|The UK must focus on three priority areas in the decade ahead
|At a time when the international economic environment is tough and the world has never been more competitive, there are no quick or easy solutions to boosting economic growth in the UK, especially given the fiscal constraints the Government faces.
However, I believe there are three priority areas for the decade ahead, specifically in relation to infrastructure investment, the re-shoring of manufacturing and support services, and skills.
Critical to achieving this growth and improving competitiveness is government and business working together. From the conversations I’m having with business leaders, there is an increasing appetite for this to happen.
In the recent Budget, the Government announced a welcome extra £3bn of infrastructure investment per annum from 2015 to 2020. However, UK infrastructure investment as a proportion of GDP lags behind the comparative figures for countries such as China, Japan, Mexico and the US. Alternative funding needs to be found if the UK is to modernise infrastructure in key areas, such as power generation and the transport network.
The Government rightly argues that the public and private sector should work together to develop and finance infrastructure, but with many banks having exited the long-term project finance market there is a need for substitution away from bank financing.
There are early signs of institutional lenders emerging, which is the logical home for long-term project finance lending. Continued support is needed for the development of alternatives to the long-term bank debt market, including guarantee programmes and government sharing of refinancing risk for bank to bond solutions on government-sponsored projects. In this respect, recent rumours of interest in infrastructure investment in the UK from sovereign wealth funds can be viewed in a positive light.
Material incentives for infrastructure investments should be considered as part of future Budgets. For example, it may be appropriate to introduce significant capital allowances. The UK should also consider a programme of transport infrastructure upgrades and maintenance, such as the US has done.
While there is a clear need for private sector funding for infrastructure projects, we should remember that the UK Government owns some £700bn of land and buildings. Sales of certain government assets could potentially be used to fund a bigger public contribution to infrastructure without increasing borrowing. A drive to improve and speed up the planning system could help both public and private infrastructure investment avoid potential obstacles.
Despite cuts to public sector spending it is also important to ensure that the significant contribution to GDP of the UK’s major cities is supported and particularly their increasing role in infrastructure investment as plans are pushed forward for radical decentralisation. This was best illustrated in the Budget by the Government’s response to Lord Heseltine’s report and the proposal for a Single Local Growth Fund. Countries such as Germany and the US have benefited from strong decentralisation and it is hoped that the Heseltine proposals can similarly benefit the UK.
Strong leadership is required in cities, working closely with private and voluntary sector leaders to provide local access to the resources and tools needed to drive growth and to support effective investment in key areas such as housing, skills and infrastructure. As well as the current range of initiatives and programmes available to support investment, developing local growth funds could provide a single focal point for investors and businesses and may make it easier for institutional investors to access opportunities that historically would have been met by the banks. As we approach future spending rounds, spending on providing affordable and suitable housing is also needed.
But it’s not only more and smarter infrastructure investment that UK plc needs. Now that the competitive advantage of countries such as China is being eroded, the re-shoring of manufacturing and services presents another opportunity to boost UK growth.
High oil costs make shipping goods less profitable and lead times are long. In industries where response times are critical, such as clothing, being based in Europe is a significant advantage. The higher pace of wage inflation in some countries compared with the UK also offers mid-term re-shoring potential. Lower cost regions of the UK could attract investment if they position themselves as alternative locations. A “Welcome Home” campaign directed at UK companies abroad would be money well spent .
Last, but by no means least, the skills of the workforce will determine whether the opportunities for growth are taken up. Investment is needed in talent to acquire the necessary skills for a 21st century economy, and a focus on vocational training including apprenticeships will be important.
The challenge is to drive productivity gains by narrowing the skills gap. Workers need to have the skills to match their talents to the opportunities available in our high-value industries, applying their new capabilities throughout their working careers and raising the economy’s overall productivity. We need good jobs to match good growth. Government needs to work with businesses and with local government to tailor skills support to meet business needs.
None of the decisions required fits easily within the boundaries of five-year political terms. All transcend the period of a single government. However, what is clear from the conversations I have with business leaders across the UK is that there is a quiet optimism in the boardrooms of Britain. What UK plc wants is consistency of policy, including a consistent tax regime, and a clear direction of travel to provide the confidence to invest. Good cross-party initiatives can play a key role here.
I believe that a determined focus on infrastructure, the re-shoring of economic activity and the up-skilling of the workforce over the next decade will provide the highest returns in the pursuit of growth.