After the Covid-19 calamity, new ideas and fresh thinking on the economy are required. Conservative MP Bim Afolami’s contribution is a new report, based on the recommendations of leading business and City figures. In this essay, below, he outlines the key themes. He is also the guest on the latest issue of the Reaction podcast. You can listen here.
After this crisis, the economy is going to need a major reboot. It will also be an opportunity to reshape the economy for the future. This is how to do it.
The public health response to Covid 19 has gutted much of the British economy, indeed the economy of much of the developed world. Thousands of businesses will be lost. Businesses which have been built up over generations may go up in smoke – through no fault of the staff or management. Unemployment will rise significantly. Let us be frank about the economic and financial difficulties that people are going through, the scars of which may last for much longer than the health crisis is with us. The changes I propose are designed to be put in place after the immediate health crisis has passed, and the virus is fully under control.
We can recover and rebuild. Yet this recovery will only come if we can persuade business leaders to create the high quality jobs we need. We need entrepreneurs to start new businesses again, investors to raise and deploy funds again, and consumers to buy things again. Put simply, this will require a resurgence in the nation’s confidence. Part of this is a rhetorical exercise, and the Prime Minister is better than anyone else on the planet for engendering the can-do spirit amongst the British people. But that rhetoric must be reinforced with a bold programme of supply-side economic reforms to turn hopeful optimism into real confidence in the long-term future. We can use this crisis to tackle the areas where the economy has been weak and build an economy that is more resilient to the challenges of the coming decade.
As we start thinking of new ways to reboot the economy, there is no shortage of ideas on either the left or right of British politics. That is welcome, exciting and appreciated. It is critical to develop a new way of thinking about the economy that lets go of the previous paradigms. That does not mean we abandon the fundamentals of what we believe – and as a Conservative I believe in a free market and not a centrally planned economy as that is the best way to spread prosperity. However, we have to adapt those fundamental economic truths to the new economic situations in which we find ourselves, and not hold to outdated orthodoxies that resulted out of very different economic circumstances. That is what I am trying to do in this article, and it is what I have tried to do in my Unlock Britain Commission which brought together business leaders, economists and entrepreneurs to help me develop new ways to reboot the British economy as we come out of this crisis.
This crisis has shown one fundamental thing. That Britain needs to be more resilient. Resilience is the capacity to recover from difficulties, and more generally to adapt to change.
First, the nation needs to be more resilient economically. It has demonstrated the weaknesses of 21st century globalisation, with a vulnerable service sector, and not enough self-sufficiency in industry and manufacturing, with our capacity to manufacture many goods (like aspects of PPE, or medical testing chemicals) being weak or non – existent. This may not have always mattered in a world where global supply chains are working smoothly, but in a more fragmented world this may matter more. In addition to this, our businesses in every sector have record levels of debt, and we will need to find a way of reducing that debt, nursing them through recovery and then growth, and do so in a way that enables the British people to share in their eventual success.
Secondly, the British people as a whole need to be better equipped in the modern knowledge economy. We need much more radical action to equip most of our people with the right skills to flourish in an increasingly data and STEM driven economy.
Thirdly, our public sector will need to become more resilient, at every level. Too many levels of local government, together with a Byzantine planning system, make delivery of economically critical housing and infrastructure slow and expensive. Quangos are still ubiquitous. People and businesses find themselves frustrated by unaccountable yet ineffectively dispersed regulations and officialdom.
My programme of recovery has three main principles.
The divide is not between state or private sector; it is between the institutions with purpose which support people, and the institutions which leave people behind.
Power needs to be returned to the people, away from the distant and unaccountable.
Freedom is hollow without giving people the means to benefit from it.
We can put these principles into practice by delivering these major changes to the British economy, which are practicable, simple (although not easy) to implement, and which will significantly raise our long term growth rate.
How to help British SMEs recover – and ensure the British people directly benefit from that recovery
After this crisis has passed, we will have an overleveraged British corporate sector, especially for those companies that received cheap debt via CBILS. These will delay a recovery – distressed firms tend to implement labour reductions, sell assets, reduce investments and employment, and shrink their business, and they become reluctant to raise new capital.
Overall, there is likely to be three types of business. First, the business which is very profitable, solvent, well run and managed, and for which the Covid 19 lockdown was a very temporary blip. They will pay off their CBILS debt without difficulty. Secondly, there will be businesses which do not have viable business models after the crisis, and they will fail. Where the company is insolvent there will be a write off, shared between the government and the banks, depending on the terms of the scheme.
Thirdly, there will be a category of business, possibly quite large, where the companies are solvent and had been trading profitably prior to the Covid 19 lockdown, but where the burden of servicing their Covid-induced debt burden will make it difficult, if not impossible, for them to regain their growth momentum. These businesses need to be re-capitalised. Large listed companies have shown over the last couple of months that there is investor appetite to provide them with more equity through placings of new shares. But SMEs that are not listed are not able to access funding in this way. These are the companies the government can help.
The Government should set up a Covid Recovery Fund, with £15 billion of capital – raised throgh government borrowing, and perhaps with private sector investment as well. This fund would not make investments directly into companies itself, and all business owners will have a choice as to whether to accept the funds. Its role would be to allocate money to a range of FCA-regulated fund managers around the UK who have investment teams already in place which are active in making investments into private companies, with the intention of achieving broad geographic and sectoral coverage. The Government will not be “picking winners” itself – the investments will be made on a professional basis.
The mandate of the Fund would be to make equity or quasi equity investments (some of which would be converted from debt, such as debt provided under the CBILS programme) into private companies that fulfil certain criteria. These criteria would include that the company was trading profitably prior to the Covid 19 lockdown, and it can be judged by some objective criteria to have the potential to grow and be successful in the long term if the debt burden can be reduced.
After 3 – 4 years, the fund could be floated on the London Stock Exchange. Frontline NHS workers and people aged 18 – 30, in both respects targeted to those who earn less than £30,000, should be issued shares at a heavy discount.
Infrastructure delivery needs to be faster and easier – here is how to do it
Planning was the most oft-cited problem for the British economy by members of the Unlock Britain Commission. A convoluted, expensive and uncertain planning system is a real hindrance to spreading and growing the economic opportunity that our people really need. Without improving the planning system for infrastructure, it will be difficult to deliver on the “levelling up” agenda. We need to make infrastructure much faster, and consequently often cheaper, to build.
The first way of improving the system of local government for planning is to simplify local government. We should remove a tier of local government across the country, restructure district and county councils into moderately sized unitary councils in the counties, and radically reduce the numbers of councillors in metropolitan areas which now have mayors as well as borough councils. This will greatly reduce costs, improve efficiency, strengthen parish and town councils in the counties, and improve oversight of mayors in metropolitan areas – government would be closer to the people and more responsive. It would also ensure that planning and business rates responsibilities are passed to the new unitary authority.
However, regardless of the actual structure of local government, we need to streamline the actual building of infrastructure. How to get it built. Not announced, but built. The most economically critical infrastructure is not just the nationally significant infrastructure like Crossrail and HS2. Large housing developments, local infrastructure like road interchanges, railway stations, motorway extensions or new dual carriageways, and waste processing projects can be of critical importance to the nation’s economy when taken as a whole; and they can be extremely important to particular regions of the country if we are serious about the “levelling up” agenda.
By making the default option for all infrastructure projects and large housing developments a streamlined Nationally Significant Infrastructure Projects (“NSIP”) planning regime, combined with small tweaks to the Development Consent Order process, we can significantly cut the time and cost of delivering new projects in the UK. In effect, we would be ensuring that local authority planning departments would deal with a smaller group of planning decisions, leaving these economically important projects to be delivered through a rules – based national regime, which would be much easier to navigate and much less susceptible to judicial review. By doing this, we can ensure that infrastructure projects and large housing developments can move from planning to starting construction within 12 months.
We need high quality STEM graduates and apprentices
We have been talking about the need to improve skills in this country for a long time. We have made great strides in recent years, with apprenticeships now a key focus of government policy and more children (especially girls) studying STEM subjects at school and university. However, there is still a need to go further. In my commission, many of the commissioners stated that they were unable to expand their businesses because of a lack of STEM graduates and apprentices. Recent CBI studies say similar things. At the same time, the number of graduates working in non – graduate jobs is above 40% (according to the ONS), and HM Treasury currently assume that between 40% and 50% of the student loans taken out by British students will be written off. Put bluntly, we need to shift our spending away from expensive three year degrees in arts subjects at certain universities which do not lead to graduate jobs (and correspondingly generate a huge amount of resentment from the young person who takes on the student loan), and towards both STEM degrees and STEM apprenticeships. We should encourage more students to study these subjects – their opportunities and options going forward will be greater, and the country will benefit.
In a new digital age, turbocharged by the changes wrought by Covid 19, we are going to need STEM skills more than ever. How can we increase the number of high quality STEM students? In relation to graduates, in a Nuffield Trust report from late 2018, it stated that “there is no evidence of a shortage of STEM graduates per se. Only a minority of STEM graduates ever work in highly skilled (“HS”) STEM occupations, and an even smaller proportion are employed in key ‘shortage’ areas. Any mismatch between the supply and demand for STEM workers cannot, therefore, be attributed to the number of students graduating with STEM degrees. Problems with the ‘supply’ of STEM workers are more likely to be explained by the willingness of graduates to pursue careers in STEM fields and the recruitment practices of employers”. It appears that the problem of STEM graduates in this country is two-fold – their perceived quality by employers willing to hire them, and their willingness to work in HS STEM occupations after graduation.
For those studying STEM undergraduate degrees at Russell Group universities, the student debt should be written off once they have worked for five years in (i) specialised occupations within STEM (the areas in which we know there are shortages and a need of higher quality) or (ii) in new Freeports or Opportunity Zones.
My estimate is that the cost of writing off this student debt would be c. £2.5bn – £3bn. This could be directly taken from within the HE budget, by reducing funding to courses (at all types of university) which do not offer high returns to students. Recently, the Onward think tank recommended reducing access to courses that deliver low economic value in terms of graduate earnings premia, by either making the charging of £9,250 fees conditional on course earnings potential or introducing a grade floor for low value courses to redirect students into routes with a higher return. This is a broadly sensible approach.
On STEM apprentices, we need to encourage more FE colleges to provide more of these high-quality STEM courses – this will increase the number of HS STEM apprentices. FE colleges and relevant high level technical courses in STEM subjects (in which there is a shortage) need to have their funding significantly increased, as these courses are particularly expensive to run. In addition, for employers that take on these STEM apprentices the Government should extend the current 0% Employer’s NI rate for apprentices for 2 years if those apprentices are taken on as full employees.
We would be creating a deep pipeline of top talent directly incentivised to stay working in STEM occupations after finishing their courses. It would help make Britain a much more attractive option to start up or grow a manufacturing business, strengthen our research base and our ability to industrialise it, and it would give a nudge to those taking on unnecessary student loans in degrees of limited value to perhaps do something else instead.
Underpinning all of these ideas is a realisation that Britain is going to need major governmental action in the coming years to achieve the transformative levels of growth that we need. Yet this is not governmental action to ensure governmental intervention in the economy over the medium or long term. It is governmental action to release the blockages that hold people back. It is governmental action to help ensure that levelling up our country can finally take place. It is governmental action to ensure that as we rebuild our economy and our SME sector, we ensure that the British people directly benefit from their success. We can and should build back better. With these ideas, we will.
Bim Afolami is the Conservative MP for Hitchin and Harpenden. His full report can be read at at www.unlockbritain.com