Britain is so adept at self-deprecation that positive economic news can feel disorientating. Last week, the IMF handed the UK one of the biggest upgrades to its growth forecasts for this year among major economies. Then on Tuesday, official data surprised economists by showing a drop in the unemployment rate to its lowest in more than a year. Amid the war in Iran and yet more political reshuffling, the robust outlook is worth a cheer. As Prime Minister Andy Burnham’s newish cabinet prepares next week’s autumn Budget, it would do well to recognise what is behind it.
For most advanced economies, such as Britain, two motors of growth are currently misfiring. First, US protectionism and intensifying competition from Chinese exports are denting industrial production. Second, an energy price shock is squeezing consumer spending. The UK’s specialism in high-value services has, however, provided an invaluable counterweight.
The professional services industry made the largest contribution to the country’s annual growth in the three months to August, according to the Office for National Statistics. Computer programming, consulting and legal activities were particular bright spots. Indeed, London’s large advisory firms and boutique consultancies are benefiting from rising global demand from organisations seeking to adopt AI and navigate uncertainty.
Business investment has been another bulwark. Expenditure on technology has outpaced its long-term trend, in part reflecting the growing domestic adoption of AI, which Britain’s services-heavy economy is particularly well placed to capitalise on. The tech sector is attracting capital too. In the first nine months of this year, innovative UK companies absorbed more than a third of European venture capital.
Britain’s economic resilience should, however, not be taken for granted. Its advantage in business services and technology rests on a wider ecosystem of private finance, research, investment and highly skilled workers, which Burnham and chancellor John Healey need to reinforce.
In the run-up to the Budget on October 28, Healey has kept a lid on the sort of rumours that sapped business confidence ahead of Labour’s previous two major fiscal events. Indications that capital gains tax will be left untouched and that existing fiscal headroom will be used to avoid major tax rises are also welcome.
But reports that the chancellor is considering additional taxes on banks are troubling. Higher levies would undermine lenders’ competitiveness and ability to support the private sector. Banks already have a higher tax burden than global peers. A better approach would be to fund any further cost of living support through efforts to cut the welfare bill. That would reassure restive bond markets and ease borrowing costs for businesses and households.
The Budget is otherwise expected to be a low-key affair. But it should at least begin to lay the groundwork for a credible growth strategy. So far, Burnham’s vague talk of “re-industrialisation” and expanding the role of the state has evoked a vision of Britain’s economy more suited to the 1970s. A plausible plan for growth must instead build on the private sector services underpinning the UK’s resilience.
That means the government needs to flesh out its pledges to cut red tape by 25 per cent and reduce the cost of doing business. A roadmap to simplify and reform the tax system, not least by addressing distortions in income taxes, would also go a long way towards strengthening incentives to work and invest.
Britain has plenty worth celebrating. Rather than looking back to the economy it once had, the government should focus on backing the strengths of the one it has today.