This is the ideal time to ask: what policies and institutions are needed to sustain long-run growth in the UK for the next half century? Our answers are contained in a book published last week: Investing for Prosperity: A Manifesto for Growth. We give an unfashionably optimistic story of the UK economy over the past 30 years. From the late 1970s, the UK reversed a century of relative decline thanks to an array of policy changes including an expansion of higher education and greater competition in product and labour markets.
Despite this overall positive performance, the UK has a number of structural weaknesses, reflected in years of inadequate long-term investment in skills, infrastructure and innovation. This failure to invest is rooted in an inability to achieve stable planning, strategic vision and a political consensus on the right policy framework to support growth.
This policy instability is compounded by a number of properties of the UK politics. First, the time horizons of politicians are truncated as they move swiftly between ministerial posts. Second, the adversarial nature of UK politics creates a tendency towards policy switches as governments change. Third, political debates often lack guidance from independent, evidence-based advice. The civil service must maintain the confidence of ministers and is constitutionally barred from advising anyone but the government of the day. Civil servants’ incentives are typically more focused on helping to deliver policies than on helping governments (or others) structure their thinking in the longer-term interests of society as a whole.
Too often, the result is a costly cocktail of political procrastination, institutional churn and poor decision-making. These are not, however, the inevitable outcomes of governing collective affairs in a democratic framework. Indeed, the UK has led the way in seeking innovative institutional solutions for designing and implementing policy, such as creating NICE and giving the Bank of England independence.
Two main lessons follow from these experiences. First, it is important to focus politics on the decisions that involve strategic choices, and the definition of high-level objectives and rules. Other aspects of policy formulation and implementation often benefit from some degree of insulation from short-term political pressures. This is particularly relevant for policies that have effects on investments with long gestation periods, such as infrastructure. Second, the quality of the political debate rests on independent, transparent, expert advice, subject to parliamentary oversight and strategic political guidance.
We have made a number of proposals designed to be both politically feasible as well as robust to swings in policy-makers’ sentiments.
Among our key recommendations is the creation of an Infrastructure Strategy Board to provide independent expert advice to Parliament to guide strategic priorities in infrastructure investment. An Infrastructure Planning Commission would support the implementation of those priorities, and have powers to share the gains of infrastructure with those who stand to lose from new developments. An Infrastructure Bank would facilitate the provision of finance,working with the private sector to share, reduce and manage risk.
To encourage innovation we recommend increasing competition in retail banking to improve the provision of finance for private investment; having the Government’s Business Bank prioritise young and innovative firms; and encouraging a long-term investment perspective through regulatory changes and tax reforms.
In the area of skills investment, we recommend improving teacher quality by expanding the intake of teachers and engaging in more rigorous selection; and using targets, inspections and rewards to hold schools to account for the outcomes of disadvantaged pupils.
As the nation begins to emerge from the worst economic crisis in many generations, we need to look beyond the next budget cycle, the next spending review and the next Parliament when making long-term investment decisions in skills, infrastructure, and innovation. This is vital in a dynamic, global economy where skills, flexibility, openness and receptiveness to technological change are becoming ever more important for prosperity.
Authors: John Van Reenen and Tim Besley, co-chairs of the LSE’s Growth Commission, and Miguel Coelho, a senior economist at the Institute for Government and head of the Growth Commission’s secretariat