The government is failing to lay the foundations for long-term growth

By David Nash, Researcher at IPPR, and, with Adam Lent, co-author of the report  Surviving the Asian Century: Four steps to securing sustainable long-term economic growth in the UK

The lower than expected German and French growth figures for Quarter 2, released last week, will have seriously concerned George Osborne because of the potential implications of efforts to shore up the beleaguered Eurozone.

Secretly, he might also be breathing a small sigh of relief: for now, at least, “we’re all in this together”.

The official explanations why the two largest economies in Europe have joined the UK in the growth slow lane are, on the one hand, French households tightening their belts and, on the other, a weakening of demand for German exports. Both are linked to the malaise affecting the single currency and the fear of contagion spreading.

Meanwhile, Osborne insists his early decision to pursue rapid and deep fiscal consolidation is sheltering the UK from worst of the storm. Treasury purists also argue that weaker growth in European countries that aren’t cutting as fast as the UK vindicates the notion that balancing the books today is a prerequisite for economic growth tomorrow.

History will judge them on this, but the current overwhelming preoccupation with tackling the public finances comes with the serious risk that Department  for Business, Innovation and Skills (BiS)  and the Treasury overlook two equally important challenges facing the UK.

In a new report released by IPPR today, Adam Lent and I argue that two forces – the well-known, yet increasing dominance of the Brazil, Russia, India, China and other ‘emerging’ economies in the global market place, along with the rapid transformation of business practices by new Web 2.0 technologies – are fundamentally reshaping the economic and commercial landscape.

These shifts represent major challenges and opportunities for British business but compared to our key competitors – France and Germany included – we are less well positioned to take advantage.

The UK underperforms in four key areas that we believe are critical, features of an adaptive, forward-looking and competitive economy.

• First, our record on business investment is poorer than our competitors. The UK has consistently ranked bottom among G7 countries for overall investment levels:

UK investment continues to be skewed heavily towards a limited range of sub-sectors, most notably finance and property.

• Second, the UK lacks the same powerful contingent of highly innovative and productive firms found in the US and many of our European neighbours.
• Third, despite improvements over the past decade, we have a larger proportion of adults lacking basic qualifications and technical skills required by high-value business.
• And finally, British companies have only a limited presence in the most dynamic, emerging markets: today just over 6 per cent of UK exports head to the Brazil, Russia, India or China.

We have been here before. In the first half of the twentieth century, British industry responded slowly to the rise of the US and mass production techniques and fell behind our more responsive and innovative European counterparts, while in the 1960s our share of global markets shrank as Japan pioneered flexible modes of production.

If we are to avoid repeating the problems of the past, Osborne and Cable must take steps to tackle these shortcomings now.

Piecemeal approaches – such as limited tax cuts or changes to employment law and planning regulations – do not add up to a credible strategy for surviving the ‘Asian Century’.

Instead, the Government must raise its ambition and consider the bigger picture, by taking a long term approach to delivering sustainable economic growth.

This should start with the acknowledgement that the state has a strategic role to play in directing and unleashing investment in a more diverse range of competitive business sectors, as well as providing the conditions in which demand for capital, skills and innovation will flourish.

Only with these foundations in place will Britain have a fighting chance of competing in new and emerging global markets. A British Investment Bank – modelled on the German KfW or Nordic Investment Bank  – would be the crucial first step in the policy sequence.

Funded by a one-off capitalisation of up to £15 billion over a period of 5 years, the bank could raise an additional £200 billion towards productive investment in innovative business and supporting infrastructure.

Without these interventions, the UK will find than when the global economy returns to healthier growth, led by China and other emerging economies, and businesses in other countries are adapting to a new generation of Web 2.0 technologies, it is once again being left behind.

If so, we will rue the short-sighted and unimaginative decisions of this Government.