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The good growth blog: Fairy tales or unicorns … imagination in the battle of ideas?
In US politics, they call it the Big Mo. It’s the idea that momentum matters at times of change, because if you have it, you can make things happen.
In the battle to be the next Prime Minister, there can be little doubt that right now the Big Mo is with the Foreign Secretary, Liz Truss. She has captured the narrative, and this has been crucial in positioning herself as a politician who can dream big at a time when the country needs it.
Her opponent, Rishi Sunak, has dismissed much of what she says as flights of fancy and “fairy tale economics” because Truss favours going back on a recent rise in national insurance and cancelling a planned increase in corporation tax. He argues the only way to fund these tax cuts is to borrow more and that it is fantasy that you can borrow your way to growth.
For Truss, tax cuts and a smaller, more efficient state are at the heart of her prospectus for the future, Trussnomics. Whatever you think of this as a pitch, you will have to go back to Mrs Thatcher, the 1980s, and monetarism to find an equally doctrinally driven approach.
Today, it is a doctrine driven by an effort to ensure that the economy avoids being crushed by the cost of living crisis. She thinks her measures will put money in people’s pockets in a way that won’t be inflationary. She wants to focus on creating more unicorns, which are start-up companies with a valuation of $1 billion or more. She stresses that more unicorns equal more employment, more innovation and more value added to the UK economy.
Both candidates are talking about growth, the difference of opinion is about how to get there. However, I believe they can go further in exercising even greater imagination.
Let’s take Truss’s view first. It won’t be a surprise to hear I am in favour of creating more unicorns. These hugely successful businesses are the stars of British entrepreneurship, and BGF has been proud to invest in some of the most high-profile – take recipe box delivery service Gousto, for instance, which achieved unicorn status in 2020. We first invested in Gousto in 2015. More recently, we were delighted to see portfolio business Paddle, which provides payments architecture for SaaS companies, become our latest unicorn. We have been invested in the company since 2016.
Truss is right to highlight and call out these businesses. But I believe we need to do more than focus narrowly on a small number of success stories. We don’t simply want an economy based on one or two star performers. These companies should be at the pinnacle of a healthy economy, but what should sit beneath them is an even healthier ecosystem teeming with businesses of all shapes and sizes. We want lots of innovation, happening in lots of places. We want more entrepreneurship, more companies setting up and more funding.
In short, we need to imagine what a truly healthy, complex and dynamic entrepreneurial ecosystem, operating across all sectors and in every region of the UK, looks like. Unicorns may be the pinnacle of this, but we will only achieve them in quantity if we fix the ecosystem that bubbles away beneath them.
To Sunak’s point, he is right that inflation must be brought under control. The UK will have to raise interest rates, as it has already started to do. He is also right that we will have to face consequences. The cost of living crisis will get worse before it gets better. It may take 12 to 18 months before inflation meaningfully starts to reduce. In that period, the national debt will likely increase.
But I believe that Sunak’s vision also needs the vital ingredient of greater imagination. Yes, good fiscal discipline is essential to drive the economy forward, but we need more than discipline if we are to improve a growth rate that lags behind other developed nations. The fact is the UK’s historical growth rate is too low. That has to change. To address it, we must effectively tackle a structural challenge facing the UK economy: low productivity.
On this point, Truss is right to say that we can’t settle for business as usual. We have to dream bigger. If we want to challenge conventional thinking, now is the time.
Increasing productivity is a perennial challenge for the UK, and I would offer three ideas to address it. The obvious area to look at is talent. It is clear that we are not making the most of the potential that currently exists in the UK. That’s because we aren’t investing enough in the right places in education and training to ensure the next generation has the skills needed in the modern workplace, whether that be the ability to code, to read a balance sheet or to engineer a self-driving car. This needs to start at a very early age; there was a great and practical report by a parliamentary group last week extolling the benefits of building entrepreneurship into the core curriculum. Children after all have the greatest imagination. While we have strong academic traditions as a country, with some brilliant scientists to show for it, the UK has less success on a broader scale of turning that into the national workforce of the future. Just as unicorns need a healthy population underneath them, so too do the Nobel laureates in academia. A successful ecosystem needs to be both broad and wide.
The other side of this coin is that we must also ensure the UK is open and accessible to overseas talent. We must make sure this country continues to be an attractive and rewarding place to work for the world’s smartest, most ambitious people. We really can be a magnet for talent. It is a competitive world, and the UK needs to play to win.
That brings me to the question of regulation because history has shown that an economy can really flourish when it is supported by the right regulatory framework. Now that the UK has left the European Union, there is a unique opportunity to refresh that framework in a way that makes the country more competitive than ever. We have heard a lot about a “bonfire” of EU rules. Let us see some action – and not merely destructive action. There is much to be done here, particularly, as I’ll turn to in a moment, to enable institutional capital to invest in the growth economy. But smart regulation is not a race to the bottom, it is not lawless; it is governed by the right laws, not least to help address informational disparities.
The third ingredient is liquidity. Our entrepreneurial ecosystem will not thrive without the capital needed to turn ideas into reality. There are huge resources of institutional capital in the UK that are currently not being channelled towards growing companies. I’m talking about defined contribution (DC) pension funds, for example, which are typically blocked from investing in unlisted equities by well-meaning but, I believe, misguided rules. Insurance companies also manage enormous assets, some of which could be redirected to growing businesses. It is essential that Solvency II rules, much debated and nearing resolution, are reformed in a way that unleashes the power of insurance companies to support the economy and boost productivity. It’s been very encouraging, therefore, to hear Truss and Sunak reference this area of great potential.
Then, we must link overseas talent with foreign direct investment. The trade deals underway will create a pathway to the UK. Let’s use that to boost exports by small and mid-sized businesses more effectively. Let’s also find ways to crowd in international investment alongside that. A good place to start is with the new Sovereign Investment Partnerships (SIPs). These SIPs are a good idea but now need good execution to be effectively deployed.
These are just some areas where I would like policymakers to focus their attention, because when I say we need to see more imagination, we certainly need to dream, but most importantly we need to act.
The UK needs to rethink its role in the world. There is a tendency in this country to obsess about being the world’s fifth largest economy. Why can’t we be the world’s nimblest? In Israel or Singapore, for example, GDP is less than 15% of the UK’s, but venture funding for innovation and start-ups is 3.7% and 4.3% of GDP, respectively, compared with just 1.8% for the UK. Just imagine what a difference we could make if we closed that gap. That really would be the UK’s very own Big Mo!
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