Will the Budget Rise to the UK’s Growth Challenge?

Jeegar Kakkad Director of Policy for Future of Britain

James Browne Head of Work, Income and Inequality Analysis

March 13, 2023
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The future of Britain will depend on a new age of invention and innovation. With the United States attracting vast investments through its Inflation Reduction Act, China seeking global leadership in the key industries of the future, and the EU moving to compete with them, the budget presented this week needs to focus on how to mobilise and equip millions of Britons, along with government and business, to get ahead. This cannot be done half-heartedly.


The United Kingdom can thrive in this new world, but only if it moves beyond stale debates on tax-and-spend and the size of the state. Instead, the UK needs to embrace the tech revolution and put it at the heart of a radical new policy agenda and a fundamental reshaping of the state, from how government itself works to how public services are delivered.

The government’s rapid response to the collapse of the US-based Silicon Valley Bank (SVB) and its subsidiary SVB UK helped protect jobs, investment and companies that will be important to the UK’s economic health. But the sale of SVB UK to HSBC does not mean the government’s job is done.


Chancellor of the Exchequer Jeremy Hunt must build on this moment with reforms that strengthen the UK’s tech ecosystem over the long run. This means this week’s budget should look beyond the standard toolbox of half-measures and short-termist policies: proposed tweaks to business-investment allowances, while needed, simply don’t match the scale and pace of the challenge facing the UK.


If the chancellor wants to be genuinely ambitious, the Tony Blair Institute’s report A New National Purpose provides the blueprint for a fundamental reshaping of the state and our economy around technology.


The first thing Hunt should do is recognise the Treasury’s role in holding back UK science and innovation. Last week, the independent review of the UK’s science and innovation landscape led by Sir Paul Nurse, director of the Francis Crick Institute, agreed with TBI’s view that Treasury micromanagement of science and technology spending wastes taxpayers’ money and innovators’ time.


If the government wants the UK to become the next Silicon Valley, then the budget must address the biggest barrier to that ambition: the Treasury itself.


Once the role of the Treasury has been reshaped, a range of options become available, and we would recommend the following:


1. Create a central strategic and delivery unit for science and technology that spans Number 10 and the Cabinet Office, empowered to embed the science and innovation agenda across the whole of government. This should be modelled after the White House Office of Science and Technology Policy (OSTP) in the US.


2. Place core R&D investment for key delivery agencies such as UK Research and Innovation (UKRI) and ARIA on seven- to ten-year spending cycles to attract more private investment. Longer spending cycles could be allowed where necessary, such as for institutions and long-term investments, with light-touch checkpoints based on expert international review.


3. Set up an Advanced Procurement Agency (APA) with a specialised mandate to find opportunities for public-sector innovation, procure promising solutions and manage their deployment and testing.


4. Incentivise pension consolidation and encourage growth equity by making the pension capital-gains tax exemption applicable only to funds with over £20 billion under management that allocate a minimum percentage of their funds to UK assets; and combine the UK Pension Protection Fund (PPF) and the National Employment Savings Trust (NEST) to create a single investment vehicle that participates in market consolidation.


5. Pursue broader planning reforms to ensure infrastructure projects that are critical to the UK’s economic transformation – from electrifying the grid to new R&D infrastructure – can get fast-track approval at the national level.


Will the Budget Be Practical or Political?

After the economic, market and geopolitical turmoil of the past four years – much of it self-inflicted – it will be tempting to deliver a safe and sensible “stability budget” that uses familiar investment incentives and policy nudges and claim victory. And in practice, the government’s own pledges to halve inflation this year and ensure debt is falling in five years will be powerful moderating factors on the chancellor.


With an election likely next year, the chancellor may also want to use the budget to set political traps for the opposition that may outweigh the pressing need to take the radical yet practical steps needed to boost innovation and business investment. 


For example, the Conservatives will want to repeat their Labour “tax bombshell” campaign in the next general election and have already made policy decisions that place Labour in a difficult position. Labour has committed to balancing the current budget at the end of the forecast horizon and getting debt as a share of national income on a downward path. Current policy does not comply with these rules – the current budget is still set to be £5.6 billion in deficit in 2027–28 on the latest OBR forecasts.


The chancellor may seek to limit the amount of headroom against his fiscal rules as much as possible by announcing personal tax cuts that will be difficult for Labour to oppose now or to reverse once in office – though history suggests that tax rises are on the cards after the election regardless of which party forms the next government. 


The composition of the fiscal tightening that has been pencilled in for the start of the next parliament may cause problems for Labour. The chancellor announced in the autumn statement that departmental spending would increase by only 1 per cent a year for the three years starting in 2025–26. Given likely demands from the NHS, defence and overseas aid, this will mean real-term spending cuts in other areas such as the police, justice and local government where spending is still lower than it was before 2010.


Even though it is probable that these plans will be revised up when precise spending allocations are made at the next spending review no matter which party wins the next general election – as has happened at each of the last four spending reviews – the chancellor is unlikely to do so now. As in 1997, this will leave Labour an awkward choice between sticking to implausibly tight spending plans or proposing tax rises. 


No Time for Old Mindsets

No doubt much of the commentary immediately after the budget will focus on the minutiae of the revised fiscal forecasts. But we need to focus on the bigger picture: in a world where we need transformational investment in energy infrastructure, digital connectivity and childcare, we need to make tough decisions about how to finance the upfront costs that will bring significant economic benefits.


Ultimately, generating growth means the UK needs a more strategic state. What we're likely to get in this budget is yet more of the tinkering state: tweaks and half measures rather than the fundamental reform we need to get growing again. 

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