Ahead of the Budget, panellists at ICAEW’s recent Annual Conference urged the government to set out a coherent investment, industrial and skills strategy as Britain continues to suffer from lacklustre productivity. The challenge for policymakers is to grasp the opportunities of structural transformation and make sure the economy works better for people in the next 10 to 20 years.

UK can’t go back to ‘normal’

The panellists highlighted the importance of policy stability, the transition to green infrastructure, and the necessity of adapting to technological changes to ensure a pipeline of investment. They agreed that potential policy adjustments, including tax reforms and public sector fiscal rules, were a way to address the challenges ahead.

Going back to “normal” is not “a great prospect” for the UK after four years of turmoil, warned Mike Brewer, Interim Chief Executive of the Resolution Foundation. With predicted economic growth of just 1% over the current parliament, according to the International Monetary Fund, plus a faltering labour market and high rates of sickness, “going back to normal means going back to stagnating economic growth and living standards”, Brewer said.

The UK, of course, is not alone. The pace of technological change, particularly in regard to artificial intelligence (AI) and economic structural changes, is affecting many countries. The difference with the UK, however, said Professor Joe Nellis of Cranfield University, is that Britain has been “very, very poor at investing right across the economy but particularly in skills”, unlike many of its industrialised counterparts. “Investment is the engine of growth. Without that investment, not only in infrastructure, but in skills, we’re not going to go into another gear of growth in years ahead,” he said.

UK economy can catch up

There is a case for optimism, given there’s “a huge amount of scope to catch up with the rest of the world” according to Brewer: “The downside of being behind the productivity race means there is scope to make a lot of fairly easy gains just to catch up to where our competitors are.”

However, while green technology and AI were pinpointed as great opportunities for long-term investment in the UK, the instability in geopolitics continues to be a potential pinch point.

“There’s a possibility of another shock in terms of the energy crisis,” said Professor Dame Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge. “The thing to watch out for is what happens to supply chains, because we’ve seen already that there were unexpected vulnerabilities in the previous shock. If there are more of those, that makes the possibility of long-term investments and growth all the harder.”

Coyle underlined the opportunity to increase productivity in the services sector, where inflation remains ‘sticky’: “That suggests those markets aren’t working very well. There’s something not functioning, but those are exactly the kinds of businesses where AI has the potential to increase productivity,” she said. “AI requires changing ways of working, structures and the jobs that people do, but there’s definitely some opportunity.”

The entrepreneurial spirit is alive and well in the UK, but Coyle warned that we have to move away from the policy churn the UK has experienced in the past decade or so. “The thing that worries me is, what’s the environment into which entrepreneurs are trying to shape their lives and build businesses? I hope we’re going to get five years where, come the Budget, they’ll leave in place for that period of time all of the important structural aspects, tax rates and industrial policy, to create a better environment to unleash the entrepreneurial spirit we have,” she said.

What will the Budget do?

The Labour government has announced the four central missions of its industrial strategy: 

• delivering clean power by 2030; 
• caring for the future; 
• harnessing data for the public good; and 
• building a resilient economy. 

It is hoped that the government will outline in more detail its industrial strategy around the time of the Budget on 30 October. “Ideally the Labour government would come in and say what their strategy is for the public finances, public investment, business tax, say it once and then go quiet again for a few years. That would be fantastic,” Brewer said.

Chancellor Rachel Reeves has also hinted that the Treasury may change its fiscal rules to allow for greater investment, which is expected to be announced in the Budget. “Now we don’t know how far Reeves is going to go in changing the rules. It could be a minor definitional tweak, or it could be something more substantive, saying: ‘I’m going to recognise that when I invest, I’m creating assets as well as borrowing,’” Brewer said.

Nellis said he would be looking for a cut in corporation tax from 25% back to 19%. “I still can’t understand why we went from 19% corporate tax to 25%. To me, that was a mistake. It would be wonderful if that was reversed.”

Coyle disagreed on the corporation tax rate cut, arguing that it didn’t make “a big difference to investment”. Rather, she said that keeping the regime stable was more important. “I think the whole package matters much more than the tax rates,” she said.