On 15th February 2024, the Office for National Statistics (ONS) confirmed that the UK has officially entered into a recession, recording its second successive quarter of contracting GDP (the definition of a technical recession being two consecutive quarters of negative growth in real GDP).
Recession
The ONS confirmed that UK GDP fell 0.3% during the 4th quarter of 2023 and that the UK was now officially in recession, having also contracted during the 3rd quarter of 2023 as well.
The recession is quite simply the result of a failed Government policy of austerity. The Government has no growth strategy and no productivity strategy, and its failed policy of austerity has crushed the life out of the economy with high taxes and high-interest rates. It is hardly surprising, therefore, that the UK has entered into recession.
If the UK is to turn this situation around quickly and get the economy out of recession and back on track, then new policies are required, and the opportunity to launch those policies is in the upcoming Spring Budget on the 6th March 2024.
New Policies
The emphasis of the Spring Budget should be firmly on putting in place policies to promote economic growth and enhance productivity. That will not only get this country out of recession but lay the platform for long-term economic prosperity. The following are some potential new policies that the Government should be looking at.
Reducing Corporation Tax And The Overall Level Of Taxation
Much of the damage that has been done to the UK economy and pushed it into recession has been caused by the fact that taxes have been increased to a 70-year high (37% of national income – the highest since the 1940s).
By reducing taxes, individuals and businesses have more disposable income to spend and invest, leading to increased economic activity, not only in the short-term in terms of getting this country out of recession but also in the long-term in terms of providing a sustainable platform for economic prosperity.
Lower taxes also incentivise entrepreneurship and innovation, as businesses can retain more profits for reinvestment. Additionally, reduced tax burdens can attract foreign investment and talent, further fuelling economic growth. The net result is greater economic growth, job creation, and enhanced prosperity.
As highlighted in a recent article, reducing corporation tax should be a top priority. Lower corporate taxes:-
- Boost economic growth by incentivising businesses to invest in expansion, innovation, and job creation, as they can retain more profits.
- Boost productivity. By allowing businesses to retain more profits, they have more resources to invest in innovation, research and development (R & D), improving processes, upgrading technology, and training employees/skills development. This increased investment in productivity-enhancing activities can increase efficiency, output, and competitiveness.
- Attract foreign investment, as multinational corporations seek locations with favourable tax environments.
- Encourage entrepreneurship, as start-ups can allocate more resources to growth and development.
- Lower prices reduce inflation, increase disposable income, and boost consumer spending.
Strategically Targeted Government Investment In Infrastructure
Government investment in infrastructure that is strategically targeted can boost economic growth and productivity in several ways (as well as dealing with the immediate problem of getting this country out of recession):
- Modern and efficient infrastructure, such as transportation networks, energy systems, and digital connectivity, can enhance productivity across various sectors of the economy. Streamlined transportation reduces logistics costs, energy-efficient systems lower operational expenses, and reliable digital infrastructure facilitates communication and collaboration, all of which contribute to increased productivity and competitiveness.
- Well-developed infrastructure attracts businesses, investors, and skilled workers, improving the overall competitiveness of a region or country. A strong infrastructure network reduces transaction costs, enhances supply chain efficiency, and fosters innovation and entrepreneurship, making the economy more attractive for domestic and foreign investment.
- Infrastructure investments have long-lasting effects on the economy, providing a foundation for sustained growth and development. Upgrading and expanding infrastructure not only supports current economic activities but also lays the groundwork for future expansion, enabling businesses to scale up operations, generate higher revenues, and contribute to overall economic prosperity.
- Infrastructure projects require significant labour, ranging from construction workers to engineers and project managers. By investing in infrastructure, the Government can create a substantial number of jobs, reducing unemployment and increasing consumer spending, which, in turn, stimulates economic growth.
- Improved infrastructure, such as better public transportation, healthcare facilities, schools, and recreational spaces, enhances the quality of life. A healthier and more educated workforce results in increased productivity, reduced healthcare costs, and higher living standards, all of which contribute to a more resilient and prosperous economy
A National Strategy For Enhancing Productivity
In a previous article, we set out the benefits of investing in enhancing productivity. Given this country's appalling long-term problems in terms of low productivity, the Government urgently needs to develop a national strategy for turning this situation around. This is a crucial component in terms of climbing out of recession and building a platform for long-term economic prosperity.
The benefits of having a Government led national strategy for enhancing productivity include:-
- A coordinated approach ensures that efforts across different sectors and regions align towards common productivity goals.
- The Government can allocate resources effectively to support initiatives that drive productivity growth and innovation.
- A national strategy allows for monitoring progress and evaluating the impact of productivity-enhancing measures, enabling adjustments as needed.
- Involving stakeholders, such as businesses, academia, and communities, fosters collaboration and collective action to maximise productivity gains.
A comprehensive national strategy for enhancing productivity should include:
- Investment in Skills Development And Training: Providing education and training programs to upskill the workforce is critical to building a competitive and dynamic economy.
- Infrastructure Development: Improving transportation, energy, and digital infrastructure to boost efficiency.
- Innovation Support: Encouraging research, development, and technology adoption to drive competitive advantage.
- Regulatory Reform: Streamlining regulations and removing barriers to business growth and innovation.
A National Industrial Strategy
A government-led national industrial strategy is essential in moulding a country's economic landscape, fostering innovation, driving productivity growth, and ensuring long-term prosperity. By devising a comprehensive plan that outlines priorities, goals, and actions to support key industries, governments can establish a conducive environment for businesses to prosper and compete globally. The fact that this country does not have such a strategy has been to this country's considerable detriment, meaning that many potential opportunities have been wasted and lost.
One of the primary benefits of a national industrial strategy is strategic investment in infrastructure and research and development (R&D) initiatives. Governments can boost industry capabilities, attract investment, and create high-quality jobs by allocating resources to critical areas such as transportation networks, digital infrastructure, and technology innovation. This not only stimulates economic growth but also enhances a country's competitiveness in the global marketplace.
Moreover, a well-defined industrial strategy enables governments to identify and support emerging sectors with significant growth potential. Countries can nurture innovation ecosystems, accelerate technology adoption, and drive sustainable development by fostering synergies between industry, academia, and government agencies. This proactive approach not only spurs entrepreneurship and creativity but also addresses societal challenges through impactful solutions.
Furthermore, a national industrial strategy facilitates collaboration between public and private stakeholders, fostering partnerships that drive collective progress towards shared objectives. By providing targeted incentives, regulatory frameworks, and skills development programs, governments can incentivise businesses to invest in R&D, upskill their workforce, and adopt best practices that enhance productivity and competitiveness.
Hence, a government-led national industrial strategy serves as a roadmap for economic transformation, guiding investments, policies, and interventions that support economic growth, technological advancement, and job creation. By aligning stakeholders around a shared vision and harnessing the strengths of various sectors, this country can build a resilient economy that can adapt to evolving challenges and capitalise on emerging opportunities.
As a testament to an opportunity lost through the lack of a national industrial strategy, this country could once have had its own Silicon Valley. Instead, the Government's of the day just 'left it to the market' and allowed a free-for-all in which British tech companies were gobbled up in foreign takeovers instead of being protected in the national interest. Hence, other countries reaped the rewards of British innovation and enterprise - not this country. The list is endless - ARM Holdings, Imagination Technologies Limited, Autonomy Corporation, CSR plc, Inmarsat, etc.
To prevent this from happening again and ensure that Britain takes full advantage of new and emerging economic opportunities that will provide economic growth, it needs a Government-led national industrial strategy.
Support for Small and medium-sized Enterprises (SMEs)
SMEs are essential drivers of economic growth and employment in the UK. Targeted support for SMEs, such as tax breaks, access to low-interest loans, and grants to help them weather the recession, would assist. By supporting SMEs, the Government can help preserve jobs, promote entrepreneurship, and foster innovation in the economy.
Monetary Policy Adjustments
Interest rate decisions have been handled extremely poorly by the Bank of England over a long period. Decisions to engage in quantitative easing stoked up inflation, the Bank was too slow to increase interest rates once inflation took root, interest rates were increased to too high a level once the Bank did start to increase them, and interest rates should long since have begun to come down by now. That is, poor decision-making by the Bank of England contributed to high inflation taking root in the first place, and the fact that interest rates have remained too high for too long has contributed to the fact that the country has now entered recession.
It is not as if the Bank of England was not warned well before the recession that keeping interest rates too high for too long risked causing a recession. It was warned way back in July 2023 by its very own former Governor, Mervyn King.
Two critical decisions need to be made at the earliest opportunity in terms of monetary policy adjustments to bring this country out of recession: (i) interest rates need to come down, and (ii) interest rate decisions need to be taken by the Chancellor of the Exchequer, not the Bank of England. Until 1997, the Chancellor made those decisions, which should never have changed.
In terms of economic policy, the buck stops with the Chancellor. The Chancellor should, therefore, have complete control over economic policy. Parts of economic policy should not, therefore, be hived off elsewhere. Moreover, the Chancellor has full control of fiscal policy. In terms of running the economy, it is completely ludicrous to separate fiscal policy from monetary policy. That is a recipe for economic disaster. Fiscal and monetary policy needs to be run in tandem, and that can only be done by having one decision-maker. That decision maker should be the Chancellor of the Exchequer, the person appointed by the Prime Minister on behalf of the elected Government to run the economy in the national interest.
Conclusion
The Spring Budget provides an ideal opportunity for a long overdue economic policy reset, not only for getting this country out of recession as quickly as possible but for providing the platform for long-term sustainable economic growth. If this country is going to come out of recession quickly and start rebuilding the economy, then the Government needs to seize that opportunity. The fact that this country has entered a recession should act as a wake-up call.
