The bumpy ride to a new UK economic model


Few political leaders can match Boris Johnson’s gift for delighting their party faithful. This week’s Conservative conference has made clear the prime minister’s dominance of his party. Not for some years, though, has the breezy optimism of a UK leader’s conference speech seemed so at odds with the realities of many Britons’ everyday lives. Labour shortages are leading to everything from petrol queues to the forced slaughter of livestock. Fuel costs are soaring. The absence of an effective opposition lessens the pressure on the government. As it approaches its midterm point, however, the Johnson team will soon have to shift from offering visions of sunlit uplands to making them a reality.

For now, the prime minister’s ratings remain robust. The strategy of blaming others — notably media and business — for today’s disruptions, and insisting they are the necessary birth pangs of a new, high-wage, economic model appears to be holding the line.

But there are real risks ahead. Continued goods shortages and supply chain disturbances could yet lead to gaps on the shelves ahead of Christmas. These could combine with the pressure on businesses to raise wages to attract scarce labour, and create a wage-price spiral. Falling real wages, even if nominal pay is rising, would have severe political costs — especially on top of the removal of the uplift to universal credit and an increase in national insurance contributions to fund social care.

A “winter of discontent” may not materialise. Even if it does, with Labour still in the doldrums, it might not cost the Conservatives the next election. Either way, the government will come under mounting pressure to move beyond the politics of assertion — the blithe assurances that answers will turn up and post-Brexit Britain will win through — to the politics of delivery. On top of his promise to level up left-behind regions, the prime minister has now layered an explicit commitment to reorientate the UK towards being a “high-wage, high-skills, high-productivity” economy.

This is a legitimate and worthy goal, but will require a co-ordinated strategy to achieve — especially as business is already having to overcome a negative productivity shock in terms of the increased trade frictions created by Brexit. It will mean more than insisting businesses must raise wages rather than “reach for the same old lever” of cheap migrant labour. Higher pay levels might force businesses to raise productivity by prompting them to become more efficient but, in the absence of other measures, may also lead them to lay off marginal workers, driving up unemployment.

The government must do more to make it attractive for businesses to invest than the two-year super-deduction of 130 per cent for corporate investment in plant and machinery that chancellor Rishi Sunak announced in March. Especially with corporation tax rising in 2023, longer-term deductions will be needed, and extended to the type of investments useful for services businesses that make up the bulk of the UK economy.

It is vital, too, to invest more in skills and training, and encourage business to do the same. Proper funding needs to be secured for the initiative to offer free college study to adults without A-levels or equivalent qualifications, and broadening student financing to include more vocational courses.

All of these goals would be best served by adopting a collaborative approach. It may suit the Johnson government’s short-term political needs to portray business as a cause of today’s problems. It would suit its longer-term hopes better to embrace it as a partner.