Industrial policy - this covers key areas for the UK:

 

Business tax cuts and help for projects: do we have a growth plan at last?

Jeremy Hunt is wooing firms with 110 pro-business initiatives. Just don’t call it an ‘industrial strategy’…

ILLUSTRATION BY PETE BAKER

Jill Treanor

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Oliver Gill

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Jon Yeomans

Sunday November 26 2023, 12.01am, The Sunday Times

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Henry VIII used Hampton Court to show off his might and power, but tomorrow, Rishi Sunak will use the Tudor palace on the banks of the River Thames to demonstrate his skills as a chat show host.

Having honed his technique on stage interviewing Tesla founder Elon Musk at the government’s AI summit at the start of this month, the prime minister will repeat the trick as he questions Steve Schwarzman, the billionaire founder of private equity house Blackstone and one of the most powerful investors in the world.

It will be the centrepiece of Sunak’s “Global Investment Summit”, from which the government aims to bring in at least £10 billion of overseas investment for the country. An array of financial “rainmakers” will be there from around the world, including JP Morgan boss Jamie Dimon and Goldman Sachs chief executive David Solomon.

Coming less than a week after chancellor Jeremy Hunt delivered in his autumn statement what he described as the biggest tax cut for business “in modern British history”, and as business secretary Kemi Badenoch launches what she calls her Advanced Manufacturing Plan, it seems the government is finally taking the needs of Britain’s wealth creators seriously.

Some are even speculating that as they attempt to bury the memory of Boris Johnson’s “f*** business” faux pas, his successors are coming close to forming what the right of the Conservative Party traditionally abhor: an industrial strategy.

A review by Lord (Richard) Harrington, a former MP, on encouraging more foreign direct investment into Britain after Brexit, even reported that “capitalism has changed”. Released alongside the autumn statement, he said in the report: “Gone is any residual view that government shouldn’t use taxpayers’ money and other resources to assist private companies in investment decisions.”

So might the Conservatives be about to embark on a radical new industrial strategy — and why would this be such a radical move?

For starters, Thatcherities in the Conservative Party still balk at any notion that the government should intervene in industry, recoiling at Labour’s attempt in the 1960s to “pick” carmaker British Leyland as a winner, only for it to collapse a few years later.

Yet Theresa May resorted to an industrial policy in 2017 following Brexit. She aimed to boost investment in science, research and innovative industries, but the plan was quickly ditched by Boris Johnson after the 2019 election.

Jeremy Hunt leaves 11 Downing Street for the Commons to deliver his autumn statement. Some believe his business-friendly measures are a sign that “capitalism has changed”

STEFAN ROUSSEAU/PA

The sensitivities are such that even last week, when Hunt proclaimed in his autumn statement that he had introduced 110 growth measures, he did not publish a list. Readers must plough through hundreds of pages of documents to find the details.

Speaking to The Sunday Times, Hunt admitted that he did not like the term “industrial strategy” because of its connotations of failed interventions of the past. Instead, he preferred to evoke Margaret Thatcher’s former chancellor, Nigel Lawson, who oversaw the 1986 “Big Bang” reforms that encouraged big American banks to flock to the City. “What I want to do is leave the country with one of the world’s great technology industries, in the way that Nigel Lawson left us the City of London,” the chancellor said.

So what he has done? His key measure — the one underpinning his boast on business taxes — concerned the seemingly prosaic issue of full expensing, the means by which businesses claim back investments costs. It was due to expire in 2026 and instead of being spread out over a number of years, it is now available more quickly.

Among his other promises were measures to boost skills, with £50 million for training programmes and pledges to speed up planning laws — for instance, by allowing local authorities to claim back the cost of dealing with planning applications.

To some, this still lacks the cohesion of a formal industrial strategy but is nevertheless a welcome change of tone. Juergen Maier, who ran the UK operations of German manufacturer Siemens until 2019, said: “This is the first time in six years that business is being listened to again.”

There are multiple reasons for the change of approach. Politically, Labour’s courtship of business ahead of the general election may be making the government uneasy. Then there is Brexit, which appears to have made Britain less attractive for inward investment than other European countries. According to the accountancy firm EY, France has overtaken Britain as a destination for foreign investors although the government published data showing Britain had attracted the third-highest amount of investment foreign investors in to subsidiaries after China and America in the past 20 years.

Jeremy Hunt Hunt promised to speed up connections to the National Grid, making it easier to invest in new green energy projects

GETTY

A new competitive threat has also emerged from America, where Joe Biden’s Inflation Reduction Act provides nearly $400 billion of subsidies to businesses investing in green technology in areas such as cars and energy. This has sparked fears of the US attracting a wave of investment that might otherwise have been bound for Britain. The European Union is looking for ways to respond to America’s initiative.

So, some businesses argue, it is about time Britain started to formalise its approach.

Ben Fletcher, chief operating officer at the manufacturing lobby group Make UK, said: “When we look at our competitor nations, we’re the only major economy… where there isn’t some form of industrial strategy.”

To Keith Anderson, chief executive of ScottishPower, an industrial plan is taking shape. He pointed not only to the tax changes from full expensing, but Hunt’s promise to speed up connections to the National Grid, which will make it easier to invest in new green energy projects.

“It’s starting to look like an industrial strategy — you’ve got a package now to incentivise investment [through the changes to full expensing] and a package to allow you to deliver it,” said Anderson.

Alistair Phillips-Davies, chief executive of the FTSE 100 energy company SSE, said the changes should speed up investment. “At the moment, it takes too long to build big, nationally significant projects in the UK. An offshore wind farm, for instance, can easily take more than a decade to deliver, and most of that time is in planning and consenting. The sooner the government delivers planning reform, the quicker companies can get shovels in the ground, create good jobs and boost economic growth,” said Phillips-Davies, who is a member of Sunak’s business council.

Yet some parts of the economy feel neglected. Steve Hare, who runs the FTSE 100 software business Sage, said there was a risk the digital economy was being left behind. The big change to full expensing does not cover investment in software. “It encourages investment in infrastructure. But to be honest, it’s a little bit like incentivising somebody to buy a computer, but not incentivising them to put any applications on it,” Hare argued.

And some find it hard to see any signs of a coherent approach after the decision to shorten the route of the HS2 train link. These critics say the debacle has hindered the government’s mission to attract foreign investors. French-owned Alstom, whose Derby plant is the biggest train-making facility in Britain, fears hundreds of jobs will be lost because of the government’s refusal to commit to new train building. Even as Hunt was talking about the merits of his business-friendly autumn statement, Alstom’s executives were meeting officials in the Department for Transport to seek clarity on new train contracts.

Nick Crossfield, managing director of Alstom UK and Ireland, said: “This short-termism must end. An industrial strategy for rail is badly needed to smooth out the peaks and troughs in Britain’s rolling stock market, encourage exports, and help decarbonise Britain’s transport system.”

This also illustrates how an industrial strategy that attempts to pick industries to back can create both winners and losers. So, while the rail industry is furious, other sectors have had support. Steel got a boost after Tata Steel received a £500 million grant to build a new electric arc furnace in Port Talbot, south Wales. And Badenoch will spell out how £4.5 billion of government funding will be distributed through her Advanced Manufacturing Plan to help bolster eight sectors, including automotive, aerospace, life sciences and clean energy.

The government also gave unspecified financial support to Nissan to encourage the Japanese carmaker to pump £2 billion into three new electric marques in its Sunderland factory. Sunak personally attended the signing ceremony with Nissan global chief Makoto Uchida last week.

Uchida admitted that some taxpayer funds had been needed to help the transition to electric from petrol and diesel.

After the ceremony at the plant, which stretches as far as the eye can see, producing one car every two minutes, he told The Sunday Times that “electrification still needs [state] support” and talked of his company’s “strong relationship with the [UK] government”.

It is a dramatic change of tone after Toyota’s loud threats to move its plant abroad if a satisfactory Brexit divorce could not be achieved. Uchida admitted there had been difficulties but was ready to move on.

“We have been discussing with the government how we can restore the competitiveness of the supply chain and sustainably grow. That’s the reason we are investing here,” he said.

And he urged the UK not to talk itself down: “I am quite surprised that people [here] are asking: ‘Why UK?’ We have great people and great talent here.”

That is exactly what Sunak wants his Hampton Court visitors to hear.

Is the very high level of immigration covering up serious problems?

 Wonderful for/against arguments in here to do with immigration; very good material for pushing into Level 5:

Mass migration is covering up the scandal of out-of-control welfare

Few politicians will dare to address worklessness when it is far easier just to import more migrants

FRASER NELSON23 November 2023 • 8:00pm

Jeremy Hunt made a cruel but still quite interesting point in his Autumn Statement speech this week. Labour, he said, grows the economy by importing foreign workers and doesn’t much care about unemployed Brits. Conservatives, by contrast, use “the potential we have right here at home”. He’s quite right to say that immigration lets governments ignore social problems by recruiting industrious workers from abroad. He’s right to talk about it as an economic drug, but wrong to suggest the Tories haven’t been getting high on it for years.

We had the latest update yesterday. David Cameron famously pledged to get net migration down to the “tens of thousands” even though it was closer to 250,000 under his premiership. Then, Brexit came along – and, with it, complete power over border control. How have the Tories used this power? By ratcheting up net migration to more than six times Cameron’s target: we found out yesterday that the annual figure is 670,000. This covers up what would otherwise stand exposed as a full-scale crisis in the welfare state.

Having new arrivals settle at the rate of 3,000 a day is quite something, relatively new to Britain. We had more net migration in January this year than in the Windrush period – or, come to think of it, the whole of the last century. 
But newcomers are certainly needed in a country where 4,000 people a day apply for sickness benefit. Mel Stride, the Work and Pensions Secretary, has caused outrage by saying he’ll crack down on this but even he doesn’t plan any changes before 2025.

Why the slow progress? Because our welfare system is out of control. It’s sucking people in at a rate that leaves ministers shocked and sickened, but unable to change. Stride’s reforms are good and necessary, but he has been advised that even these changes will land him endless lawsuits and judicial reviews by campaign groups adept at using lawfare to fight the Government. And yes, the Tories should have cleared up this legal mess long ago – but they were preoccupied by Brexit, Covid and regicide. The consequences of all this distraction are now becoming clear.

Now, consider the politics. Reforming welfare is a political suicide mission: get it right and you’ll be riddled with bullets and resented for trying tough love. Get it wrong and you’ll be castigated for being cruel and heartless. Ken Loach will make a critical film about you. And who is out there demanding reform? “I’d say only three people,” a minister told me recently. “Mel Stride, Jeremy Hunt and you.” So there are columnists for whom this is an obsession, but not very many other people. Employers like these skilled, affordable migrant workers. The Treasury likes the tax revenue they bring. Who wants to bring all this to an end?

Migration allows the cover-up of the biggest welfare problems the country has ever seen. I recently asked Andy Burnham, mayor of Greater Manchester, if he knew that 18 per cent of his city were on out-of-work benefits. He didn’t. The figures are worse for Birmingham, Glasgow and Liverpool (all 20 per cent), Middlesbrough (23 per cent) and Blackpool (25 per cent). In the 1980s such figures would have been seen as a scandal: how could a fifth, or a quarter, of entire cities be on the dole? Businesses would not be able to grow. They would be forced to raise wages to entice people to work, or provide training. 

But mass immigration offers an alternative, and it is one we have silently chosen to take. So we don’t notice the missing workers: the real total (5.5 million) doesn’t show up in the official claimant count. If you know where to look, you can find shocking projections: 2.8 million claiming sickness benefits now, for example, and that’s expected to rise to 3.4 million by the end of the decade. An increase bigger than the population of Bristol, swallowed up by this system. A social problem? Absolutely. But an economic one? Nothing that mass migration cannot solve.

It feels churlish to criticise Hunt and Stride when they are doing more about this than any other politician. With Labour, there is just silence. If the problem isn’t getting enough attention under the Tories, it will be getting none under Keir Starmer, who has never spoken about it. His party would have even less appetite for this battle, and tends to see welfare as a public service that anyone can use. To write cheques, approve sick notes and consign people to edge-of-town estates has always been the more expensive but politically easier option.

We should at least stop being surprised by the huge numbers. We can expect net migration to stay high: about 400,000 next year, slowly settling at about 250,000 in a few years’ time. More than twice Cameron’s target. Don’t expect housebuilding to proceed at anything like the same pace. The newcomers will keep flattering social and economic statistics. They’re more likely to be in work, now, than natives.

But we can see the effect in our economic figures: this year’s economic growth of 0.6 per cent would be a 0.3 per cent decline on a per-capita basis. The UK-born workforce has not risen much since 2010: two-thirds of employment growth (and 80 per cent of it since the Brexit vote) is down to migration. We’re very good at integration; at finding great newcomers and welcoming them. But Britain is also quite good at not discussing the problems facing those at the bottom: and that is the risk we face.

Why is it that white working-class boys are the demographic least likely to go to university? Why are 400 people a day being written off as being too sick to do any work? And even after the reforms announced this week, why should we now see a future where we consign literally hundreds of thousands to the same fate?

If the Brexit vote was intended to nudge Britain towards a more cohesive economic model, then it’s hard to say that it has worked so far. I’m not at all confident that a Labour government would do any better. So yes, Hunt and Stride’s reforms may not be enough. But at the moment, they really are all that we have.

A quick look at inheritance tax (before the Autumn Statement)

 

It’s a Leftist myth that abolishing death taxes only helps the rich

Our tax rulebook is so complicated that multi-millionaires can easily find ways to avoid IHT

MARK LITTLEWOOD21 November 2023 • 6:00am

What a difference a couple of months make. In September, Jeremy Hunt said that reducing the tax burden was virtually impossible. Yesterday, Rishi Sunak announced that the time for tax cuts had finally arrived. If he were so minded, the Chancellor should now have the “fiscal headroom” to abolish inheritance tax (IHT) and still have a good number of billions to play with. 

IHT bears many of the features of a bad tax: it’s relatively easy to avoid with adequate planning, raises little revenue and also has the uncomfortable feature of hitting the bereaved when they are likely already to be at a very low ebb. The popular myth around IHT is that it simply penalises the unworthy children of the super-rich. In this caricature of events, we’re merely ensuring that those blessed with highly successful, affluent parents are unable to choose a life of indulgent, unmerited leisure upon their parents’ passing. 

The truth is rather different. Our tax rulebook is so complicated that multi-millionaires can easily find ways to avoid IHT. They may not be able to cheat death, but they can use trust funds and other contrivances to swerve tax liabilities. Those who have done reasonably, but not enormously, well for themselves – perhaps owning a decent but not extravagant house, and having a reasonable but not absurd savings portfolio – find it harder to avoid. They don’t have the resources to employ clever accountants and financial advisers.

When the grim reaper comes, the taxman will be following in his wake. And the children – who tend to have less, often much less money than their parents – are made to suffer regardless of their circumstances. No surprise, then, that IHT is unpopular. On a very basic level, many people seem to feel that accruing money to pass onto one’s children is a noble pursuit. Yet the “optics” still point our policymakers towards keeping the tax, for it is deemed unacceptable to be “helping the rich”. 

Sadly, this attitude now afflicts our entire tax system. A chancellor cannot put together any sort of tax change without the distributional effect being considered the primary basis by which it should be judged. A tax change that benefits the moderately affluent – or even the wealthy – is feared to be unconscionable unless there are equivalent or greater gains to the poorer parts of society. A package of measures that might assist households in the top third of earnings by, say, £1,000 per annum, but only aids the bottom decile by £100 a year, will be derided as a “giveaway” for the rich. 

It sometimes feels as if the main purpose of the tax system is not to raise resources efficiently and fairly for public services while maintaining vital incentives, but rather to move us inch by inch to some fantasy nirvana in which wealth and income gaps have been abolished altogether. Even if a swathe of carve-outs and loopholes allow the wily to dodge the headline rates of tax, the impression must be given that those towards the high end of the salary scale are being asked to do ever more. 

Abolishing or lowering IHT won’t supercharge the economy overnight. But it would be a step towards making the tax system simpler and more straightforward. That should be enough of a reason to embrace such a change. But if no such move is forthcoming, it will reinforce the idea that the main preoccupation of politicians is what taxes look like, not what they actually do.

Now here's a thought - have central banks got it wrong (again)?

 

Central banks will have to slash rates as the world’s fiscal bubble bursts

The main prop of global economic recovery is wobbling

AMBROSE EVANS-PRITCHARD15 November 2023 • 9:00am

The consensus at the Fed, Bank of England and ECB is that the ‘natural’ rate of interest has jumped to a permanently higher level CREDIT: JIM WATSON/AFP

The world economy has been kept afloat for a quarter century by serial bubbles. Each has masked the weakness of underlying growth.

As successive bubbles pop, the economy fails to self-correct by the normal process of the business cycle. It takes ever more monetary stimulus to right the ship.

It was the dotcom equity boom in the late 1990s, the US and Club Med property booms in the 2000s, the QE asset boom and China’s credit spree in the post-Lehman 2010s.

Today we are in the final phase of the great fiscal boom. Budget deficits ballooned to wartime levels on both sides of the Atlantic during Covid. These have yet to come down to tenable levels.

“Politicians have got into the habit of spending money like there is no tomorrow, and the population likes it. Sooner or later the bond market is going to throw another tantrum,” said Mark Dowding from BlueBay Asset Management.

Once this fiscal bubble bursts, or simply sputters out, the contractionary effect will in my (unfashionable) view knock away the central prop of the global economic recovery. It may already have begun.

Central banks will then have to slash interest rates much faster than their “higher for longer” protestations would suggest, and perhaps revert to emergency QE to head off a deflationary bust.

The consensus view at the US Federal Reserve, the European Central Bank and the Bank of England is that the Wicksellian “natural” rate of interest – known as R* – has jumped to a permanently higher level.

Henceforth the economy can cope with sharply higher borrowing costs. We are never going back to zero rates and negative bond yields, or so goes the thinking.

If so, this has vast implications for global borrowing costs and the market value of $140 trillion of outstanding bonds. It is the burning question in world finance today.

But not everybody thinks they are right, least of all Wicksellians. A recent article in the journal Central Banking argues that this flies in the face of both orthodox monetary theory and what is actually happening to global credit.

Philip Turner, a former top official at the Bank for International Settlements, and Marina Misev from the University of Basel, warn that central banks are being misled by false assumptions about R* into dangerous overtightening, risking a global credit crunch and an asset crash.

They argue that the natural rate is determined by whether private credit aggregates – bank loans and debt securities – are rising or falling. They have been falling at alarming rates across the West.

Bernard Connolly, author of You Always Hurt the One You Love: Central Banks and the Murder of Capitalism, predicts that the neutral rate will plummet as soon as fiscal worries force countries to tackle their budget deficits, a process already underway in Europe.

“I do not think that real long rates at their present levels are sustainable,” he said.

The average deficit was stable near 2.4pc of GDP in the advanced economies before Covid. It is 5.2pc this year, according to IMF data, but is starting to fall rapidly.

The US is an egregious exception with a deficit near 8pc on a quarterly basis. “It should be in balance at this stage of the cycle. It doesn’t get better than this,” said Moritz Kraemer, former head of sovereign ratings at Standard & Poor’s.

The IMF predicts US deficits of 7pc as far as the eye can see, pushing public debt to 137pc of GDP by 2028 if nothing is done. Nothing is being done.

S&P and Fitch have already stripped the US of its AAA rating. Moody’s put the US on negative watch last Friday, citing the perennial soap opera over the debt ceiling. Needless to say, such downgrades change nothing. America issues the paramount reserve currency and is still the world’s military colossus. It can get away with fiscal murder.

Others are not so lucky. America is lifting borrowing costs across the world by crowding out the bond markets with debt issuance and roll-overs running at an $8 trillion annual pace. Spillovers have pushed a clutch of countries into the crosshairs of the bond vigilantes.

“I think the UK could be vulnerable again if the Tories cut taxes too much or if they do it in a fashion that doesn’t raise economic productivity. The bond markets can turn on you very fast if they don’t believe what you are doing,” said Mr Dowding.

It is hard to see how putative cuts in stamp duty and inheritance tax, being floated as a pre-Christmas bonus, can help to lift the British economic speed limit. What the UK needs is lower business tax and infrastructure projects with a multiplier above 1.0 that pay for themselves via higher growth.

The iron law of sovereign debt management is that you don’t have to outrun the cheetah, you have to outrun the weakest herbivores of the herd. Fortunately, the UK is no longer the first target.

The UK is still on probation after the Truss episode but Rishi Sunak’s technocrat government has won a degree of Davosian respectability, no doubt enhanced further by the defenestration of Suella Braverman and the return of David Cameron as the face of British diplomacy. Davos hates the culture war.

Revised data shows that the UK economy has performed no worse than the eurozone over recent years. What I notice in global economic commentary is less and less talk of Britain as a Gothic horror story.

The vigilantes are instead eyeing Italy, where Giorgia Meloni’s honeymoon is over and what remains is the same old story: a half-reformed economy with a poisonous mix of near-zero growth, bad demographics and a debt ratio of 140pc of GDP.

“The really ugly mix will come in countries where interest rates are pulled up by global or regional factors without a corresponding increase in growth,” said Neil Shearing, chief economist at Capital Economics.

“Italy’s long-term debt dynamics are grim and the country operates within the straitjacket of monetary union. We doubt it will stay out of the firing line forever,” he said.

Euro membership twists the knife for the eurozone periphery. These countries no longer have a sovereign central bank and cannot print their way out of trouble. They are like a company and can go bankrupt, à la grecque, unless and until Germany agrees to rescue them.

You could argue that debt markets have already pricked the global fiscal bubble, setting in motion slow debt deflation. The eurozone has one foot in recession and the collapse in credit points to a protracted slump.

The jump in 10-year US Treasury yields to 4.5-5pc is percolating through the financial system and commercial real estate markets. The damage accumulates month after month as borrowers must refinance on hostile terms.

In a sense, the bond vigilantes have shown by their actions that they will not fund America’s fiscal degradation at tolerable cost. They will not cover the hole left by two sets of major tax cuts. They are demanding a premium to pay for a welfare state (entitlements) that has risen to 75pc of all US federal spending and is patently out of control.

The consensus New Keynesian view is that the world has jumped to a new regime of much higher interest rates and governments must cut their fiscal cloth accordingly.

The rival Wicksellian view is that the world economy cannot endure such high rates for long. If the Wicksellians are right, central banks will discover that R* has crumbled beneath their feet.

The ECB and then the Fed will have to carry out a violent policy pivot, slash rates, and ultimately mop up debt with fresh QE.

Almost nobody in the markets is prepared for that surprise.