The UK’s economic strategy lacks long-term thinking, is prone to “chop and change” and is at risk of fragmentation, MPs have warned.
Experts are “mostly unpersuaded” by the Government’s arguments for abolishing its Industrial Strategy in the 2021 spring Budget and replacing it with the Plan for Growth.
Critics claim it lacks detail and that the Treasury failed to collaborate with business or regional bodies.
The criticisms are leveled in a major report by MPs on the Treasury Select Committee. It states: “We are particularly concerned at the ‘chop and change’ and lack of long-termism in growth strategy and policy, without which businesses themselves are unable to plan and invest themselves.
“It was suggested that there was insufficient detail and a lack of collaboration with businesses and regional bodies meant there was no overall strategic vision of what the UK’s economic problems were, how they should be prioritised, and what policies and interventions were therefore effective.”
Examining the UK’s “productivity puzzle”, MPs say they found that business investment has fallen since 2016, and while focusing on tax incentive reforms is a good start, wider economic certainty, coherence and stability in the Government’s growth policy – which is currently deficient – will be key to improving investment.
They conclude a significant part of the country’s productivity shortfall is due to a “long tail” of low-productivity firms, usually small businesses, with relatively poor digital adoption and management skills.
Several witnesses told MPs the current government framework was too restrictive of investment. “In particular, the net-zero transition may need substantial public investment, and they thought the Treasury had been wrong to rule out financing this through borrowing,” the report states.
The committee said it was concerned that there had been no replacement for the Industrial Strategy Council, which provided oversight and evaluation of policies for growth and had been “a force for consistency and long-termism”.
It said there was an urgent need to find out why, post-pandemic, there has been a sharp fall in the number of people looking for work, compared to pre-pandemic trends.
This was “harming economic activity and could exacerbate inflation,” and the Treasury should devote extra resources to address the fall, MPs added. “That may mean additional resourcing for ‘long covid’ processing,
to enable those suffering from long-term sickness to re-enter the workforce in greater numbers,” the report says.
“Moreover, labor and skills scarcity could hold back growth and stoke inflation. The Government should be looking to prioritize addressing the gaps in the UK’s skills and taking steps to ease labor shortages.”
The need for an “overarching strategy” to co-ordinate activity across government departments was crucial, the committee said.
“It is unclear to what extent the Plan for Growth is an active strategy driving the Treasury’s activities as the co-ordinating economics ministry,” the report says.
“As a result, there is a risk that growth strategy and policy are fragmenting across departments.”
However, “post-pandemic scarring” seems likely to be much less of a problem than first feared, the MPs found – but ministers still need to assess the risks.
The report said wider economic certainty and coherence and stability in the Government’s growth policy, which are currently deficient, are also important for greater business investment.
It warned that company indebtedness might also be a restraining factor and “should be monitored carefully.”
Mel Stride, the Treasury committee chair, said: “We have a new Chancellor and shortly will have a new prime minister. Getting a grip on productivity will be key to kick-starting economic growth and stimulating greater business investment in the UK.
“The evidence we received suggests there needs to be greater stability and long-term certainty in Government policy making.
“It’s also imperative the Government takes action to help the large number of people suffering from long Covid, many of whom are likely to wish to return to work.
“Prioritising investment in this area is likely to have a tangible benefit on the UK’s tight labor market, which will help in the fight against inflation.”