Ahead of the Curves: Growth at any cost?
This discussion took place in October 2022 as part of the Ahead of the Curves series, in partnership with Stifel Europe. This phase of the programme focused on the UK's Ambition for Growth and what will be needed to achieve it.
You can also listen to the podcast interviews which provoked this discussion here.
It’s a mark of the speed with which things happen in British politics these days that the UK’s Prime Minister changed in between the Jericho/Stifel roundtable conversation, and this write-up being posted. Liz Truss was our shortest-lived occupant of No 10 ever.
The subject was the fallout from the disastrous September mini-budget which had aimed to stimulate growth in a flagging British economy. The Growth push the FT said, “worsened the parts of the economy that people understand and cared about in pursuit of a target that people don’t understand and don’t care about.” It’s likely that more of us should care about economic growth and understand why the UK has been so poor at achieving it over recent years. Certainly, COVID and Brexit have not helped.
The collapse of Truss’s economic project, dubbed “Trussonomics”, saw her forced to resign and dealt a lasting blow to the Conservative party’s reputation for fiscal responsibility. Her legacy will be adding the concept of the “moron premium” to our fiscal rectitude. The response from the markets was swift. The value of the sterling plunged while government borrowing costs spiked, which threatened the solvency of parts of the pension industry. The Bank of England launched an emergency government bond-buying programme in an attempt to stabilise markets.
However misguided the remedy, the underlying economic malaise remains.
Eithne O’Leary of Stifel opened the conversation. “It’s not difficult to find fault with the actions of Liz Truss’s government. The markets were spooked by two things: The first is the combination of the energy commitments, with the cuts in taxes without any realistic understanding of how that was going to get paid for. From a policy perspective, it was at best naïve. We seem to have an administration driven by ideology – it’s not something that the British public seems to want.
“I genuinely don’t understand to whom the government was appealing. The trouble with ideology is that people who are zealots tend to bend reality to their system of values.
“Secondly, we need some stability at the political level. If the Bank of England has to step into the market routinely it shows, there’s no economic stability. More broadly, the UK’s infrastructure isn’t in a great place and neither are skill levels in the workforce. These factors make it difficult to see why investors would want to invest in the country. We need a substantial re-think and U-turns in policy are critically bad for creating that confidence. The government needs to borrow and needs to convince the market to invest to fund these policies. Cutting nurses (and others pay) for example to fund them would be catastrophic.”
Simon Nixon, chief leader writer at The Times was also dismayed by the course of events. “Stability is a precondition for everything else that delivers growth. We need a stable framework in terms of governance and macroeconomic framework. When I was the chief European commentator at the Wall Street Journal, I spent most of those ten years writing about populists in one way or another whom I came to think of as people who try to provide simple answers to complex questions and who flounder when they come up against reality. In the Truss government, we had unpopular populists. The flaw in the argument was thinking they had a simple answer to a complex problem. I see the parallels with the Greek crisis.”
Trying to find some better news Matthew Gwyther wondered whether a degree of predictable energy stability is what Julia Pyke, Director of Financing & Economic Regulation, Sizewell C is seeking to create. “This is the first government to decide on a programme for nuclear power since 1995. The ability to make decisions, though sometimes unpopular, is a good quality if we want infrastructure built – previous governments haven’t been willing to make a decision about the future of the nuclear industry, other than as to the construction of Hinkley Point C, despite it being necessary.
“I’d also suggest that deciding France and Emmanuel Macron are friend not foe is a step forward. Looking through the lens of my project (and this is not reflective of any political views) pre Brexit we could have never financed a nuclear power station on private markets because of state aid rules - it’s only in moving to a UK-based legislation we can finance a nuclear fleet..”
Lesley Smith wondered what the opposition - now way ahead in the polls - should do now. “All parties take polls with a pinch of salt, what people say two years in advance of an election is different to what they do when they get to the election. Liz Truss seemed to be echoing everything Starmer had said in the past 4-6 months (in terms of what was wrong) but what she didn’t seem to have was a sensible plan to put it right.
“Labour needs to not get excited and step up their work on policy and the economy, engage with people who can help them. The public doesn’t understand the specifics of growth or productivity but they do understand seeing us at the bottom of an international league table with our economy dragging behind.”
As far as Brexit and its economic effects on growth are concerned she thought, “Labour can’t reopen that. To be the party of undoing Brexit would be the gift that the Tories need. They need to spend a lot of time and energy trying to repair burnt bridges. The foreign office and BEIS will be working on plans on how we can work more closely with Europe if Labour gets back but Labour can’t go into a campaign by reopening the whole Brexit debate.”
Vicky Pryce agreed with Simon Nixon that the mini budget simply brought into the spotlight underlying problems. “The explosive budget, meaning the government would have to borrow massively to maintain the energy price freeze they promised and also to fund the large tax cuts which looked all resulted in what we saw being played out in the capital markets. The worrying thing for me was that the BoE went back to engaging in more Quantitative Easing to calm the markets, which can only be interpreted as a lack of confidence in government policies forcing the Bank to abandon, for a while at least, its publicised intention to in fact start engaging in Qualitative Tightening instead.
“To improve productivity, you need to improve skills, improve infrastructure and gain investment. In all these areas we seem to fail. Taxation won’t attract new businesses, it’s not sufficient when we’ve blocked ourselves from a huge market next door.
“The cost of added post-Brexit bureaucracy to SMEs is a problem. Exporting organisations are the most productive because they have to compete on the international market. We are losing access to our closest and biggest market and the UK has seen a reduction in its trade intensity which is bad for long-term productivity and growth.”
Nicholas Moore, Managing Director, Biopharma, Healthcare, Stifel said, “The timing of the “growth agenda” currently emerging with greater prominence in UK and global politics is fascinating because we are at an inflection point where interest rates and the cost of capital are going up everywhere. I’ve spent the last decade of my career focused on growth companies because with interest rates being so low, people have had to look at higher-risk investment opportunities to generate a certain return. There is a juxtaposition here because the period from approximately 2009 to 2021, when interest rates have been at global historic lows, was arguably the best time in history to finance growth-focused companies with more distant, higher-risk cashflows. Given the current cycle of increasing interest rates, the prospect of financing anything, especially higher risk more growth-focused opportunities, is becoming significantly more expensive”.
With a view from The Brookings Institution in Washington, D.C., Sanjay was baffled by the UK government’s behaviour: “I think there is much bewilderment here on this side of the Atlantic. The messaging, the lack of due diligence and sudden reversal of policy and the emergency measures by the BoE give the impression that no one is in control. Growth is a nice buzzword, but when you drill down to how you actually get growth, the UK has damaged many channels which could lead to real growth in the last couple of years. For instance, free and incumbent trade would clearly lead to growth – and Brexit here has impeded growth and closed off future growth potential. Innovation – you can attract investment through innovation, but you need a very well-educated workforce. Brexit again has hurt tremendously here by removing the UK from European educational networks and making it less attractive for top-level researchers to move to the UK. Immigration – more people help with economic growth, but for that, you need policies that are welcoming towards immigrants and that provide a stable framework within which people can plan long-term.”
Eithne added, “I’ve been surprised by the political class moving towards the US model while voters look at a much more European view in terms of benefits and healthcare.”
Wendy Jephson agreed; “We’re not Americans and we have different expectations of what our country will do for us. Layer on top of what is happening currently with the government – the rejection of previously trusted advisors. When making radical changes you want to know things have been well thought through. It is enormously frightening - as someone trying to set up a business in this environment - to think of how this will pan out. However, in the FinTech ecosystem, we’ve seen incredible growth so it’s not that we are a country incapable of succeeding.”
Simon Nixon continued “I’m worried we’re not being gloomy enough. I fear that what we’re going through now in Britain has the potential to be a serious crisis for the country. The mini budget’s effects shouldn’t have upended a G7 government bond market. We’ve been reappraised by the markets. Our growth and investment numbers are an aggregate of what’s happening beneath. We find ourselves now in an incipient crisis when we are talking about investment. One of the crucial things is a risk-free rate from which we can price and who knows anymore what that is in Britain.”
Eithne explained, “The regulatory system in the UK is just as contrary as the rest of Europe – regulation is part of the issue but not the centre of it by any stretch. Every government in my memory has suggested setting fire to regulation and it’s never happened. A decent path to growth would be for things to be stable, cut down the madness and hold a course. Stop picking fights with everybody. Infrastructure that works, a climate in which people have the confidence to invest”.
Within days of the discussion, we had a new prime minister elected by many who had in the preceding months denounced him as a “bean counter” and a “socialist” for urging prudence with the public finances. This difficult story has some way to run yet.
The discussion was attended by:
Matthew Gwyther, Partner, Jericho Chambers
Wendy Jephson, CEO & Co-Founder of LetsThink, Former Head of Research & Ideation - Market Technology, Nasdaq
Nicholas Moore, Managing Director, Biopharma, Healthcare, Stifel
Simon Nixon, Chief Leader Writer, The Times
Eithne O’Leary, President, Stifel Europe
Sanjay Patnaik, Director Center on Regulation and Markets, Brookings Institution
Vicky Pryce, Economist and Business Consultant, Board Member Cebr
Julia Pyke, Director of Financing & Economic Regulation, Sizewell C
Lesley Smith, Corporate Advisor
