Last week, I attended the launch of the Economy 2030 Inquiry as the culmination of two years’ work by the Resolution Foundation and the LSE’s Centre for Economic Performance. The report is stuffed full of excellent analysis, insight, and policy prescription and I was pleased to see the role of cities so prominent in their recommendations though the challenge from Tom Riordan, CEO of Leeds City Council, on the day to go further beyond Manchester and Birmingham in the scale of their ambition was correct.
At the core of their analysis was evidence demonstrating that the UK is a “services superpower” and that “Britain must build on its strengths as the second biggest services exporter in the world”. This is a powerful insight though not a new one. So, I have been reflecting after the event why as politicians and policymakers, we find it so hard to put services at the centre of our economic and industrial strategy. My sense is that there are probably two reasons.
Firstly, we find it really hard to describe the services sector. In our hearts, as politicians and policymakers we are storytellers. We like to be able to convince people of our ideas by means of example. It was particularly telling that in the Chancellor’s session at the event that followed straight after the analysis of our services strengths that the companies he chose to namecheck on our growth potential were the likes of Nissan, Toyota and Jaguar Land Rover.
It is not particularly surprising that our attention is more naturally drawn to consumer facing companies. Advertising works. If we look in central London, at the heart of the UK’s service economy, and went through the 32 companies that have office space in the Shard then I would be surprised if the average person had heard of more than half of them.
This difficulty to describe the breadth and depth of the service sector is not unique to the UK. The recent untimely death of the actor, Matthew Perry, provides a reminder of this. His character in Friends was arguably the most economically successful of the group of six living in downtown New York, yet the long-running joke was that none of his dear friends knew what he did for a living. Very few children reach into the dressing up box to put on a Quality Assurance Manager’s uniform.
Statistics do not make this challenge of definition any easier. One of my favourite of the many charts in the final report is this one that shows the UK’s revealed comparative advantage:
Source: Figure 30, “Ending Stagnation: A New Economic Strategy for Britain”, Resolution Foundation et al, 2023
On the same chart that has separate bubbles for essential oils, lead and precious metals and stones we also get a giant bubble for “other business services” that encompasses law, accounting, consulting, advertising, and scientific services amongst other things.
So what? Does it matter that we aren’t very good as politicians and policymakers at understanding and describing the services sector. If I go back to my economics training then having a high degree of market complexity with lots of businesses competing is the gold standard we should be aiming for. And to an extent, that is certainly true. But we live in a world with market failures and if we are to have an activist industrial strategy then we need to be able to engage with and deploy public policy measures aimed at the parts of the economy with that growth potential. Which leads me onto my second point.
The nature of capital stocks and investment within services is very different to manufacturing. Services are productive because of their human capital and intangible capital – i.e. the people working in the business and how they capture, record and replicate their interactions and ideas. The excellent Capitalism Without Capital by my former colleague Stian Westlake and Jonathan Haskell describes the features of intangible capital which are at the heart of the service sector. In particular, the scalability of the product is what opens up the global markets for tradeable services – the book, the briefing note, the contract, the accounts, the report, the performance, the protocol, the mathematical equation, the engineering blueprint, the computer code, etc. But as they go on to argue, the nature of how this intangible capital stock can be grown and nurtured, alongside the complimentary need to grow human capital is different to traditional economic thinking on investment.
It is in that context that the centrepiece of the Chancellor’s speech at the event, namely to showcase the Autumn Statement decision to introduce “full expensing” for capital investment, should be analysed. This is undoubtedly a bold measure and was broadly welcomed in the room as being a positive step to address our poor record as a country on business investment. However, given it is focused on plant and machinery then it will undoubtedly be of more benefit to the manufacturing sector than to the services sector. By how much, we do not know because HM Treasury rarely practice what they preach and do not produce full Green Book compliant Impact Assessments for their tax measures. But I will leave that for another day.
Returning to the full expensing announcement, what we do know from the Autumn Statement is that it is an expensive measure, with the cost rising to nearly £11bn per annum by the end of the forecast period. As a thought experiment, I was reflecting on what you might do with an equivalent sum of money if your target was primarily focused on doubling down on our strengths in the service sector.
You would certainly want to invest in the skills and talent of people to build deep and rich labour markets. You would want to build vibrant places that people wanted to live in, could get around easily between and work closely with others. You would want to join together academics, innovators and entrepreneurs to interact and develop new ideas. You would want to create a vibrant business ecosystem where collaboration could take place, where advice could be sought, where finance could be accessed, and international links could be made. In short, you would want to invest in cities.
We know that the fiscal position is challenging, even if we were to take a more rational approach to how we account for capital in the fiscal rules, as we argued for in the Urban Futures Commission.
But as the Autumn Statement demonstrated, there are always choices. The Economy 2030 Inquiry sets out a serious plan to get our economy going again, with services and cities at the heart. Given the impact we’ve seen already across the country from the £30m a year Gainshare Funding within Devolution Deals, imagine what could be achieved if we had split that £11bn between our Core Cities, providing them each with a £1bn investment per year – 33 times more than Gainshare even before you think of the leveraging potential.
With the RSA we have demonstrated there is a £100bn prize each year from getting our cities firing on all cylinders. We stand ready as Core Cities to play our part in reviving the national economy. Better start working on those Impact Assessments…