Good afternoon. It’s been hard to know where to look this week, what with the second Trump administration’s opening salvo on taxes and tariffs alongside Rachel Reeves’ increasingly aggressive demands on regulators to deliver growth, but I choose the home front.
The ousting of Marcus Bokkerink as chair of the Competition and Markets Authority on Tuesday evening — pour encourager les autres — was part of a concerted attempt by the government to shift the narrative on growth.
Reeves let it be known that growth — including potentially expanding Gatwick and Luton airports and adding a third runway at Heathrow — must trump all other priorities, including the drive to net zero.
At the same time, the government announced the next raft of planning reforms, including establishing a ‘Nature Restoration Fund’ where developers can pay into a pot for projects that offset the damage caused by developments.
As you’d expect, there are already complaints and objections from this apparently gung-ho approach, including from backbench Labour MPs who are reportedly “holding their heads in despair” at the sight of a Labour chancellor pedalling a Tory narrative on deregulation.
But I suspect Reeves won’t mind that too much, because there really is a need to change the narrative — not just of this government, which has had a wretchedly flat-footed beginning, but of the entire post-Brexit period.
Turning the page, telling a story
Last week Labour Together, the party’s in-house think-tank, published a timely report setting out how post-Brexit UK needs to get its mojo back, in a “more dangerous and competitive world”, as evidenced this week by Trump’s return to the White House.
The report’s author, Jonathan McClory of strategy firm Sanctuary Counsel, assembled a panel of UK and international diplomats, academics and investors to create a semi-structured focus group to try to identify a new way forward.
Even though none were asked specifically about Brexit, almost all brought it up. This is not about trade barriers, per se, but about the reputational damage caused to the UK as a place to do business and the failure to build a compelling new national narrative outside the EU.
As one interviewee noted:
“The chaotic political handling of Brexit has left an impression of a country that doesn’t know what it wants, doesn’t have the capacity to think about its interests, and is consumed by slogans rather than strategy”.
Three other key takeaways: firstly, the UK interviewees were gloomier than the international ones, which tells you that too much self-flagellation over Brexit is counterproductive. As Sir Keir Starmer keeps saying, “we need to move on”. But it’s actions that matter, not words.
Secondly, that the UK’s future softpower advantage should be centred on “science, technology, and innovation” — AI, green technology, bioengineering — at least as much as traditional cultural advantages.
This is not to dismiss our traditional values around history — the UK invented most of the world’s sports, for example — and we’re good at the flummery that comes with an active royal family. But in this new ground zero world of AI, rampant tech, pandemics and climate change, the argument is that “it’s time to move on”.
And thirdly, and most importantly, that the rebirth starts at home. We can tie ourselves in knots over the ‘EU reset’ and how to handle Donald Trump (“Heaven help us”, as one senior government insider put it to me this week) but the foundations that need fixing first are here.
As another interviewee said, “The UK needs to put its domestic affairs in order first,” adding, encouragingly: “once [the UK] manages that, it could really be a leader on many of the areas the global community is struggling with.”
Saying is not doing, but it’s a start
Obviously, putting domestic affairs in order is not just about giving speeches in Davos to please corporate investors, but that’s not a bad place to start if you’re trying to stem the tide of relentlessly negative reactions to a Budget that has weighed on hiring and investment.
The next step is to join the dots. As a reader pointed out after last week’s newsletter, it sends a powerful signal that Angela Rayner overruled the Environment Agency to green-light a Cambridge housing development last December that had been blocked over water scarcity concerns.
But that needs to be accompanied by an actual plan to reduce water consumption, release finance for a new water pipeline and, ultimately, deliver a new reservoir after a period of 35 years when the UK has failed to build a single one.
As well as long-term investment, that requires lining up all the strategic regulators, from Ofwat to the Environment Agency and to actually get it done — and have it seen to be done. Reeves made a start on that this week.
It also means, for example, that if you’re going to have an industrial strategy that draws talent from all across the world, prevailing on the Home Office to make visas easier and more plentiful — and daring to make the political argument why this is necessary.
And it means, if you’re going to have a ‘trade strategy’, actually injecting some urgency and ambition into the EU-UK ‘reset’ (still not too late), which leads to another argument over immigration and the repeated failure of a homegrown skills strategy.
Or it could mean, according to Chris Southworth at the International Chamber of Commerce, taking aggressive steps to remove what he calls the “over zealous regulation” that makes it so difficult for SMEs in particular to obtain trade finance.
So while there probably isn’t much in the coming EU ‘reset’ that will fix things for SMEs who’ve been hammered by Brexit, Southworth argues there are steps — on access to finance and trade digitisation — that the UK can do at home to get UK companies exporting.
He’s not convinced that the Bank of England’s Prudential Regulation Authority is going far enough to remove barriers that are a legacy of 9/11 and the 2008 financial crash and are stifling the ability of SMEs to obtain low risk, short-term working capital.
“I would have liked to see far more radical and ambitious ideas such as removing capital requirements for SMEs altogether. This would inject far more confidence into the market that the PRA are getting serious on supporting growth,” he says.
Make no mistake, the mood is pretty grim. But as I heard while chairing the annual Executive Survey for MakeUK, the manufacturing body, this morning, it’s far from terminal if the government can build a compelling narrative for Britain.
Business is labouring under heavy additional costs as a result of the Budget but as the CEO of medical products maker Vernacare Alex Hodges said, there is also a well of optimism waiting to be tapped — they just want the government to lean in a bit.
So I can think of lots of reasons why various growth-enhancing measures (some examples above) won’t happen; but after making such a desperately low-key start to their term in office, ousting a prominent regulator and promising to ‘build baby, build’ is at least sending a strong signal that you intend to have a serious go at it.
Britain in numbers
This week’s chart comes from a thought-provoking report by the Centre for Cities think-tank which maps the link between places engaged in exporting activities and higher wages and productivity.
The report uses national data to show that exporting activities are the drivers of UK productivity growth, with sectors like IT, chemicals, pharmaceuticals and finance leading growth since 1997.
This is because exporting activities, particularly in the new industries, have a “greater ability to absorb new innovations and use creativity to create value”, and also have greater resilience because they can access more markets and ride out cyclical downturns.
This is the mechanical link between trade and growth. So as the Centre for Cities chief executive Andrew Carter observes, the report highlights the need — political constraints aside — to deepen that relationship as far as possible.
“We clearly need to have the most advantageous relationship and arrangement with Europe as we can possibly get. There’s the difficult politics of that but the further we move away from the best version of an arrangement, the harder it gets,” he says.
For all that, the government remains committed to a deeply limited EU ‘reset’ strategy, hemmed in by its red lines on single market and customs union membership.
We’ll see if the fallout from Trump leads to a pinking of those red lines in a bid to unlock areas that would help attract investment, via improved access to the UK’s largest export market for both people and goods.
We are now approaching the point, as the agenda is drawn up for the first EU-UK ‘reset’ summit in March or April this year, when we’ll start to see how ambitious the UK is prepared to be.
Even keeping to the red lines, there are things to be done: the youth mobility deal (which could bleed into elements of professional mobility), full alignment with the EU’s carbon-markets (to reduce carbon border tax friction) and maybe even some fixes on customs.
One area that is being flirted with in London is the UK joining the Pan-Euro Mediterranean convention. This is a customs agreement between the EU and 20 countries, including several in the Middle East and the Balkans, where all countries share the same ‘rules of origin’.
For now, ministers are officially saying that the UK is not interested, but sectoral analysis and some business consultation is ongoing. Trade minister Douglas Alexander left the door open this week by telling MPs that the convention “is an issue that we are open to looking at” and the UK approach would be “pragmatic”.
It’s complicated. It’s not a silver bullet and will do nothing to address regulatory frictions. But if you want to understand the possibilities (and some of the trade-offs) then a paper by Anna Jerzewska of the consultancy Trade & Borders, is a really clear piece of work on a tricky subject. Well worth your time.
The State of Britain is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.
