Is the UK stuck in a rut on growth? - speech by CBI Director General at University College London

Introduction

Good afternoon, everyone and welcome to those watching us online.

How great to be at UCL – an institution that for almost two centuries has been pushing the frontiers of knowledge to benefit our economy, country and lives.

Much more impressively, they are CBI members! Thank you for hosting us today.

Two years ago, I made my first major speech as CBI Director General, setting out a simple but ambitious proposition: Britain needs a national economic strategy. I questioned why other countries do it all the time, but the UK never does.

How successful my call was! Three Conservative Prime Ministers have announced three different economic strategies! But none have really stuck.

The CBI has done its part. Seize the Moment is our manifesto for a more competitive, dynamic, and future-focused economy. It sets out the real growth prizes available for UK firms and sectors this decade, in actual pounds and pence and, therefore, the jobs and benefits for workers and communities. We stand ready to fold it into the work of the new Cabinet.

The imperative has grown

Why do we care so much about Growth? It isn’t about economics. Or politics. It’s about people. People in this country who’ve had pay rises but not as high as price rises. People who know their jobs are changing and want to be reskilled or upskilled for new and better-paid jobs. This is about people who recognise that the health service needs more money; schools need more money; transport needs more money. But there isn’t any more money. Because there isn’t any growth.

Now, I am no doomster or gloomster. I am a British boomster! And I’m not here today to talk the UK down.

Nor our politicians. It’s been a turbulent few years, let alone few months. And our Ministers and civil servants have given so much of themselves and have shone at many moments.

So, although I do have some criticism of where we are; and feel compelled to say it; it’s not personal. Driving up UK growth after 15 years of stagnant performance, in a Parliament and world of permacrisis, is not easy.

And credit where it is due. This Prime Minister and the Chancellor have done a really good job of stabilising our economy after the fallout of the autumn. The Chancellor, in particular, upheld high levels of capital spending despite requiring a £55bn consolidation in his budget. And he’s begun to sow important seeds to return to, in his March Budget.

Despite an election looming, I personally believe that we don’t need to keep debating what we need for growth. There is a large consensus: higher levels of business investment, the right labour market and skills; and Britain winning in future innovation markets.

The current CBI forecast is that the PM should comfortably hit his pledge of getting the economy growing by the end of the year – by 0.1%. But today I suggest that if our policies aim for 0.1% growth, it’s the most we’ll ever achieve.

Because to overcome the headwinds we face – unlike anything we’ve seen – we need much more forward momentum.

The challenges we face in 2023

This is a speech about solutions. About tailwinds to overcome the headwinds. But let me start by setting out starkly those areas where I think our economy is moving backwards, not forwards. On capital, people and ideas. The three core priorities of our Prime Minister – so brilliantly set out in his Mais Lecture less than 12 months ago.

Investment

Let’s start with capital investment.

The CBI forecasts UK business investment to fall this year – as do all major forecasters – and to still be 9% below its pre-pandemic level as 2024 ends. And, across the country, I’m speaking to firms putting their investment plans on ice because they need to divert cash to deal with higher energy costs, higher wage bills and higher tax rates.

As Chancellor, Rishi Sunak accepted that one of the major problems here is that the UK’s tax incentive regime for investment is lower than the OECD average.

He had a grand plan – one we agreed to go with. Put corporation tax up by six points overnight – six points! But accompany that with an investment super-deduction. This meant those firms who invest in Britain pay less tax than those who don’t. But, as of right now, only half the plan will happen in a few weeks.

The super-deduction is not set to be replaced. With it, the UK had the fifth most competitive tax system in the OECD for capital investment. Without it, we’re back to 30th out of 38.[4] Just like our business investment, which ranks bottom of the pack − alongside Turkey and Greece. Our investment plans now are anti-investment.

People

On people and skills, we know this is getting harder.

In the wake of the pandemic, tens of thousands of older workers have left the workforce. There is a growing number of people unable to work because they’re experiencing long-term ill-health. Just when the NHS is on its knees trying to cope with current demand.

Childcare’s expensive in the UK – amongst the highest in the OECD. And it’s keeping parents who want to work at home or limiting their hours.

Politicians on all sides, don’t want to use economic migration to tackle labour shortages. Selling it to the public seems too daunting.

And on workforce skills – both government and business are failing. Just 24% of the UK’s public education spending goes to post-secondary education and vocational training and skills compared to the OECD average of 66%. That’s the smallest percentage of all 38 OECD countries. And British firms are among the worst performers in Europe on investment in training. The two are not unconnected of course.

Innovation

On innovation, we have a real opportunity to scale up our technology and life sciences sectors. But we have just been spectacularly overtaken on green growth – by far and away the biggest innovation opportunity in the 21^st Century.

We do really well in Britain at creating unicorns, $1bn in value. But we struggle getting them to decacorns, $10bn in value. We are working with many of them on how to change that and with this Prime Minister, Chancellor and Business Secretary, I am confident we will make progress.

We have done so very well on life sciences in recent years. We all want that to grow further. But there are real barriers to getting there. The sector depends on the NHS having the bandwidth to innovate. And on our companies feeling this is the right market to invest, which is now eroding fast as government procurement increasingly makes margins uncompetitive.

Where I am far more worried, however, is our complacency on green technology.

The Skidmore Review is devastating. And echoes CBI analysis of the UK’s performance against our competitors in future green industries.

Today, we’re publishing some new data on the global race for green growth. To sum up, the UK is falling behind rapidly – to the Americans and the Europeans, who are outspending and outsmarting us. We’re behind the Germans on heat-pumps, insulation and building retrofits, the French on EV charging infrastructure, and the US on operational carbon capture and storage projects – despite the UK’s North Sea advantage.

We’re lagging all three on hydrogen funding.

This is stunning to many who rightly felt clean energy was ours to own. But it has changed in the last two years when the UK has lost market share in green tech, equivalent to the potential value of £4.3bn by 2030.

The politics of growth

So, the challenges are big. And I am really worried about the political response.

The Conservative party appears to be restarting its civil war on tax. Some in the party are calling for big tax cuts for voters this year as a quick growth fix. They are wrong. The Prime Minister is right. To deploy mass tax cuts now with inflation this high will backfire. In fact, it did, just a few months ago. The PM has our full support on this one.

But I reject a polarised notion that you have to choose between fighting inflation and getting growth. Or, as the Government seem to think, that you must first bring down inflation before you act to get growth.

Consumption-led growth is the wrong path right now, but investment-led growth is not only non-inflationary, it’s totally essential to stimulate now. Otherwise, you won’t get good growth next year – where one would expect today’s politicians might want to offer some good news.

And we need to send signals immediately to domestic and foreign investors that the UK is the place to invest, right now. The rest of the world’s already off the mark.

To do that, we need the Government to make big decisions not small ones. Ones that change boardrooms. Ones that change Whitehall. And that is what I want to propose today. I fear from discussions with Government that their plans are simply too unambitious to get us out of the rut we’re in. Too small to overcome our challenges.

We need bigger action.

Action on capital

Let’s start with capital. The UK’s problem of low business investment isn’t behavioural, it’s structural. That’s what makes the rationale behind the super-deduction – and the PM’s original commitment to replace it – so powerful.

So, going forwards, this is simple: let’s finish the job the Government started. We propose full expensing for capital investment. It’s not about a more generous tax system but using it in a smarter way. It allows us to raise investment now – by enabling cash to flow back to firms when they make their investment, not drip feeding the benefits, sometimes over 30 years.

That’s critical to driving investment from the heart of recession – tackling why firms say they can’t invest by giving them the cashflow benefit of investing right away. And the cost to the Government is largely a balance sheet one – phasing the cash differently to stimulate growth. Of course, it would cost more if there was a massive uptake of investment. But that cost would be insignificant, weighed against the benefits of that increased investment.

In case you think this is a conversation between tax accountants, let me be clear. If companies invest more, they create better jobs. They automate more which means prices come down. They build better healthcare equipment for our hospitals, safer trains for our railway network and more.

The Government have said they believe in this policy but can’t afford it. That’s because they don’t want the hit to their annual accounts. I don’t think that’s good enough and nor do Britain’s investors.

But recognising their concern, I propose a new way to do this today – in steps. Let’s lay out a roadmap to achieve full expensing within three years. Right away, it would signal the UK is committed to rewarding investment. Politicians love to say Britain is open for business – this would make hollow words ring true.

Action on people and skills

When it comes to the labour market and inactivity, we need very bold answers here. Unlike other countries, we start this with one hand tied behind our back. The Government don’t want to use immigration to fill vital shortages.

In which case, their policies on long-term sickness, benefits incentives, childcare and training need to be twice as bold than other countries’.

First, let’s connect benefits and work so that people are able to return to part-time work without losing all their benefits. Employers can really help here with these pathways.

On childcare, I’m afraid there will need to be spending on more free childcare to really move the needle. Some of the supply-side reforms in Whitehall aren’t going to cut it for parents round the country.

On immigration itself, we can be far more pragmatic. Britain doesn’t need to go without the fruit pickers, warehouse operatives, and welders on a point of principle. It just needs politicians to say in public what they know to be true in private. Immigration that is fixed and short-term, eases shortages and buys us the time to get our labour market balanced again.

On adult skills, we need finally to sit together – business and government, as well as the skills sector - and make real change. In contrast to other European systems, when the UK Government does spend money, it doesn’t work with business to do it. The Lifelong Loan Entitlement was created as a contract between government and the adult learner. It was not conceived of as relevant to the current or future employer.

And while our tax system intervenes to address market failures of investment in capital and ideas, it does the opposite on skills. In the UK, we give tax hikes not tax breaks to companies who train. The Apprenticeship Levy forces companies to spend money on training. Fantastic! But not their own training. Other people’s training. That’s a tax not a levy.

Let me be clear. At the CBI, we champion Apprenticeships. For several sectors and employers, these are truly world-class qualifications and pathways to work. But it doesn’t work for everyone and is not the only skills policy in town. Most firms end up handing the money back to the Treasury.

But I want to talk to business here too. Risking our members’ wrath once more, I want to say the CBI doesn’t oppose levying firms to get them to correct years of underinvestment in training. We think it’s a very good idea. But, for us, taking the funds off companies to subsidise others is an act of economic self-harm by the Government.

Yes, UK companies do need to spend more on training their people. And I would welcome any initiative to make transparent what employers spend on their training budgets. In a labour market where the candidate calls the shots, there’s fierce competition among firms on their employee value proposition (EVP). I say today that any EVP that doesn’t have substantial investment in skills development and retention will fail. The market will weed out firms that underinvest in people – and so it should.

Finally, I urge the Government to have one labour market strategy and to have one point of accountability. Today this sits with the Home Office, BEIS, the Department for Education, the Department for Work and Pensions, the Health Department, the Cabinet Office and the Treasury. When everyone’s accountable, no-one is. This stuff is critical to our economy in 2023 – labour shortages drive both inflation and recession.

Action on innovation

Then, innovation. As I said earlier, here, I am confident the Government will act. It’s the Prime Minister’s passion and supporting him, we have two successful entrepreneurs leading the Treasury and Business Department.

Everyone, especially our politicians, loves a tech start-up. Or a photo with a robot. But rather than glamorous inventions, innovation should encompass and improve the competitiveness of our whole economy. Across every sector and region.

So, what does forwards look like on innovation?

Let’s double down on the Life Sciences Vision to ensure our coveted life sciences companies don’t exit Britain…

We can do this by continuing to unlock investment for those health challenges with real economic impacts like ageing and respiratory disease – and the Health Secretary has done well so far on cancer and addiction. We must also keep a growth lens on how we build out health-data infrastructure – making us a world-leader for data-driven start and scale-ups in health and life science.

Let’s get serious about the Prime Minister’s ambition to turn the UK’s $1bn companies into $10bn companies. To push us forward, faster, our President Brian McBride is inviting some of the UK’s fastest-growing companies to join the CBI’s Project Decacorns. Together, we will set out how the UK can grow new global champions in the digital world – at home.

Securing green growth

And, then, let’s get back to winning not losing in green by making smart regulatory changes and using public money specifically to unblock private sector investment. We did this on offshore wind – we can repeat that successful formula. And this year, the CBI will prioritise green growth as the major propeller for the UK’s future competitiveness.

We believe the UK could lead the world on green growth as we did in setting net zero targets. But we’re on the verge of being relegated from the Champions League by the Americans and the Europeans: both in an arms race to win global market share. Not only are they spending money, they’re abandoning regulatory barriers including state aid to win the prize! That’s a lesson for us on what it means to go big.

The UK Government protests that it’s increased its green investment. But we are not racing against ourselves. We’re in a race with our competitors, and this is where the lion’s share of growth for Britain will come – or not – in the years ahead.

Here’s how we’ll win. First, build off our unique strengths: our geological advantages in wind and carbon capture and storage; our science-base in universities; our world-class finance market; and the early leadership of UK companies across all sectors.

Second, make smart fiscal choices rather than believing we can outspend the competition. Put our funds into immature technologies where the market can’t yet act. Use Contracts for Difference across all technologies as we have in wind. And create positive incentives for local content – not protectionism but pro-British investment.

And finally, I’m afraid it’s time to confront regulation, planning and consenting that hampers our success. Put simply we are world class at being impossible to get projects going, nationally and locally. From laying connectors, to building EV charging infrastructure – and that’s before you even get to onshore wind and solar.

I know that subsidies, and planning reform are both anathemas to the Conservative Party. But refusing to budge on either when it comes to green innovation, makes a mockery of the Government’s desire to make the UK the most innovative economy in the world.

Smarter regulation

Leading on from this, I must say something about the UK’s regulatory divergence from Europe. The Government is convinced this is a major opportunity for growth. And I agree it can be too. But it’s a bit more complicated, than scrapping overnight many of the terms of trade we’ve used for decades.

Because divergence is high-stake politics and economics. Often, we don’t consider the EU’s possible counterplay, and where they could outcompete us. We also need to recognise that divergence will often shrink our market size and/or add a skip-load of red tape. The party of deregulation risks simply doubling the amount we have.

So, while it can definitely work – witness the historic success of the City of London and our rapid Covid vaccine approval – you have to run the numbers to make sure it’s not a complete own-goal. And it will take far more than a regulation play to make the UK win global share of global sectors.

So do it smart, do it where appropriate, and do it when government and business are ready for bold and joint action.

The Chancellor has appointed Sir Patrick Vallance to lead a thorough review into securing possible prizes in five high-growth sectors. This is the right approach. Serious reflection and consideration.

The complete opposite in fact of the Retained EU Law Bill – which says that at the end of 2023 all retained EU law in the UK expires. It’s creating huge uncertainty for UK firms.

Companies are asking will we really erode maternity and paternity regulation or health and safety standards like the General Product Safety Directive?

Or rapidly change regulations on REACH, which governs the use of chemicals? With billions of pounds of industry costs?

Or create the potential for firms being underinsured because it’s harder for analysts – who don’t know what laws will be retained – to effectively price risk into products?

Do we really want to subject the public – and industry – to another round of mass confusion and disruption, just when we’re trying to exit recession?

Instead, let’s review, retain, reform and – where appropriate – repeal EU law the Vallance way. Smartly. Not the Retained EU Law Bill’s way. Foolishly.

Our challenge to business

I realise some will see this speech as a harsh analysis of where we are. And it won’t be popular with political leaders. But we do it because we believe it’s true. Because we don’t feel any politician can respond to Britain’s current problems without growth. And mostly because we believe that both parties are now led by pro-growth politicians. This should be a moment of maximum opportunity.

And I’ve tried not only to criticise. But instead to channel Lord Young − who we recently lost − who famously stood out for bringing solutions not problems.

Transform our tax system to reward those who invest. Be bold on labour shortages. Fight back on green innovation, don’t be outspent and outsmarted by the competition. And don’t be reckless on regulatory divergence, be ready.

I’m also today challenging business to adopt solutions:

• Invest more – in capital, people and ideas – and persuade your shareholders of its merits.
• As part of that, train more or fear losing the talent war.
• On Innovation, accelerate your net zero journey. The politicians may be waxing and waning here, but this is a question of corporate strategy. If you’re not racing to a green future, you’re behind.

Conclusion

Let me finish where I started. On how we respond to Brexit, Covid, Climate Change, and a global inflation and Energy Crisis.

All reasons why business-as-usual politics and economics are not enough. Why small decisions now won’t cut it.

The CBI will stop asking for yet another national economic plan for now. But we will not stop asking – or holding our politicians to account - for national economic action.

On Capital. On People. On Ideas.

Bold changes that will get the UK back in the game.

And drive a force of economic momentum; that does more than get you a scrap of growth. It gets you out of the rut and charging forwards to build the country and economy we all want to see.