Hunt goes for productivity growth – at last

In  a speech to the CPS – Centre for Policy Studies – the Chancellor of the Exchequer Jeremy Hunt spoke about improving productivity growth across the public and private sectors – a transcript follows – we have to agree with most of what he said, so we can only hope his new study team know how to identify and implement effective and big changes, not just spout some baffling management-speak before disappearing into the long grass as the next general election approaches

Introduction

It is a pleasure to be with you this evening and a privilege to deliver this speech for an organisation founded 49 years ago.

Over that time the CPS can be proud of the profound impact it has had on the way we think about freedom and enterprise.

And I am delighted – as Chancellor – that even though you will soon reach the ripe old age of 50, there is absolutely no prospect of you taking early retirement, something impossible to imagine under the energetic leadership of Lord Spencer and Rob Colvile.

Today, I want to talk about one of the government’s five priorities – growing our economy – which alongside reducing inflation and bringing down debt, is central to our economic mission.

Because just as when the CPS was founded, it is growth that will prove declinists wrong, unleash prosperity through enterprise and give families confidence in their prospects.

Rob himself pointed this out in his excellent essay, “the morality of growth” when he said:

“If there is one thing that we all need to do – it is to remind people ceaselessly of the importance of growth.”

Productivity and growth

Growth is critical for many reasons.

It is the way we increase people’s living standards.

It is the way we increase opportunity with high wage, high skilled jobs based on the innovation that will define this century.

And it is the way we make sure our private sector is not strangled by an ever-expanding state.

According to the OBR’s long-term forecasts for the public finances from the end of this decade, our economy’s long term trend growth rate is 1.6% but public spending – even excluding debt interest – will grow by 2% a year.

So every year, the OBR’s projections suggest that the size of our state will be growing by nearly half a percent more than the size of the economy.

Now we are not the only ones facing this dilemma. OECD projections say Germany, Italy and Japan will have even lower growth over the next 25 years, with France about the same and the US only marginally ahead. Many of those countries have even steeper demographic challenges than we face and all face pressure to increase the burden on taxpayers.

You don’t need brilliant Treasury analysts to tell you the consequence of a state growing faster than the economy: higher borrowing, higher taxes or a combination of the two.

The OBR’s analysis suggests that without any action, the result of these demographic pressures could be a public sector debt of 217% of GDP by 2071, more than double the current proportion.

I think it is wrong – morally and economically – to pass on that level of debt to future generations.

Others might look to tax as the solution to this problem.

But to keep up with projected spending pressures that would mean increasing annual tax revenues by £200 billion by 2071 in today’s money, or to think of it more simply at least doubling the basic rate of income tax and main rate of employee National Insurance.

I reject that prospect, because that is the path to socialism: less freedom, less enterprise and less prosperity.

But to borrow an extra £28 billion would have exactly the same impact.

Higher inflation would lead to higher interest rates and higher debt repayments.

Rachel Reeves herself said such an approach would spook the markets.

It would be an illusory dash for growth which would increase the burden on taxpayers, shake confidence in the UK and pass on unsustainable debt to future generations.

So we need to find a smarter way out of the challenge faced by so many advanced economies.

Tackling inflation relentlessly must be the immediate priority. High growth needs businesses and investment and consumer confidence, none of those are possible with inflation.

High growth needs low inflation.

But tackling inflation is the starting point not the end point.

Higher living standards means growth in GDP per head, not just growth in GDP. That means growth driven by increases in productivity.

If we were as productive as Germany, our GDP per head would be £6,000 higher per annum. If it reached US levels, it would be £8,000 a year higher.

In my Bloomberg speech in January I identified the four pillars necessary to achieve productivity-rich growth. I called them the four ‘E’s: Education, Enterprise, Employment and Everywhere. Education, so we tap into people’s talents by investing more in skills; building an Enterprise economy by reducing the burden of tax and regulation; removing the barriers to Employment so businesses can recruit; and spreading growth Everywhere so all parts of the country are levelled up.

Now the productivity challenge applies to both the public and the private sector.

If we increase our productivity growth in the public sector by 0.5% a year, we stabilise the proportion of GDP consumed by the state by closing the gap between anticipated growth and anticipated spending up to 2050.[1]

And if we replicate that productivity growth in the private sector we start to increase living standards as well.

That would mean a boost not just to GDP, but GDP per capita. It would mean increasing tax revenues without increasing tax rates.

And it would put us on a sustainable path to lower taxes.

It is also the route through which union reforms, privatisations and support for competition delivered lasting growth and productivity.

Public sector productivity

Let’s start with the public sector. It is the sector over which governments have the most direct control – and that matters because, excluding benefit system transfers, it accounts for about 20% of our national output.

The long-term pressures, whether an ageing population or the need for stronger armed forces, won’t change.

But the way we meet those pressures can change. We can be much, much more efficient.

We start, I am afraid to say from a low base. Public sector output is 5.7% lower than pre-pandemic compared to private sector output which is 1.3% higher.

What does that tell you? Our innovators, job creators, entrepreneurs and risk takers have bounced back but the public sector is still feelings the effects of a once-in-a-lifetime pandemic.

But now, with that pandemic behind us, we need a renewed focus on public sector reform.

Patricia Hewitt’s review into how we significantly reduce the number of top down-targets in the NHS made a series of recommendations to help empower local leaders, something I am pleased the NHS has already started to take forward.

A recent review by the National Police Chiefs’ Council (NPCC) has already identified that 443,000 officer hours are spent filling in forms and dealing with unnecessary administrative tasks.

And it was recently highlighted that 10,000 public sector workers are focused predominantly on equality, diversity and inclusion initiatives, with nearly 800 of those in local councils alone.

Breaking down barriers for disadvantaged groups should be everyone’s responsibility not something you tick a box to achieve at further cost to taxpayers.

So I have asked John Glen, the Chief Secretary to the Treasury, to lead a major public sector productivity programme across all government departments which we will report on in the Autumn.

He will assess how we can increase public sector productivity growth, both in the short and long term, and look at what it would take to deliver that additional 0.5% every year that would stop the state growing ever bigger as a proportion of our output.

We also need to be better at measuring productivity.

The UK is one of the few countries to include public sector output measures as well as input data in its productivity statistics, which is a good start. But we can still do better.

Crime, for example, is down approximately 50% since 2010, great achievement. That excluded fraud and computer misuse (which wasn’t measured then.) But it barely makes a dent on their policing productivity figures because our productivity figures don’t capture crime outcomes.

Likewise on defence we measure what we spend, but not how safe that makes us.

And where we do measure outputs and the quality of delivery, mainly in the NHS, we count the number of hospital treatments but not the value of preventative care, even though that saves lives and reduces cost.

So I have asked the National Statistician to review how we can improve the way we measure public sector productivity which he has agreed to do.

I want this to be the most ambitious public sector productivity review ever undertaken by a government, with the Treasury acting as an enabler of reform. So we will spend time getting this right.

But if we do, the rewards are clear.

More innovation in the NHS, building on the success, for example, of the new surgical hubs that reduce waiting times and will give us 1 million extra procedures by 2024-25.

More innovation in our education system, building on the success of places like Oak Academy which has helped deliver over 150 million online classes.

And more innovation across our public services by harnessing the potential of AI to boost public sector productivity, building on cutting edge initiatives like the NHS AI lab and the Foundational Model Taskforce.

More innovation. Better public services. Less pressure on the public purse. A growth mindset that delivers more for less not just more for more.

Private sector productivity

Nor will we limit our ambitions to public sector productivity. When it comes to the private sector we can only enable reform rather than direct it, but we will play our part.

That’s why in my Bloomberg speech I announced the four pillars of our productivity plan: Education, Enterprise, Employment and Everywhere.

On education we have a huge skills programme in place already, including an expansion of apprenticeships, T levels and boot camps. Sir Michael Barber is advising me and the Education Secretary of where we need to go even further on the implementation of our reform programme.

For an enterprise economy we need more business investment, so we introduced full expensing of capital allowances in the budget, long championed by the CPS and making us the only major European country to do so. We are following this up by looking closely at the way our pension funds operate to consider avenues for reform.

On employment we know businesses need to be able to recruit the labour they need. So in the budget we set out one of the most comprehensive ever plans to address labour shortages including cutting the cost of childcare by up to 60% for many families and abolishing the lifetime allowance on pensions.

Finally to make sure we level up the benefits of growth to everywhere in the UK, we are launching 12 investment zones in left-behind areas, mini-Canary Wharfs which will bring clusters of fastest growing industries to areas where they are most needed.

It has long been thought that emerging economies should be investment-led but advanced economies consumption-led. But if we are to emerge from the low growth trap facing Western economies we should re-examine that orthodoxy because increasing investment is one of the biggest ways we can raise productivity in both the public and private sectors.

Conclusion

So I finish where I started: meeting Rob’s challenge to explain to the country why growth is so important.

Growth gives hope to young people about their prospects.

It gives security to older people about the public services they need.

It gives reassurance to taxpayers about the burden they are being asked to bear.

But it needs productivity. A relentless focus on efficiency and innovation across both the public and private sectors.

A dynamic, high growth future is ours for the taking – and productivity will be at the heart of it.

Thank you.

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