We need an entrepreneurial state

The public and private sectors must work together towards shared strategic national goals

Towering columns

At Project Syndicate, Mariana Mazzucato sets out why economic growth in isolation is insufficient without defined social objectives, too:

The economy will not grow in a socially desirable direction on its own. As I stressed ten years ago, the state has an important entrepreneurial role to play. After governments’ recent attempts to kick-start their economies following the pandemic, it is clear that we still need new thinking about how to achieve growth that is not only “smart,” but also green and inclusive.

Governments need economic-policy roadmaps with clear goals, based on what matters most to people and the planet. Public support for businesses should be made conditional on new investments that will “build forward better” toward a greener, more inclusive real economy. Consider the United States’ CHIPS and Science Act, which aims to boost the domestic semiconductor industry. The law prohibits funds from being used for share buybacks, and one could easily imagine additional provisions requiring that future profits be reinvested in workforce training.

But to help steer growth in the right direction, governments also must make goal-oriented investments in their own capabilities, tools, and institutions. The outsourcing of core capacities has undermined their ability to respond to changing needs and demands, ultimately reducing their potential to create purposeful growth and public value over time. Worse, as the public sector’s capabilities and expertise have been hollowed out, it has become more susceptible to capture by vested interests.

In The Spectator, James Heale examines what could follow from Britain’s decision to embrace India through its ‘Indo-Pacific Tilt’:

It is sometimes assumed that a UK-India trade deal might double the number of work visas granted to Indian nationals. Brexit has done that already, by replacing the EU free movement scheme with a points-based immigration system modelled on parity of treatment. This has revealed a huge demand for Indians from British employers who seek highly skilled, well-educated fluent English speakers. The latest visa data shows that one in four work visas granted now goes to an Indian. In all, twice as many arrive for work from India as from the whole of Europe.

But this is a political problem for both sides. Tory ministers are facing pressure to cut immigration – so they don’t want to put more student visas on the table as part of a trade deal. For his part, Narendra Modi is already facing concerns about an ongoing ‘brain drain’ of India’s best and brightest – a trend that some fear could be exacerbated if a FTA were signed.

Diplomatically, the conversation is often fraught. Modi’s government is unabashed about channelling Hindu nationalism – which can mean defining itself against the colonial past. Ahead of the 75th anniversary of independence, English-language street names were changed. The recent opening of a new parliament building was billed as an explicit rejection of the Lutyens original.

There are demands for the return of treasures, goods and documents taken during the Raj. After the BBC ran a documentary that was critical of Modi, its offices in India were raided by tax department officials. When Sikh separatists tore down India’s flag at its high commission in London, New Delhi retaliated by hauling in Britain’s high commissioner and reducing security outside his house. For Modi, facing re-election next year, there could be more votes in standing up to Britain than in cosying up.

On his Substack, Noah Smith looks at how the West’s decoupling from China is developing and affecting the global trading system:

This will take time. Decoupling is not an instantaneous process. China spent two decades becoming the workshop of the world; the rest of the developing world isn’t going to mirror that accomplishment in one or two years.

But there are reasons to think the process is just getting started. Although the Economist articles present decoupling as being driven by Biden’s policies, the truth is that the U.S. government has barely begun to push. Export controls are narrowly focused on the chip industry, and the Inflation Reduction Act isn’t really about decoupling at all. Other than that, all Biden has done so far is a set of investment restrictions that was very weak and narrowly targeted at a couple of high-tech industries, some minuscule investments in onshoring of critical minerals, and some minor deals with allies to share the benefits of green energy tax credits. He kept Trump’s old tariffs on China in place, but didn’t strengthen them.

That means that so far, most of the decoupling that’s being done is being driven by the prudent decisions of private companies and investors — natural market forces, rather than the visible hand of government policy. There’s no reason to expect those forces to reverse themselves — even setting aside the threat of war, every nation has seen some manufacturing activity leave for cheaper countries once costs rise. And meanwhile, the engine of U.S. government policy — and European government policy, etc. — is just revving up. Once policymakers figure out which policies actually speed decoupling without injuring the economy, you can expect them to double down on those. This is only the very beginning of the decoupling story.

For the New Statesman, Harry Lambert says there is an urgent need to fix the British tax system and reduce intergenerational inequality by targeting wealth:

We have come a long way from 1978. When Healey failed to implement a wealth tax he consoled himself that inequality was falling anyway. That is no longer true. Inequality, Piketty argued in Capital, is U-shaped. Having fallen during the 20th century, it would rise in the 21st. In Britain, and across the developed world, inequality has risen dramatically over 40 years.

The UK is splitting apart, fuelled by a tax system that entrenches inequality. The consensus behind change is broad. A former senior Treasury official I spoke with supported all of the ideas that follow here. He had raised similar ideas with successive chancellors of both parties. With the exception of Nigel Lawson, he said that none were interested. It was all considered too difficult. Taxing property was seen as political death. But, he added, a great deal has changed since the financial crisis.

By making the case for tax reforms on wealth whose time has come, Labour could acquire the definition it has lacked under Starmer. The agenda open to Labour’s leaders should not be confused with the party’s Corbyn-era policies, which focused on taxing highly paid employees, or with the tenets of Tony Blair, who never sought to even the inequalities of wealth and now thinks taxes should fall. Blair is a poor guide to the present. The value of privately held wealth in Britain has doubled as a share of GDP since he entered No 10 and the tax code has only become more weighted in capital’s favour.

For the i, James Sean Dickson argues that younger generations are carrying the burden of the fight against inflation while mortgage-free homeowners remain safe:

But one lucky group in particular is cushioned from the Bank of England’s decision making: homeowners without a mortgage. In other words, baby boomers. According to Savills UK, over 50’s now own 78 per cent of the UK’s private housing wealth. It doesn’t matter if interest rates are rising when you’ve already paid off your mortgage – you’re free! There’s no big reduction to your spending power.

Even better, the large savings pots of older generations are finally starting to see substantial interest for the first time in the best part of two decades. And while nurses, teachers and other public sector workers must suffer pay erosion, because restoring their pay to the level it sat at a decade ago is inflationary, baby boomers are perfectly entitled to the spoils of the triple lock pension (bar one blip since 2010). This particular pay rise is, apparently, not inflationary.

And while young homeownership has plummeted over recent decades, outright-ownership – without a mortgage – has risen. Since 2013-14 there have been more outright owners than mortgagors. This, combined with the much greater popularity of fixed rate mortgages, means the burden of interest rate hikes falls on a smaller number of people.

In the Daily Telegraph, Matthew Lynn shows how the bank of Mum and Dad is fuelling dependency on older generations for aspiring homeowners:

Parents – and the occasional wealthy aunt or uncle for the very lucky – have been helping to get young people started on the property ladder for generations. Yet until relatively recently, that hand up was seen as something restricted to the wealthy upper-middle classes, not dissimilar to sending children to private schools.

While parental assistance might have been a bit more common than that – between a quarter and a fifth of buyers from 1970 to 2004 had help from their parents – it certainly wasn’t the norm. After all, very few people had a spare £10,000 or so lying around to help a kid or two buy their first home. Over the last two decades, however, that has changed.

Family help to buy has become a completely critical component of the property market, and by extension the wider economy as well. In 2023, relatives are expected to contribute some £8.1bn to help young people buy properties. That money will help close almost half of all purchases by the under 55s, with total lending up 50pc on 2020 and the average sum given reaching almost £26,000. Large chunks of the British property market seem now to be dependent on intergenerational transfers to keep moving. Take that away, and things will seize up.

Wonky thinking

According to a new report, Implications of the NHS workforce plan, from the Institute for Fiscal Studies, NHS workforce expansion would require around an extra £50 billion in funding. Such an increase could only be achieved by raising the standard rate of VAT to about 27 percent by 2036–37 or increasing all income tax rates by about 6 percentage points. By 2036, half the public sector could be working in the NHS:

Here, we do not seek to evaluate the merits of the plan, its modelling assumptions or its achievability. Instead, we start from the assumption that the plan will be implemented in full and consider the potential implications for the size of the NHS workforce and NHS budget in England. While the plan includes funding for new training places, it does not estimate nor provide for the longer-term increases in funding that will be required to cover the salaries – and other costs – of an expanded workforce.

The plan suggests the number of staff employed by the English NHS will increase from around 1.5 million in 2021–22 to between 2.3 and 2.4 million in 2036–37. This would be equivalent to average growth in the size of the NHS workforce of between 3.1% and 3.4% per year. For context, we estimate that NHS staffing numbers grew by around 1.1% per year between 2009– 10 and 2019–20. Meeting the plan would almost certainly see the NHS account for a growing share of not just public sector employment but also the overall workforce. By 2036–37, we estimate that almost half (49%) of public sector workers in England will work for the NHS, compared with 38% in 2021–22 and 29% in 2009–10. Moreover, we estimate that one in eleven (9%) of all workers in England will work for the NHS, compared with one in seventeen (6%) in 2021–22 and 2009–10.

Such an expansion in the workforce has implications for the size of the NHS wage bill. First and most obviously, employing hundreds of thousands of additional people will increase staffing costs. But in addition, to attract and retain this many more workers, it seems likely that – at a minimum – NHS pay will need to keep pace with earnings in the wider economy. Taken together, we estimate that the workforce plan implies real-terms increases in the NHS wage bill of around 4.4% per year. Even if all other NHS spending (on non-staff items) were frozen in real terms for the next 15 years, this implies that the NHS budget would need to increase by around 2.3% per year, over and above inflation, to cover these higher staffing costs alone.

In a new report for Policy Exchange, Re-Engineering Regulation, James Vitali makes the case for a better designed regulatory regime based on achieving outcomes instead of sweeping deregulation.

Regulators are seen by some as responsible for eliminating risk from our lives. But should we try to eliminate all risk from our existence? The pursuit of a regime in which there is zero risk and uncertainty in our lives would lead to an intolerable level of control on individuals and businesses, and it would not only reduce freedom of action, industry and innovation, but create new risks and hazards as well.

Unfortunately, too, debate on regulatory reform often goes down an unproductive cul-de-sac which identifies all attempts at regulatory reform as an attempt at wholesale, dogmatic deregulation. Nevertheless, what is a legitimate and increasingly urgent subject of debate is whether or not we are weighing other societal objectives and values sufficiently when it comes to the regulatory regime in many sectors.

As Policy Exchange’s Re-Engineering Regulations: A Blueprint for Reform made clear last summer, what the UK needs is not wholesale deregulation, but better, smarter regulation. It is the character and quality of rules and regulations that matters, not the quantity. Improvements need to be driven by the centre and coordinated across Whitehall. In many cases, this will mean peeling back a layer of bureaucracy that is strangling the potential of British enterprise, but in others, it means reforming and optimising the rulebook to align incentives in a way that is conducive to the national interest. Ultimately, though, the entire system must be re-aligned so that it is incentivised to regulate more effectively.

The UK’s departure from the European Union does present an enormous opportunity for the Government to improve its regulatory regime. But it is an opportunity, not a handout. Many of the benefits of Brexit are already apparent, but the Government must think hard about how to capitalise on the repatriation of regulatory authority for the benefit of the British public. The UK needs to establish how it can continue to be an attractive place to transact business in an increasingly competitive international environment.

Book of the week

We recommend The Power of Money: How Governments and Banks Create Money and Help Us All Prosper by Paul Sheard. The author calls for a radical re-evaluation of how we think about the role of policymaking in creating economic outcomes:

[my first conclusion is] to do with the inconsistency and inadequacy of the current policy framework for managing the demand side of the economy, and the need for its reform… this framework rests on a strict conceptual and operational separation of monetary and fiscal policy, and the assignment to monetary policy of the primary responsibility for managing aggregate demand, to ensure price stability and full employment. The government gives the central bank the "independence" to make the necessary monetary policy decisions.

This framework has several problems. There is an important aggregate-demand management component to fiscal policy. When trying to rein in demand to bring down inflation, raising taxes is to fiscal policy what raising interest rates is to monetary policy. Why is one component of aggregate-demand management assigned to a technocratic entity, independent of the political arena, while another is left in the hands of politicians? Two answers are usually given: one, that monetary policy alone can always control inflation - in particular, that it can always offset any expansionary or inflationary effects of fiscal policy - and, two, that fiscal policy inherently involves distributional issues and inevitably has differential sectoral impacts, so must be left in the political realm.

The first assertion is looking increasingly shaky in light of recent historical experience: Japan's chronic deflation and pre-pandemic concerns in the US and elsewhere about "secular stagnation" suggest that monetary policy needs help from fiscal policy when its gets near the zero interest rate bound. Also, the surge in developed-world inflation in the post-pandemic recovery calls into question the notion of leaving inflation fighting to monetary policy. The second assertion is suspect, too, because monetary policy also has distributional and sectoral impacts, including likely leading to a bloated financial sector. Independent central bankers may want to ignore these impacts, but that doesn't mean the government should.

Whether the goal is managing aggregate demand or finessing distributional issues, closer coordination and joint deployment of monetary and fiscal policy is needed. The problem is that the current operational and conceptual framework doesn't facilitate that: monetary-fiscal coordination, let alone joint action, borders on anathema to devotees of central bank independence. Consideration should be given to restructuring the policy framework to clearly make aggregate-demand management a joint responsibility of monetary and fiscal policy, and to more explicitly recognize the distributional and sectoral impacts of monetary policy.

The second reflection is that the time has come to overhaul how we talk and therefore think about money and related economic policy matters. Our current terminology reflects the existing institutional framework and received thinking. That is fine as far as it goes, but it results in confused reasoning on many key issues, which is not conducive to sound policymaking. I don't have the linguistic answers, but I can list a few problems.

First, we need a better way of talking about what we currently call "monetary policy" and "fiscal policy." Fiscal policy is quite monetary in nature… the government cannot target the size of its budget deficit, as this is determined simultaneously via countless decentralized economic decisions by individuals and businesses, domestically and overseas. But, just like the central bank, the government can influence demand by adjusting how much net purchasing power it injects into the economy by way of sending out checks and changing tax rates…

Government "debt" is another term overdue for retirement, We shouldn't think of government bonds as debt that needs to be repaid - as opposed to rolled over - any more than we do reserves and banknotes. Adding in reserves and banknotes and netting out the government bonds held by the central bank, we should just call it (the stock of) "government-created money" and stop worrying about the putative nightmare the government that is, us - will face one day having to repay it. The amount of government-created money might well prove to be excessive if it is deployed as purchasing power into the economy beyond the economy's capacity to absorb it and triggers inflation. In this scenario, restraining inflation is the reason to worry and change policy - not national solvency.

In a last point on language, when it comes to new or expanding government programs, we need to stop worrying about how we are going to pay for them (that is, where the money is going to come from) and start talking, or at least thinking, in terms of where the resources are going to come from -and, importantly, which parts of the economy are going to have to release their resources to help generate the new ones needed. Reducing all of this complex activity to monetary terms is very convenient - and is part of the power of money - but it should not deceive us about what the relevant economic restraint is: not money, but real resources, and how productively they can be used.

Quick links

There were 8 stabbings, 275 arrests, a sexual assault, and one police offer left in hospital following the Notting Hill Carnival.

The number of deported foreign criminals fell by 40% over a decade.

Immigration and asylum is the top issue for 2019 Conservative voters.

Just 60% of 2019 Conservative voters plan on voting Tory again with many defecting to Labour or Reform UK.

Labour is more trusted on taxes, immigration and crime than the Conservatives.

Nationwide reported that house prices fell by 5.3% in the year to August.

78% of voters favour a 1% tax on wealth above £10 million.

The Foreign Affairs Select Committee referred to Taiwan as an “independent country”.

Tensions flared after 12 Chinese aircraft engaged in military harassment of Taiwan.

Voters support giving work visa concessions to India to secure a trade agreement by 46% to 25%.

The Danish government is planning a new law to ban burning of the Quran and other religious works.

A man was blinded and disfigured in Germany after defending a woman from a Moroccan migrant attempting to drug her drink.

A defence company chief was arrested by German authorities for selling electronic components to Russia.

The UK AI Summit is expected to include China despite resistance from the EU and Japan.

The Met Chief said poppies, Help for Heroes wristbands and police memorial badges should be the only acceptable additions to police uniforms.

A paedophile drag queen was sentenced to 34 months in jail.

63% of the public support the death penalty for child murderers.

Home Office officials were found to have gone beyond compliance in diversity plans pushing gender ideology.