Rishi Sunak’s Mais Lecture last week was filled with references to all the people one might expect from a Conservative Chancellor. From Adam Smith to Thatcher, it was a who’s who of free-market luminaries.
But by far the most interesting namecheck was for one of Rishi’s professors when he was at Business School in Stanford: the Nobel Prize-winning economist Paul Romer.
Romer’s influence is shot through the speech, right down to the Chancellor’s focus on three major determinants of growth – “capital, people, ideas”. Fundamental to Romer’s theory is that economic incentives can drive innovation and technological change, the key to growth. This is exactly what the Chancellor was trying to achieve by talking about a new culture of enterprise, one where the state creates the right incentives for the UK as the capital of ideas and innovation.
By framing his vision around an enterprise culture, the Chancellor was able to talk seriously about the UK’s economic weaknesses, without ever sounding defeatist. He pointed out poor business spending in R&D, poor investment in skills, not enough private sector spending on capital. Sunak especially underlined that the UK’s business investment environment is not as competitive as it should be (although he studiously avoided pointing out that the 2023 Corporation Tax rise will only make this problem worse).
The open question by the end of the speech was where the culture of enterprise sits with the Government’s other major economic agenda – Levelling Up. Here, Rishi could have leaned on Romer a bit more.
Along with theories of growth, Romer has pioneered the idea of ‘Charter Cities’, places in developing countries where there can be policy experimentation and sets of rules designed to produce growth and innovation in otherwise unproductive environments. Originally designed as a mechanism for development, the same set of principles should inform how a culture of enterprise and Levelling Up can work in harmony.
Ben Houchen, Mayor of Tees Valley speaks eloquently about this. He points out that local communities want to experiment with new policies and attract private sector investment. At an event at Policy Exchange last month, he said that about three quarters of his time is spent trying to attract local investment, and he wants more tools to create an even more positive environment. By levelling up local leadership, creating freeports, giving local people better tools, you can create the local conditions for a culture of enterprise in the private and public sector.
Conservative governments over the last decade have rightly heralded their legacy of radical reform, especially in health and education. But one place where we have more to do is in unleashing the spirit of enterprise in the economically weaker parts of the United Kingdom. The Chancellor is right – Conservative voters across the country don’t want an ever-growing state but more vibrant economies where they live.
To deliver that meaningful change we need to think more seriously about how the devolution and public service reform at the heart of Levelling Up can give local communities power over economic development, and the ability to combine local knowledge and entrepreneurial spirit with the economic incentives at the heart of the Chancellor’s culture of enterprise.
Take Rochdale for instance. Rochdale is actively bringing together the Chancellor’s three key points – capital, people and ideas – to drive regeneration. Once stuck in a low-wage, low-growth, low-skill equilibrium, key partnerships between universities, the local council, and private businesses have focused on graphene manufacturing to deliver higher-skilled, higher-wage jobs while harnessing public sector investment in universities to that end. This kind of local economic leadership over the long-term will then benefit from the better investment environment at the heart of the Chancellor’s Mais vision.
Similarly, the Chancellor focused heavily in his speech on how the UK does not invest enough in research and development, and that our tax structure does not lead to strong business multiples in innovation. This is a real problem. Andy Haldane, one of the architects of the Levelling Up White Paper, has made the point before that the UK is very bad at diffusing the knowledge and innovation it does create. Countries such as Germany have stronger local institutions that help distribute benefits and generate local economic returns. A better investment environment in the UK will benefit from the very local institutions strengthened by Levelling Up and the Innovation Accelerators announced in the White Paper.
This isn’t disastrous 1970s style corporatism, where the commanding heights of the economy always seemed to pick losers regardless of economic conditions. It’s rather the opposite – local initiative creating the conditions for private sector British winners underpinned by national, dynamic free market policies.
In the Mais Lecture the Chancellor showed he had a coherent and inspiring vision for the UK. The challenge now is to make that vision coherent across a Government with several key economic priorities. Hopefully his old Stanford prof can be an inspiration yet again.