Gamble on growth won’t work unless supply-side reforms are a success

Liz Truss and Kwasi Kwarteng expected their mini-Budget to have a big impact. However, they surely did not anticipate the chaos in currency markets and the rocketing cost of debt that came in the aftermath of the Chancellor of the Exchequer’s announcement last Friday.

There will be plenty of time to ponder whether the trigger for the market meltdown was the size of the unfunded giveaway or the lack of an independent assessment from the Office for Budget Responsibility (OBR). What is clear is that, for a second time in a year, the practical details of Conservative tax and spend plans have been overshadowed by wider economic events.

>> Also read: Industry disappointed by Kwarteng’s lack of action on retrofit

>> Also read: Shares in housebuilders sink as economists predict further rate hike

Given that so much of the contents of the announcement had been trailed in advance, the strength of market reaction is striking. Clearly, this is not just about a strong dollar but a wider combination of a huge Budget giveaway, a timid 50 basis point increase in the UK base rate and lack of oversight by the OBR, which has spooked every currency market in the world.

It is hard to argue with the central premise of the growth plan – that consistent, strong growth is essential for improving living standards

The growth plan goes far beyond tax cuts, but many of its proposals are also subject to high levels of risk in both impact and implementation. These changes – that could take place quickly and which could have long-term effects – need our attention, even as it is drawn away by noisy financial markets.

It is hard to argue with the central premise of the growth plan – that consistent, strong growth is essential for improving living standards. However, since the UK last experienced growth of 2.5% per annum in the mid-noughties, the growth equation has become more complex even as growth has slowed.

Issues of sustainability and economic and ecological resilience need to be accounted for, even if the pursuit of growth is to improve everyone’s living standards, not simply “growth for growth’s sake”.

This is where the challenge of supply-side reform comes in. UK society and its economy are complex systems, and all changes will have intended and unintended consequences. The cancellation of a mind-bogglingly complex new system of alcohol duties will simplify life for the drinks industry, but a freezing of duties might increase consumption and pressure on the NHS.

When making changes, the critical consideration is that there is a net increase in benefit. The cancellation of IR35 measures is a good example which highlights that the government has been listening to industry. Yes, the changes might result in a reduced tax take, but reduced administration costs and greater flexibility for industry to take on freelance workers will be popular and pro-growth.

It is widely accepted that UK planning processes have acted as a barrier to growth, but thorny issues associated with accountability, environmental and neighbourhood protection and the fair sharing of development gains will still need to be addressed

IR35 is a good example of burdensome regulation, because the disruption caused to many businesses is obvious. However, its repeal will be a mixed blessing for construction given the sector’s historic over-reliance on self-employed labour.

The same applies to much-needed reforms to planning, potentially addressed via investment zones and the newly announced Planning and Infrastructure Bill. It is widely accepted that UK planning processes have acted as a barrier to growth, but thorny issues associated with accountability, environmental and neighbourhood protection and the fair sharing of development gains will still need to be addressed, whatever the approach proposed by the new government.

So, what do I like about the policy decisions aimed at driving growth? Firstly, it is good to see some continuity in proposals to encourage investment, including the reforms to pension investment. I am also sure that proposals to streamline local growth funding will be welcomed, so long as funding remains at promised levels.

The greater incentives for the public sector to sell surplus land are also well overdue and giving the NHS full flexibility with respect to the banking of land sale proceeds is a helpful reform, with the bonus of providing land for much-needed housing in towns and cities where it is most needed.

I look forward to seeing the detail of the Planning and Infrastructure Bill, but at the same time note just how little discussion there has been over the past few years on how the Nationally Significant Infrastructure Project (NSIP) planning process should be reformed. With a list of over 150 projects included within the growth plan, clearly the government is in a hurry, but the proposals really do need to be “right first time”, not only to ensure that they have public support, but also to ensure that schemes deliver the UK’s wider development objectives enshrined in the Climate Change Act and the recently passed Environment Act.

That is not to say that change won’t be welcome, but it needs to be done with great care and with a view to providing long-term certainty as well as a fast-track process.

One aspect of the growth plan that I am less convinced about is the proposal for investment zones, and in particular the relaxation of planning rules. Enterprise zones have been a great success and I would like to see freeports having a similar impact.

There is no avoiding the fact that the growth plan is radical – some might say foolhardy – and that the initial reaction from the markets has been very negative

An expansion of areas that qualify for financial incentives will be helpful, as it will reduce the risk of investment being transplanted from one area to another. However, as the Levelling-Up and Regeneration Bill passes through the legislative process, it is possible that existing planning reforms such as the Infrastructure Levy will be diluted further, and that the end result will be both more complex and less accountable. We await the detail.

There is no avoiding the fact that the growth plan is radical – some might say foolhardy – and that the initial reaction from the markets has been very negative. Many of the proposed changes to the tax system, labour laws and benefits system are provocative and have little if any electoral mandate. More announcements on migration laws, environmental legislation and agriculture are also in the works, all of which entail further risks and unintended consequences.

Truss has declared a willingness to be unpopular, so do not assume a climbdown. This is why, even at this moment of greatest uncertainty, it is important for the industry to review and understand the substance of the plan and its implications, and not to be distracted by the smoke and noise of chaotic financial markets.

Simon Rawlinson is s a partner at Arcadis and a member of the Construction Leadership Council