Page 5 - ISO April 2023

INVESTMENT STRATEGY QUARTERLY

Concomitant with upgraded forecasts for the UK’s economy, the fers the lowest rate of investment across G-7 economies and
OBR delivered more good news in relation to the outlook for the thirdly, labour productivity has plunged to multi-decade lows.
public finances which percolating down, produced a windfall of
£27.9bn enabling the Chancellor both to meet his fiscal rules It goes without saying that all proposals put forward to improve
(just) and to dispense rather more largess than had been the UK economy’s prospects must address each of these issues
expected. The Budget mathematics reveals yet more positivity and not individually, but collectively.
in the form of medium term fiscal projections which include To say that this is a complex undertaking represents a serious
notably lower public borrowing than outside independent understatement. Reforms are likely required both as they per-
observers could have hoped for. tain to the labour market (including to pensions, housing and
the provision of childcare). Reform is also required to promote
It goes without saying that, when staring into the future the risk
to the country’s reviving public finances is that the economy and boost investment and more specifically that targeted
fails to deliver against reinvigorated expectations. The most investment likely to achieve a lasting improvement in produc-
obvious threat lies in either an acceleration in the issues tivity. Easier said than done. Promoting investment, for example,
affecting the global banking sector (although apparent Bank of requires the funding from an equivalent increase in savings,
England insouciance reflects the extent to which the UK’s cen- which might involve an overhaul of the tax system in addition to
tral bank believes that domestic banking entities are sufficiently the pension industry. Whilst the knock-on benefits from such
resilient and ringfenced to withstand any escalation of the reforms might also boost the labour supply in addition to
crisis) and/or the impact of a continuation in the now fairly pro- achieving the desired improvement in productivity, it is pretty
longed downward trend in commercial bank lending and the clear that profound adjustments involving complex interlink-
provision of credit. It is noteworthy, in passing, that the OBR’s ages will not be taking place overnight and seem more likely to
forecasts do not include any provision for any possible addi- be measured in decades, not months or years. Reforming the UK
tional deterioration in the prevailing situation. is a huge, but necessary challenge. Establishing a cohesive long-
term approach can only be achieved over a number of
In his speech to parliament when announcing the Budget pro- parliaments and requires, in the first instance, a preparedness
posals, the Chancellor reiterated his desired industrial strategy on the part of all political parties to work together. Garnering
based upon four pillars: Education, Employment, Enterprise such cross-party support in an age of confrontation feels like the
and Everywhere. With regard to the first two, Mr Hunt intro- vain struggle of aspiration over experience. But despite this a
duced measures aimed at addressing the UK’s apparent shortfall goal does exist and it can be reached not in terms of nar-
in labour supply, a broad suite of initiatives reflective of the row-minded political party point-scoring but in a spirit of mutual
wide-ranging nature of the problem. These may, or may not cooperation and a willingness to work together for common
prove effective over the short-term, but it is the UK economy’s prosperity in the future.
health over the medium-to-longer term that matters just as
much and here we find ourselves revisiting some very familiar
territory. That the UK economy faces serious structural chal- KEY TAKEAWAYS:
lenges is beyond doubt. Equally, the intractable nature of these • The Spring Budget delivered a package of measures
challenges is reflected in the fact that there is no “silver bullet” likely to boost the UK’s near-term economic
and no easy answers. Had there been they would surely have performance.
been deployed by now. • The Chancellor has articulated the foundation stones

In an attempt to simplify that which fundamentally ails the UK necessary to underpin the UK economy’s longer-term
the issues boil down, loosely, to the size of the labour force, the revival.
capital provided to that labour force and the efficiency with • But achieving an increase in the size of the labour
which the labour force puts that capital to work, productivity in force and the targeted investment necessary to
short. deliver productivity improvements are both complex
and interlinked.
Where does the country stand? Firstly, the UK’s labour force is
smaller now than it was at the start of the pandemic and smaller • Achieving the necessary root and branch reform
still than it was prior to the Brexit referendum. This places the requires aspiration and will take time. Prolonged
UK in a fairly unique position matched only across developed cross-party cooperation, a big ask in the current
economies by Italy and Japan (where demographics and an atmosphere of elevated political antagonism would
ageing population have played a key role). Secondly, the UK suf- be an important first step.

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