Wednesday brought some welcome good news for the UK government as it tries to generate the elusive growth it needs to stabilise the budget. Universal Studios confirmed a major investment in Bedford to build a theme park after a couple of years of consideration. This will result in 8,000 extra jobs in 2029, with construction in the next few years adding to building demand.
Meanwhile, the government is battling to buy time to save the remains of the steel industry in Scunthorpe, where the Chinese owners want to close the blast furnaces and the nearby rolling mill as it is so much more expensive than making steel in China.
The recent Office for Budget Responsibility (OBR) forecasts set out at the Spring Statement halved the forecast for this year’s growth to 1%, but this is being tested. The impact of US tariffs on UK exports to the US and the possible knock on to world trade and activity of the wider impositions by President Trump have left the OBR talking of a future further cut to growth. The OBR has said a trade shock or failure to boost productivity as planned would eliminate all the Chancellor’s financial headroom from the Spring Statement.
The original growth plan
The Prime Minister in December set out six milestones for his growth and wider strategy. Two applied to the whole UK, pledging to put more money into the pockets of working people, and to achieve 95% clean power by 2030. The pay pledge was explained as achieving rising real income per head over the Parliament, which requires sustained employment and more growth in output and productivity.
The clean power promise means generating most of the UK’s electricity from renewable sources aided by residual nuclear, with gas standby by power reduced to 5%. This implies a much faster rate of investment in renewable energy itself, in grid capacity to make it possible to transfer the power to where it is needed, and in electricity storage to tackle the problem of windless days and many hours without sun.
Three of the pledges related to England, as the government has shifted substantial power to the devolved administrations. He promised to get waiting times in the NHS down to 18 weeks, requiring substantial reform and large increases in spending. He confirmed 1.5 million new homes to be built over five years.
The government is well behind target so far and anticipates fast acceleration in the second half of the period. The OBR agrees but says the outcome will still fall short of the planned numbers. Mt Starmer assured us three quarters of five-year-olds would be school ready, implying more work and spending on pre-school facilities.
The prime minister proposed 13,000 more police to expand law and order in England and Wales. This has led to arguments with forces over the extra costs of National Insurance and other funding issues. The total approach laid considerable emphasis on the public sector and the favourable impact of the increased spending identified in the budget.
The real incomes promise was being met but could be hit by the slowdown in growth and any worsening of the general trade and economic outlook. The housing policy rested on more planning permissions. It also needs cheaper mortgages and more affordable houses to boost sales.
What is the government proposing?
The government announced earlier this week a minor relaxation of the rules limiting the sales of petrol and diesel cars, recognising the sharp decline in this industry. The measures are unlikely to make much difference to a sector struggling to convert from internal-combustion vehicles to battery ones against a backdrop of customer resistance to the new products.
It is conducting a wider review of regulations with regulators, urging them to adopt more growth-oriented approaches. Some modest improvements have been suggested but nothing that has caught the headlines in a way which could make much difference to confidence and output.
The government still places a lot of hope in boosting building, which is why Bedford is helpful to their campaign. The announcement of support for a third runway at Heathrow airport is part of the programme, but there is unlikely to be any building work anytime soon given the continued long delays in getting detailed approvals for such a large project. Much of the infrastructure work planned to build soon takes the form of renewable energy projects.
Energy policy is causing problems
The government claims renewable power is cheaper than relying on gas. During the transition, however, the UK has some of the highest energy prices of the advanced world which is acting to drive energy-intensive business out of the country. The government is looking to see if it can shunt some of the costs of electricity from the electricity bill onto the gas bill, but this does not tackle the underlying issue that energy is generally too expensive. The government has approved three increases in the managed energy price in a row, which is also hitting people’s spending power and delaying the pre-election promise of £300 off household bills.
The renewables strategy still requires very large capital sums including a massive increase in grid and storage capacity, which all needs paying for.
Public-sector expansion
The government’s instinct is to go for growth in public services, wanting to see better outcomes and to meet the needs of a fast-increasing population. This is now circumscribed by the lack of growth and the impact of the Chancellor’s revised fiscal rules. As a result, the spending round of negotiations between departments to produce a new forward spending plan this June is looking at a wide range of cuts in various departments. The government has also embarked on a slimming programme for civil service payrolls and for independent government bodies. Its mantra is reform as well as increased spending. It is seeking to understand and reverse the decline in public-sector productivity.
Subdued growth ahead
Growth is going to remain well below where the government wants it to be and subject to domestic and international pressures that are unhelpful. The government needs to help improve business confidence, hit by the tax raising budget and by overseas events. Productivity is adversely affected by the loss of capital-intensive activities like new oil and gas production, oil refining and steel making. It is going to take some interest rate cuts and action on energy amongst other measures to provide the big boost needed to achieve the overall aim of achieving the fastest sustained growth in the G7.
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