Economic growth in the 21st century will be driven by the adoption and commercialisation at scale of a phenomenal range of new technologies. Mastery of these is already cementing US economic growth; similar mastery of green technologies is behind China’s economic boom.
This is “creative destruction” – the evisceration of the old and the creation of the new. The challenge for Britain is to find its way to a parallel growth alchemy. It’s a challenge to which last Wednesday’s budget did not rise.
The US and China have two advantages denied Britain. First, they have been able to drive through destabilising change careless of the social consequences. In China, this is because it is a totalitarian autocracy. In the US, it is the belief that the state should accept only minimal responsibility to compensate for individual hardship.
Second, they have continental economies that allow fledgling enterprises to scale up into organisations of size within one economic regulatory jurisdiction. The UK has neither.
Importantly, both countries have a third arrow in their growth quiver – a sophisticated ecosystem for supplying risk capital to young innovative scale-ups and then fostering competition between them to develop innovative winners.
In the US, this is done through a network of skilled venture capitalists, who follow initial investment rounds with successive further rounds for competing companies that prove themselves. They may supply only 0.2% of all US investment, but nearly half of all American public companies started as venture capital-backed.
The Chinese copy the Americans. Their state-owned banks invest in “little giants”, which then compete with each other for the next round of venture funding. No venture capitalist or party official can anticipate which will succeed and which will fail. In both systems, most fail, but the success from the few that succeed more than compensates.
All British companies need access to the EU single market, but young growth companies most of all
In the tidal wave of gloom engulfing our national conversation, there is one ray of light. Britain has the emergent foundations for reproducing what China and the US are doing, and better than anywhere else in Europe. The UK has the world’s third biggest venture capital industry. It has a state-owned development bank, the British Business Bank, as the country’s lead venture investor, an exceptional science base and two-fifths of Europe’s fast-growing, young, venture-backed, high-growth companies.
In the spending review, Labour found another £1bn a year for the British Business Bank to invest in young scale-ups, and has cajoled Britain’s pension funds into potentially matching that investment through the Mansion House accord and Sterling 20 initiatives.
The budget announced a stamp duty holiday for three years after a young company floats on the stock exchange to encourage investors, and some other tax breaks. All are helpful but, given that we now know the famed fiscal black hole never existed, these are baby steps that could and should have been leaps.
To spend pro-rata what the Americans and Chinese allocate annually for venture investment, the scale of what Britain does needs, as a minimum, to be trebled, not least to help staunch the sales of UK tech companies to the Americans. For example, if just 10% of the exploding £109bn budget for ill-health and disability benefits for 2030-31 were to be reallocated to venture investment, Britain could build a trillion-pound tech economy by 2040.
Two more growth props are needed. The first is an employment, training and social security system that allows everyone to be fast-moving. There is a template for all this in Denmark’s “flexicurity” system. The UK needs one like it. Friday’s decision to abandon the proposed qualifying period for unfair dismissal from day one to six months is a step in the right direction, but it needs to be accompanied by huge investment in training programmes and income support for the transitionally unemployed.
Last, the EU. All British companies need access to the EU single market, but young growth companies most of all. Britain, as David Miliband argued recently, should address the debilitating post-Brexit crisis in the UK’s goods trade with Europe by unilaterally aligning with single market rules. This should be the precursor to rejoining the single market.
In addition, the negotiations to join the €150bn EU defence procurement scheme should never have been allowed to collapse through British cheese-paring. The EU dramatically dropped its price tag; Britain should have increased its offer. Here, UK growth and European security interests coincide. Fear of Nigel Farage’s reaction should be put aside. He is, in one of the chancellor’s best budget lines, a Russian asset.
A recurring theme in this paper’s Road to the Budget series has been the urgent need to accelerate the UK’s growth. On this, the budget at least held the line on maintaining vital public investment, but essentially offered little else.
What Britain needs to do stares us in the face. Labour should just do it.
Photograph by Luke MacGregor/Bloomberg via Getty Images