The Chancellors. Howard Davies

productivity record already discussed, they list a high degree of inequality, and an unfavourable demographic position, with the population ageing rapidly in the next decade, and Brexit likely to reduce high-skilled immigration from neighbouring countries.

      Some of these factors are not susceptible to Treasury intervention. But the report identifies policy weaknesses which are potentially under Treasury control. In particular, they see ‘long-run issues with parts of our tax system, such as the relative taxation of capital and labour’, and the absence of a coherent approach to carbon taxation. (I discuss the tax system in Chapter 4.) And they conclude: ‘The UK also lacks any long-term institutional structure to govern industrial strategy. The ability of sub-national government to manage change has also been weakened, with local authority spending power in England falling by 18 per cent since 2010.’ That is important given the evidence across Europe that attempts to ‘level up’ economic development ‘are driven by regions with high human capital and high-quality local government’.²¹ The Treasury’s centralizing instincts, and suspicion of local government, could be serious disadvantages in pursuing a levelling-up agenda. Critics see ‘no sign the government is embracing the co-ordination needed for the moves to have a significant impact – nor any hint of further devolution of policy powers away from the centre’.²²

The stakes are high. Torsten Bell et al. conclude: ‘If the pace of UK underperformance … were to continue at the same pace in the 2020s as in the 12 years to 2019, then the country will end this decisive decade with GDP per capita much closer to that of Italy than Germany: 17 per cent lower than Germany and just 6 per cent higher than Italy.’²³ My first job on leaving university in 1973 was as desk officer for Italy in the Foreign and Commonwealth Office, as it then was. At the time, the Italians liked to talk of il sorpasso (the overtaking), the moment when their economy would overtake the UK’s. That did in fact happen in 1987, but by 2020 we were almost 30% richer per capita, after dismal performance in Italy since joining the euro. For us to fall back to the Italian level would be dramatic. Fortunately, in the summer of 2021 external forecasters expected the UK economy to grow less rapidly than France and Germany in the recovery phase, but still ahead of Italy.²⁴ That is not, however, a high bar.

Notes

      1 1. Gus O’Donnell, Angus Deaton, Martine Durand, David Halpern and Richard Layard, Wellbeing and Policy. Legatum Institute, 2014. https://li.com/wp-content/uploads/2019/03/commission-on-wellbeing-and-policy-report-march-2014-pdf.pdf. The Kennedy speech can be found at https://en.wikipedia.org/wiki/Robert_F._Kennedy%27s_remarks_at_the_University_of_Kansas.

      2 2. Nicholas Crafts, The impact of EU membership on UK economic performance. The Political Quarterly, 18 May 2016. https://doi.org/10.1111/1467-923X.12261.

      3 3. Dan Corry, Anna Valero and John Van Reenen, UK economic performance since 1997: Growth, productivity and jobs. Centre for Economic Performance, LSE. December 2011. http://eprints.lse.ac.uk/47521/1/CEPSP24.pdf.

      4 4. Nicholas Bloom and John Van Reenen, Why do management practices differ across firms and countries? Journal of Economic Perspectives 24/1, 2010, pp. 203–224.

      5 5. Nicholas Sowels, From prudence to profligacy: How Gordon Brown undermined Britain’s public finances. Observatoire de la société britannique, 2011, pp. 77–93. https://doi.org/10.4000/osb.1136.

      6 6. Jonathan Portes, The Coalition’s confidence trick. The New Statesman, 2011.

      7 7. Gordon Brown, My Life, Our Times. Bodley Head, 2017, p. 350.

      8 8. Howard Davies, The Financial Crisis: Who’s to Blame? Polity, 2010.

      9 9. Jonathan Cribb and Paul Johnson, 10 years on: Have we recovered from the financial crisis? Institute for Fiscal Studies, 12 September 2018. https://ifs.org.uk/publications/13302.

      10 10. Ibid.

      11 11. Benjamin Nabarro and Christian Schulz, Recent trends to the UK economy. IFS Green Budget, October 2019. https://ifs.org.uk/uploads/GB2019-Chapter-2-Recent-trends-to-the-UK-economy.pdf.

      12 12. Jonathan Portes, ed., The economic record of the Coalition government. National Institute Economic Review 231, February 2015. https://www.cambridge.org/core/journals/national-institute-economic-review/article/abs/economic-record-of-the-coalition-government-introduction/8015174E2D750BB262797CB54D544413.

      13 13. Jennifer Castle, David Hendry and Andrew Martinez, The paradox of stagnant real wages yet rising ‘living standards’ in the UK. VoxEU, 21 January 2020. https://voxeu.org/article/paradox-stagnant-real-wages-yet-rising-living-standards-uk.

      14 14. Paul Krugman, The Age of Diminished Expectations: US Economic Policy in the 1990s, 3rd edn. MIT Press, 1997, p. 11.

      15 15. Martin Wolf, Why once successful countries like the UK get left behind. Financial Times, 21 February 2021.

      16 16. Nabarro and Schulz, Recent trends to the UK economy, p. 66.

      17 17. David Sainsbury, Windows of Opportunity: How Nations Create Wealth. Profile Books, 2021.

      18 18. Abigail Haddow, Chris Hare, John Hooley and Tamarah Shakir, Macroeconomic uncertainty: What is it, how can we measure it and why does it matter? Bank of England Quarterly Bulletin, 2013 Q2. https://www.bankofengland.co.uk/quarterly-bulletin/2013/q2/macroeconomic-uncertainty-what-is-it-how-can-we-measure-it-and-why-does-it-matter.

      19 19. Impact of the Brexit trade agreement on our economy forecast. Office for Budget Responsibility, 3 March 2021.

      20 20. Torsten Bell et al., The UK’s decisive decade. The launch report of ‘The Economy 2030 Inquiry’. Resolution Foundation. May 2021. https://economy2030.resolutionfoundation.org/reports/the-uks-decisive-decade/.

      21 21. Sascha Becker, Peter Egger and Maximilian von Ehrlich, Absorptive capacity and the growth and investment effects of regional transfers: A regression discontinuity design with heterogeneous treatment effects. American Economic Journal: Economic Policy 5/4, November 2013, pp. 29–77.

      22 22. Diane Coyle, Sam Warner, Dave Richards and Martin Smith, Budget ditches industrial strategy for centralised levelling up. Bennett Institute for Public Policy, 10 March 2021. https://www.bennettinstitute.cam.ac.uk/blog/budget-ditches-industrial-strategy-centralised-lev/.

      23 23. Bell et al., The UK’s Decisive Decade.

      24 24. Gregory Claeys, Zsolt Darvas, Maria Demertzis and Guntram Wolff, The great COVID-19 divergence: Managing a sustainable recovery in the European Union. Policy Contribution 11 2021, Bruegel. https://www.bruegel.org/wp-content/uploads/2021/05/PC-2021-11-ecofin-210521-1.pdf.

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