Whether we like it or not, powerful financial markets are always trying to judge if they like what a government is doing. As Liz Truss’s moment in the spotlight showed, if they really don’t like what they see, the markets can force political change, sometimes brutally.
But in some ways, uncertainty is even more of a problem for these markets. As recent turmoil in the USA and beyond shows, when markets can’t work out where policy is heading next, the result can be massive disruption with falling share prices, upward movement on bond yields and all sorts of disruption to the currency.
This uncertainty as to how policy is going to evolve, and how policymakers may react to events, is in danger of becoming a significant issue for the UK government as it seeks to create the conditions for sustained economic growth. This is something that has become ever more urgent as the IMF and other forecasters revise down their forecasts for the world and UK economies.
The UK government’s recent steel intervention brings that into focus. Although this action was fairly widely welcomed, it raised a lot of questions. If you are trying to work out what UK policy is now, you may be excused for being a bit confused. Is the steel push a signal that this government is up for intervention of all sorts in key manufacturing sectors? If so, what is ‘key’? Is that intervention likely to be via grants and loans or involve more radical steps like nationalisation? How will the government react if another key industry, particularly one in a key electoral area where Reform are making inroads, is in trouble? Just how far will it go?
These questions aren’t just points of intellectual interest for political nerds. Firms and their investors, local government and other players, are trying to work out how their plans might interact with wider government strategy. Their various takes on government policy will influence when and if they invest or expend precious capital and other resources, all of which affects the potential for economic growth.
Rachel Reeves has been pretty clear on her stance on fiscal policy. Whatever one thinks of the decisions the Chancellor has made, most people now understand that she intends to stick to her fiscal rules. That gives everyone some sort of anchor in this area – even though the markets are going to keep testing her resolve and will ask if spending cuts or tax rises will be the response to the fiscal ‘headroom’ being under threat. Meanwhile, the Bank of England remains robustly independent, with no threats of the type President Trump has made to the US Federal Reserve, so that gives some certainty about the conduct of monetary policy.
So, being clearer where this government is on industrial policy is very important. So far, economic agents have had to infer this largely from the government’s actions: studying the pre-election speeches and manifestos only gets you so far. One action that has taken on a lot of significance in the minds of those with little else to work with was the removal of the Chair of the competition watchdog, the CMA. This has been interpreted (over interpreted?) as a signal that competition is being downgraded in the government’s attempt to get growth going, something that might please some multinationals, but would worry many economists if it were true.
The government is soon due to publish its Industrial Strategy and its 10 Year Infrastructure Strategy, and that is where it needs to be clearer about what it is aiming for and what it intends to do. Of course governments need to retain flexibility and each case will have unique characteristics, but firms and investors making long-term capital decisions need some sort of framework to go by, some idea of the government’s policy and crucially, of its ‘reaction function’ to events.
We at The Future Governance Forum (FGF) have been giving them our views on how to do this – and will be saying more very soon. This includes:
- Perspectives on industrial and spatial policy
- The role of local government and Mayoral Combined Authorities via Local Growth Plans
- Using the private sector in partnership with government to deliver infrastructure (including social infrastructure) at a time when fiscal pressure reduces the ability to do everything that’s needed to secure growth and better public services purely through public investment.
This follows FGF’s work: developing a new model of public-private partnership called Infrastructure Investment Partnerships (IIPs), Local Growth Plans and alongside the work we’re doing to develop a Regional Industrial Strategy.
But this goes much further and goes beyond the economic sphere. We are currently doing detailed work on how to reform the centre of government. And it’s clear that without a clearly defined vision and strategy, it’s very hard for public servants, local government, civil society and corporates to know where the centre of government is trying to head and how it’s likely to react to developments. It’s a sort of inadvertent form of power-hoarding at the centre because everyone has to wait to see what decision is made on each individual case before they can act. And it leads to suboptimal performance all over the place.
As we have consistently argued with respect to all the government’s missions, the growth mission cannot be met by government acting alone, it needs all partners and stakeholders to be part of the effort. And in terms of the private sector, that means trying to give them a bit more feel of the government’s policy and likely reactions to events. The Industrial Strategy launch in June is a real chance to give that extra guidance and certainty.
