Britain Needs a Better Narrative
What is holding back investment is a reluctance to confront trade-offs
Rishi Sunak spent today glad-handing global business leaders at a summit in Hampton Court palace designed to promote Britain as an attractive place to invest. The prime minister trumpeted the cuts to business taxes in last week’s Autumn Statement as underlining Britain’s status as a low tax economy, which Sunak claimed were one of the country’s three big competitive advantages alongside its culture of innovation and its people. It was the first such business summit since 2021 when business leaders were hosted at Windsor Castle by the late Queen. Tonight the guests, who include the bosses of JP Morgan, Goldman Sachs and Blackstone, will be entertained by King Charles at a gala dinner in Buckingham Palace.
But Sunak’s pitch for investment would be far more convincing if the government had not just chosen to freeze public investment in cash terms for the next five years in last week’s Autumn statement. That is the equivalent of a 16.7 per cent cut in real terms at a time when Britain’s infrastructure is crumbling and it needs to spend tens of billions of pounds over the coming decade to upgrade its infrastructure for the clean energy transition. This decision was even more bizarre when one considers that the government-commissioned Harrington review of foreign direct investment published last week alongside the Autumn statement concluded that “one pound of government investment can unlock seven to nine pounds of private investment”.
Jeremy Hunt had billed the Autumn Statement as an exercise in supply side reform, with no less than 110 measures designed to boost Britain’s productive capacity. Yet it seems the chancellor refused to pull the one lever available to him that could unlock significant private sector investment and thereby boost supply potential. Nor was the highlight of his budget, the decision to make full expensing of business investment permanent, all that it seemed. The Institute for Fiscal Studies has noted that much of the claimed £11 billion cost to the Exchequer will be clawed back in later years, reducing the overall bill to £3 billion. The Office for Budget Responsibility reckons that the move increases potential output by 0.1 per cent by 2028.
Of course, the government is right to be concerned about investment. Britain has experienced an alarming slump in the rate of growth in investment since the financial crisis which has only grown worse since Brexit. In 2021, British businesses invested the equivalent of 10.3% of GDP, compared to an average 13.0% across the rest of the G7. And while Britain tops the European tables for foreign direct investment, a third of this has gone to the offshore wind industry. The bulk of the £29 billion of pledges announced today similarly went to energy infrastructure. Stripping out renewables, Britain's share of European FDI since 2017, has averaged just 13.9 per cent, less than its share of the European economy. France, Germany and Spain have all seen far faster rates of FDI growth as a percentage of GDP over the last five years.
Brexit and Truss
The Harrington review set out in brutal clarity what is really holding back foreign investment in Britain. Brexit comes high on the list. Nearly 40% of US businesses cite access to the single market as their top priority for European investment, with over 60% ranking it among their top two. The political chaos of recent years is also a factor: the proportion of investors choosing Britain as one of their top three favoured European locations has dropped from 43% to 32% since 2021, with a third citing political instability as a reason, according to a survey by E&Y. Meanwhile infrastructure investors complain that Britain’s business environment now ranks below France, Germany, Iberia, and the Nordic countries for investment-friendliness.
What can be done to reverse the slide? Harrington recommends the appointment of a cabinet minister to help sweep away bureaucratic obstacles that may lie in the way of potential investors. As the report notes: “We have heard time and again about government systems that are too often disorganised, risk-averse, siloed, and inflexible when it comes to the needs of modern investors. We have developed a system where civil servants and politicians alike will do anything to de-risk a decision, by shoving financial decisions to a series of semi arm’s length institutions as well as a series of “competitions” as a system of allocating taxpayers’ money.”
No doubt a minister for investment will help. But the problems that Harrington identifies seem to me to be symptomatic of a deeper problem in British politics: a worrying reluctance to confront trade-offs. Align with EU rules or diverge? Build new homes or preserve the countryside? Welcome foreign workers or cap migration? Bold targets such as net zero are set with no credible plan to deliver them. Tens of billions of pounds are spent on HS2, only for the northern extension of the new high speed rail line to be scrapped without consultation. The government hasn’t even been able to produce updated national policy statements for nationally significant infrastructure projects which would allow them to be fast tracked through the planning system.
Implausible Assumptions
It is easy to blame this on a run of weak political leaders. Boris Johnson famously refused to acknowledge even the existence of trade offs. He was endlessly willing the ends without willing the means, whether proclaiming his ambition to turn Britain into the Saudi Arabia of wind, build a nuclear reactor every year, build 40 new hospitals, or 300,000 new homes a year. Hunt’s autumn statement can be seen in a similar vein. His claim to be able to make £16 billion of tax cuts while sticking to his fiscal rules hinged on what Paul Johnson, the director of the IFS, calls “questionable, if not implausible assumptions” about deep spending cuts after the next election.
But Britain doesn't just need bold leaders, willing to take political risks and provide a clear direction. It needs a new narrative. Britain can no longer simply market itself as the best place in Europe to access the European market, as it did for 43 years. Its domestic market is now 65 million, not 450 million. And it stands outside the three major trade global blocks as America, the European Union and China compete to lavish vast subsidies on critical sectors that Britain cannot afford to match. Until a national consensus emerges on what Britain’s new economic model should be based on a realistic idea of where comparative advantage lies, investors can hardly be blamed for sitting on their hands. They may be waiting some time.
Well put, Simon. We have gone down the wrong road. A beleaguered Tory government is never going to adopt the initiatives needed.