council of Economic Advisers, was co-chair with the former monetary policy committee member Tim Besley of the initial phase of the London School of Economics’ Growth Commission.
It brought together economists, leading business figures and other experts. Among the recommendations in its final report were a focus on raising skill levels, an industrial strategy and greater openness in trade, including a “services passport” to allow more trade in services with the European Union. It also called for financial sector reform to improve incentives for equity investment and more “long termism” in general in investment decisions.
More recently the Resolution Foundation, collaborating with the LSE, published its Economy 2030 Inquiry. The foundation is influential in the Labour Party, its former chief executive Torsten Bell being elected as one of the party’s MPs in July. His book Great Britain? How We Get Our Future Back drew on the Economy 2030 Inquiry.
The final report of the inquiry, Ending Stagnation, was published late last year. It stressed Britain’s “huge strengths” and status as a “services superpower” but also the fact that the past 15 years had been a period of economic stagnation.
For services, it called for trade policy “more expansive in focus and innovative in approach” and said the government should “pioneer new services trade agreements with the likes of Singapore, Australia, Canada, Switzerland and Japan”. Since Brexit, “the UK has suffered a broad-based fall in both openness and competitiveness”.
Most of all, growth will not revive unless we invest more. UK public and private investment combined is the lowest in the G7. “Investing too little for one year is manageable, but doing so year after year is a recipe for relative decline,” it concluded. “This is precisely what the UK has been doing and where it finds itself … Virtually all of the productivity gap with France is explained by French workers having more capital to work with.”
Prolonged low investment, and the need to raise it, is also one of the key diagnoses of the Productivity Institute, a group of experts which has come together in an effort to lift the UK out of nearly two decades of productivity stagnation.
Another important strand is fixing public sector productivity, which on one measure is lower than in 1997. Stagnant public sector productivity translates into an ever-rising tax burden. The Tony Blair Institute recommended a shift to the new debt measure of public sector net financial liabilities (PSNFL), or “persnuffle”. In a new paper, Looking Beyond UK Budget 2024: Priority Reforms for 2025, it says harnessing new technologies, including AI, is the key to boosting public sector productivity and reforming the tax and benefit system.
There are other think tanks, though those on the right are in danger of devoting their efforts to attacking the government rather than offering constructive ideas.
Nobody pretends boosting growth will be easy. The international environment is less favourable and, as discussed last week, could be even worse if Donald Trump wins next week.
It is quite possible that Labour will deliver the wrong sort of productivity growth if higher labour costs and red tape mean lower employment. It is also quite possible that, while public investment will be higher, the goal of boosting private sector investment will elude this government, as it has its predecessors. There is also the question of whether the “X factor” missing for the past decade and a half, the buzz which leads to the creation of enough exciting new businesses, can be rediscovered.
We know why the UK economy has struggled. Whether the many ideas for ending that struggle can be successfully put into practice is one of the many questions about the budget.
David Smith is Economics Editor of The Sunday Times
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