Chancellor Rishi Sunak opened yesterday’s Mais Lecture by condemning Russia’s unprovoked aggression: “When the sovereign freedom of one democratic nation is threatened, wherever they may be in the world, democracy everywhere is challenged.” Spot on.

The Mais Lecture is an annual event at Bayes Business School (formerly Cass), where Prime Ministers, Chancellors, Governors of the Bank of England set out their economic vision.

Sunak gave us a flavour of what to expect in his upcoming Budget, but it will also be seen by many as his pitch to be the next Prime Minister. And that pitch is “a future economy built on a new culture of enterprise.”

Sunak praised free markets as a machine for innovation and growth: “The arc of human history has taught us that more than any other economic system, the free market provides the best possible route to achieving the most happiness and security for the greatest number of people.” As is almost a tradition for politicians, he then points out the free market’s limits – whether that’s the need for a safety net, its impact on social bonds, and externalities like climate change. All pretty standard stuff.

According to Sunak the biggest challenge the free market faces today is where new growth will come from – again, all pretty standard stuff. Most economists and think-tankers have been sounding the alarm on UK productivity for years.

After a lot of platitudes, however, Sunak hinted at something more interesting and concrete.

He has three priorities:

1) On capital investment, Sunak refers to the growth we experienced in the 19th and 20th centuries: “Even in the decade before the global financial crisis, capital deepening grew UK productivity by just 0.4pp per year, less than half the OECD average.” As he explained, today capital investment by UK businesses averages just 10% of GDP, considerably lower than the OECD average of 14%.

And he offers a diagnosis: “An analysis of the Net Present Values of different countries’ tax treatment of long-lived capital assets like plant and machinery shows that despite the UK’s highly competitive headline corporation tax rates, the overall tax treatment provided for capital investment is much less generous than the OECD average.”

The Chancellor’s priority will thus be to cut taxes on business investment, which is something we have long called for. In fact, our Research Director Sam Dumitriu was among the very first in the UK to push for expanding capital allowances, and will soon release a report with another think tank that I expect will be similarly influential. Watch this space.

2) On improving technical skills, Sunak is particularly concerned with adult education. Just 18% of people aged 25-64 hold vocational qualifications. This is a third lower than the OECD average, with UK employers spending just half the European average on training their employees.

Sunak thinks we need to reform the complexity and confusion in the current system. There are currently 4,000 qualifications at level 3, and over 3,000 at levels 4 and 5. But while confusion and complexity are no doubt a problem, are they really the main problem for employers? Sunak hints that the Apprenticeship Levy might also need reform, which we’ve called for before, but I’m sure there are some smart entrepreneurs and experts in the adult education space who have some ideas on what more can be done. If so, get in touch.

3) Last, and best, the Chancellor lauds the importance of innovation (I would suggest reading this section in full). Citing Paul Romer’s insight on the non-rivalrous nature of ideas and the $400 bet between Professor Robert Gordon and Professor Erik Brynjolfsson on whether we’re still innovating, Sunak comes down on the side of the latter, taking the view that Artificial Intelligence is a general-purpose technology, like steam power, electricity, and information technologies.

I think this is correct. And we put out a paper by former Office for AI Adviser Séb Krier, setting out exactly how the UK can be the place in the world for AI.

Ultimately, Sunak acknowledges that differences in productivity explains almost all of our economic gap with the US. He claims Brexit could give us the freedom to improve our regulation of technology, life sciences, financial services and innovation (more on that below), and claims that the Government is already helping with British Patient Capital, the Future Fund, tax reliefs, and the Help to Grow programmes, as well as by reforming Solvency II, listings rules, and the charge cap to unlock pensions. Mostly things we have called for or supported, but we think we will need much more than this to close the gap with the US. We’ve got a host of reports in the pipeline to set out exactly how.

We were also very pleased that Sunak cited our research, when he said that half of our most innovative companies have an immigrant founder. But actions speak louder than words. Given the Investor Visa has been scrapped and the Innovator visa is under threat, we won’t be counting chickens any time soon.

Sunak is also going to look into better incentives for R&D. As he acknowledges, self-financed business R&D as a percentage of GDP is less than half the OECD average, and while other nations have been improving their R&D investment rates in recent decades, that in the UK has stayed flat or even fallen. In addition, business spending on R&D amounts to just four times the value of R&D tax relief, while the OECD average is 15 times. So I think we can expect some more targeted tax breaks for entrepreneurs looking to invest.

The speech isn’t inherently Conservative and certainly isn’t conservative with a small ‘c’, so we hope he’ll be reading about the way of the future.

Mugwump
The Substacker Mugwump has something interesting to say about the benefits of Brexit. #FBPE types shouldn’t be overly concerned. Mugwump lives up to the meaning of their sobriquet – a person who remains aloof or independent, especially from party politics.

While they think Brexit has made us poorer, compared to what we could have been, this only makes the need for ambitious policies more necessary – policies like planning reform (see our recent paper for what this could look like, and Ryan Bourne’s article mentioning it on ConservativeHome.)

Mugwump was inspired to write following the Cabinet Office’s “embarrassing” The Benefits of Brexit policy paper. Embarrassing, because it is a hodgepodge of vacuous statements and things we could already have done inside the EU. As well as things that are objectively bad for growth, like ending free movement.

So what can actually be done that will meaningfully offset some of the damage of Brexit? Mugwump puts forward a non-exhaustive list of 12 ideas, including joining the Trans-Pacific Partnership (TPP), unilaterally recognising EU and non-EU standards, auctioning airport slots, and reforming GDPR (although this will likely still have to be done in negotiation with the EU).

Although Mugwump isn’t particularly optimistic about the potential for his wishlist happening – whether for political feasibility or the risk of retaliatory measures from the EU – their realist approach is a whole lot better than the Cabinet Office’s waffle.