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Competitiveness: Why UK Economic Growth Is So Elusive

21/01/2025

By Professor Sir Dieter Helm

The dominating mission of the current government is “growth” and almost every day some new initiative is announced. One day it is AI, the next it is fusion, then it is windfarms. Regulators are asked to “come up with five ideas” to promote growth, and government departments are told to present any requests for budgets and spending almost exclusively through the growth lens. One “winner” after another gets its day in the sun. The Prime Minister can “announce” 14,000 jobs from the development of AI one day. Yet if announcements caused growth, the UK would already be in the stellar global class.

The UK government is not alone: almost all governments want to promote economic growth. What gets lost in the spin is a reality check of the evidence. Governments aren’t very good at causing growth. They are much better of getting in the way. In consequence, the most successful growth policies start with the maxim “Do no harm”, before moving on to examine what actually causes economic growth, and what obstructs it.

If the government wants to take economic growth seriously, then it should focus on (the lack of) UK competitiveness. It needs to ask itself why UK exports lag, why imports grow, and why domestic production is so expensive. It also needs to ask why saving are so low and why investment is overwhelmingly foreign.

The government needs to ask itself how the sprint to net zero electricity by 2030 is going to make its energy more competitive, and why building more houses is going to help British companies compete. It has to ask itself why unfunded public expenditure is going to increase UK investment and why increasing the taxes on employing people is going to make UK companies more competitive. It needs to ask itself why its educational policies are going to promote excellence and meet the future industrial demands.

Instead of making the usual declaration that the UK is going to be the (not even “a”) world leader in not just AI, but in net zero technologies and hydrogen and nuclear, and in all the sectors picked as “winners” in its emerging industrial strategy, and instead of asking regulators if they can come up with any new ideas of how to promote economic growth, the government should first start with much more basic questions: why would global companies want to relocate to the UK; why is manufacturing industry very much on the exit path; and why is it so much more attractive to set up businesses elsewhere, including in the US?

If economic growth is the government’s number one priority, each of the main policies that the government has set out in its first six months needs to be put under a competitiveness microscope. Do they do no harm? Do they increase or reduce competitiveness?

Energy costs and competitiveness

Energy costs are the first exhibit. The government claims that the sprint to net zero electricity by 2030 (just 60 months away) is going to lower the cost of energy and hence improve the UK’s competitiveness. This government is not the first to make this sort of claim. Boris Johnson told us that the leaders of Russia and China would be looking to the UK’s “world leadership” and seek to learn from us how to do it. As a result of this, we were going to have the world’s cheapest energy. It is a claim that has permeated UK energy policy for at least a decade or more. Germany made similar claims for its Energiewende energy policy.

Three questions arise: first, if this is so, why are UK industrial energy costs amongst the highest in the developed world? Second, why isn’t the US floundering in a sea of “expensive” fossil fuels? And, third, why are customer bills still going up after so much renewables capacity has already been added, and coal has been eliminated from generating electricity?

On industrial energy costs, sadly the evidence points in the opposite direction. Contrary to what we are led to expect – that the world’s energy-intensive industries will be flocking to the UK to gain the advantage of its cheap energy – intensive energy is heading in the other direction. Companies are not building new petrochemical, fertiliser, aluminium, steel and mineral mining and fabrication in the UK. On the contrary, more are leaving. Port Talbot’s steel conventional production is coming to an end, to be replaced by the recycling of scrap metal through a very high cost (and hence heavily subsidised) electric plant – eventually. Primary steel will be imported even more than it is now from China and elsewhere. Fertiliser manufacturing is closing, and the Grangemouth petrochemical refinery is being inverted to handle imported petrochemicals produced elsewhere. The list goes on and on.

More significantly, there is an absence of much new investment in new energy-intensive businesses. These expect big subsidies (because the UK is not cost-competitive). The going rate appears to be about £500 million per plant. These subsidies are part of the costs of net zero, and they need to be added to the selective attempts to show that costs are falling. (More on this below.)

Perversely much of this makes climate change worse. Importing instead of producing energy-intensive products does not reduce global carbon emissions. It does, however, reduce UK territorial emissions, and hence lets politicians across the political spectrum still make silly claims about world leadership and the scale of emissions reductions. It is depressingly necessary to keep stating the obvious: climate change is global and it does not matter where the emissions are being emitted from. Increasing emissions in China to reduce them in the UK almost certainly increases global emissions.

The competitiveness implications are much greater than is typically acknowledged. The costs of energy permeate every economic activity. All economies are built on energy, from food to data centres to robots and AI and retail. If the UK has high energy costs, it means that it is likely to have high food costs, and high digital technology costs. High energy costs raise the costs of the sprint to net zero too, since the electric vehicles (EVs) and the turbines and the solar panels and all the supply chain are energy-intensive. Indeed, that is why almost all of it is imported – because the UK cannot produce almost any of it competitively. China’s coal lies behind the solar panels and the wind turbines, and EVs, and so do its petrochemicals. It is why attempts to re-shore bits of the supply chain are so expensive in subsidies, and all these costs need to be baked into the arithmetic of the costs of the sprint to net zero.

There are very good arguments for decarbonisation, but reducing competitiveness is not one of them. The argument for the sprint to net zero in a matter of 60 months to meet the net zero 2030 target for electricity is not so compelling. What a sprint to the 2030 target means is that, if taken seriously, the UK must pay whatever it costs to commandeer the necessary equipment for the supply chains and the necessary skilled labour, as well as whatever returns investors demand too. It must pay whatever it costs for the contracts for differences (CfDs) to back new wind and solar, and whatever it costs to keep old nuclear going and whatever it costs to build new nuclear capacity. In the process, it must pay whatever it costs to keep gas in the system as the standby to handle the intermittency and for more interconnectors, and whatever it costs to get power through the interconnectors at times of stress on the system and when the exporters might need it too.

All of this adds to the costs of energy and reduces the competitiveness of the economy. The net zero electricity world with existing technologies requires a lot more capacity to meet the demand, for the very good reason that wind and solar are intermittent. They are not firm power and security of supply is all about firm power. The equivalent firm power required for security of supply with 50GW of offshore wind is much greater than it has been relative to demand in the past. This has to paid for. It is an additional cost. It reduces competitiveness.

The reply that the government gives (and the government before it) is that, notwithstanding these costs, bills will come down for consumers by £300 by 2030. This is an absolute claim, not a relative one. The relative claim is that, whatever the sprint to net zero cost, it will be worth it because the costs of fossil fuels will be much higher and much more volatile. Put aside the fact that the output from renewables is very volatile, the claim about net zero being cheaper comes down to a bet on the future costs of oil and especially gas.

This opens up the obvious question: why would anyone think that the cost of oil and gas is going to go ever upwards? If the businesses did, they would be getting out of the US fast. The recent blips in gas prices in Europe and the knock-on impacts on other global gas markets are a consequence of Europe’s reliance on pipeline gas from Russia. Stop or limit this, and prices go up. But there are two caveats: gas is not uniquely located in Russia; and Germany’s dependency on gas (the core of European demand for Russian gas) is the consequence of Germany’s energy policies, including the Energiewende. Why did Germany allow this to happen? Why did it give the go-ahead for Nordstream 1 and 2? Why did it swap domestic nuclear electricity generation for gas?

More generally, the logic of the net zero transition is that the demand for oil and then gas will peak. Peak demand not peak supply, as environmentalists once convinced themselves of. Peak oil demand in the face of abundant supplies, and with the price of oil massively above the costs of production in the Middle East and Russia (and many other producers) should lead to a scramble for market share. The oil price should then fall. When it comes to gas, the more the net zero strategies push to get out of fossil fuels, and rely on batteries and other storage to address the renewables-based electricity system, the more the price of gas should fall. The irony of the claim that high and volatile oil and gas prices are going to be protected against is that it may, in fact, be the protection of UK industry and consumers from low and falling oil and gas prices.

Which brings us neatly back to competitiveness. Contrast the UK’s energy policies with those of the US and Donald Trump. The US has cheap gas and abundant oil. It is the largest producer of oil in the world (roughly 13mbd versus 10mbd in Russia and 9mbd for Saudi Arabia). It has lots and lots of very cheap gas. Trump’s policies emphasise the fossil fuels not the renewables.

There are plans to add 80 new gas-fired power stations in the US by 2030, and big tech is turning to gas for AI and data storage in the short term, whilst exploring nuclear for the longer term. Data centres need firm power 24/7. Those who think, for example, that locational pricing will get data centres and AI to locate in the north of Scotland do not explain how the non-firm intermittent wind is going to deliver 24/7. Gas does this, and in the US gas is growing faster than ever before.

It is not good news for the climate. It’s doubly bad: more gas in the US improves US competitiveness and accelerates the exit of energy-intensive businesses from the UK and Europe. If the UK and the EU want to lead the charge to net zero, then they should focus on carbon consumption, not territorial carbon production, and make their citizens pay for it, rather than telling fairy tales that “it’s all going to be cheaper” here. Trying to unilaterally lead in a world that is not following its playbook is necessarily very expensive. This does not mean that the UK should not unilaterally push forward, but it does mean being honest with its voters and consumers. The result is that living standards will have to go down relative to, for example, the US for the foreseeable future. Unilateral net zero targets based on carbon consumption (not territorial emissions) would stop the UK causing more climate change, but this will not promote economic growth, as the existing generation is replaced by much more generating capacity to produce the same outputs. At best, it is capital maintenance – same output, different assets.

Who thinks that the future industrial giants of the coming decades are going to include the UK at the top of the leader board and the rest of Europe in its wake? Why aren’t the US financial markets falling back on the fear that expensive US energy is going to undermine its great industrial giants? The US’s problem is not that its energy costs for oil and gas are too high, but that coal-intensive countries like China and India are even cheaper. And so is the cost of labour. Like it or not, a fossil-fuel-driven US is not falling behind the UK and Europe on energy cost competitiveness. Quite the contrary, as the recent Draghi Report to the European Commission made so painfully clear. The gap is big and getting bigger. It is Germany that is in energy cost trouble. It is not growing. The UK has already lost most of its manufacturing, so arguably has less far to fall now. Unsurprisingly in the German election campaign energy costs are a core issue, in a German discussion about its lack of competitiveness. It is time the UK government woke up to this extremely inconvenient truth too.

What about the argument that renewables are getting ever cheaper and are “cheaper than fossil fuels”. It would be wonderful if it was true, but sadly it isn’t anytime soon. What is true is that the marginal cost of renewables is close to zero, and fossil-fuel prices are above zero. But this is to miss the cost point. An ever-cheaper solar panel is “a good thing” provided it is not made with coal, petrochemicals and exploited labour (which at least 80% of them are). From a competitiveness perspective, the costs of solar are not mostly about the panels. It is the system costs of solar – and wind – that matter, and these are clearly not zero. A zero marginal cost world is a capacity investment world. That capacity has to have a lot of non-zero marginal cost generation in the system and a much expanded grid and distribution system too. It needs batteries and pumped storage, and it needs lots of gas to handle the intermittency. These are the system costs of wind and solar. With a bit of wind and solar on the system, these costs are pretty small, but with 50GW of offshore wind, it is a different story. Intermittent renewables render everything else intermittent too. These destroy the economics of gas and nuclear too – because both become intermittent. The cost of holding the 35GW of gas on the “net zero” electricity system in 2030 when that gas capacity is assumed to operate (and hence get revenues) only 5% of the time is large and it is a cost of the sprint to net zero. The costs of rendering the new Hinkley nuclear power station intermittent would be extraordinary. If the “surplus” nuclear power when the wind is blowing is used for something else, this might mitigate the impacts. But there is no suggestion that these alternative uses will be able to take up Hinkley’s production at short notice and turn it into hydrogen, for example. In time possibly it will, but not by 2030. Moreover, it would require the coordination of investments in other energy-intensive activity, which is not a forte of the UK economy and UK governments to organise.

All of the investment for the net zero sprint is capital-intensive, and that adds another competitive hurdle. As we shall see, government policies are driving up the cost of capital. This cannot do other than further drive up the costs of the net zero sprint, and reduce competitiveness. (On this, see more below.)

Building more houses

The government’s growth strategy has a second strand alongside the sprint to net zero in 60 months. It is the pledge to build 1,500,000 new houses by 2030. Given that the 300,000 a year is not being met now, nor is it likely to be met in 2025, the current number that need to be built to meet the 2030 target is more like 350,000 to 400,000 per year.

How exactly does building more houses lead to economic growth? Building houses is undoubtedly “economic activity”, just as filling the potholes in the roads is economy activity. In GDP terms, it will raise GDP if delivered and if it does not simply crowd out other economic activity.

Let’s assume that it is met in 60 months. It is another whatever it costs target. The labour, the materials and the sites have to be found. Obvious problems emerge. First, are their enough skilled labourers to do this and how much will this surge increase the cost of labour, raising the costs across the economy and reducing the economic output elsewhere? Labour cost inflation has a crowding-out impact. The costs of building wind farms and transmission lines, big infrastructure projects and all the other capital maintenance and investments will go up.

An answer might be that providing more houses is going to have a compensating benefit in improving labour mobility and reducing labour costs as workers reduce their demand for higher wages on affordability grounds. This is a stretch: if immigration is going to be sharply reduced, there have to be British workers. In the tight labour market which the housebuilding and net zero policies will exacerbate, there is no evidence that building more houses equals lower wage demands.

The above argument rests on the assumption that the houses are actually built in the 2030 sprint. Why would this happen? Housebuilders do not want to maximise the number of houses built. They want to build profitable houses and that is best done on the green belt, not in inner cities, and not for social housing. That’s why the argument gets told that if only the planning laws were relaxed, housebuilding would increase. What housebuilders really mean is: free up greenfield and green belt sites where the costs of building are lower and the prices achieved higher.

If the government wants to build 300,000 houses or more per year, and if the problems of housing are about inner cities and urban contexts, then the answer is that it will have to step in and subsidise. That is what governments did between the Second World War and the late 1970s, when 300,000 houses per year were built. The public sector built around 150,000 per year.

There is no money to do this. Borrowing costs have gone up for the government and, as a result of the increase in the costs of government borrowing, for the private sector as well.

The government has made the achievement of these housing targets harder, not easier. The cost of borrowing has increased not just because of global developments, but also because of the unfunded spending in the 2024 Autumn Budget. That Budget also increases the costs of labour to companies. If building houses was the route to economic growth, then this government has followed many others in the past in pursuing two mutually incompatible objectives at the same time. Nothing new here; but don’t expect the results to be very different.

The further question is how more houses make the UK more competitive. More houses may be a good thing, but having more houses is unlikely to reduce the cost of labour, so that is not the transmission mechanism to greater competitiveness. It will probably make it worse. What about the supply chain of materials to build the houses – the bricks, cement, steel, timber, electrical systems and wires, pipes and sewerage connections and transport infrastructure? Some of this is home-grown, but much is not, and the result of 1,500,000 houses without commensurate major transport upgrades will increase the costs of commuting and increase business costs. There are no plans to fast-track major transport infrastructure commensurate with the 2030 target. Few roads and railway lines get built in 60 months. In the UK, for example, it is taking at least two years to complete the bridge at Oxford train station.

Unfortunately, it would be a luxury if governments pursued only two inconsistent objectives at the same time. This government has at least three. Building lots and lots of houses is likely to be energy-intensive and the materials are likely to be carbon-intensive. Then there are the costs of net zero houses. These are higher, not lower. That is why housebuilders push back on being made to meet net zero requirements. New gas boilers are still going in, for example, because gas boilers are much cheaper than heat pumps. It costs more, not less, to incorporate net zero requirements. Of course, if the net zero investments lead to cheaper energy (and soon) then the purchaser may pay more now for lower energy costs later. But the “if” matters, and seems not to be convincing the house buyers so far.

The upshot is that the carbon footprint goes up not down. Even if the new houses are more energy-efficient than older houses, the purpose of the policy is to increase the number of houses, not to replace old with new.

Raising the cost of debt and hence the costs of investment

The government thinks that investment is the key to economic growth. Put aside for a moment the fact that much of the investment is capital maintenance – replacing one set of assets with another to produce the same output (especially electricity and sewerage works). And put aside that capital maintenance is an operating cost that should be paid for by current customers (and taxpayers), not pushed on to future customers and the next generation (and hence the young) as debts they inherit for the delivery of the same services. Let’s assume, for the sake of argument, that it is all investment.

That much needs to be done to the infrastructure is widely acknowledged. It is hard to think of any global companies flocking to the UK to get access to its brilliant infrastructure. One cursory glance at the state of the trains, the state of the energy infrastructure, mobile coverage, the airports, or even the water supplies should be enough for any company board to step back. The quality of UK infrastructure is not a source of competitive advantage.

This government, like its predecessors, is therefore right to focus on infrastructure and let’s assume it is investment. Investment requires savings and savings mean forgone consumption. The UK’s savings are very low. Once capital depreciation is taken into account, savings may be close to zero. This means that a competitiveness strategy would try to do two things: raise the level of savings in the UK; and get foreigners to lend to the UK.

On the former, the tax increases in the 2024 Autumn Budget focused on increasing the cost of labour to companies (the employer national insurance increases) and raising the taxes on savings (capital gains tax (CGT) and inheritance tax (IHT), and reducing some of the incentives to build up pensions). So far, so bad: nothing here to increase savings. Telling the citizens and others that they may have to pay for the net zero strategy (instead of promising the nirvana of win–win: cheaper and better), and that they will have to reduce their spending to make room for investment is not on this government’s agenda – nor indeed on that of any recent UK government.

The consequence is that it mostly has to come from foreigners, and indeed it does. That is why government ministers are flying around the world with the begging bowl out, and in the process setting aside many of their other concerns. For the government, China is worth pursuing, if only for £600 million over five years for a largely unspecified benefit from access to the London financial markets. The Middle East is an obvious source. Less obvious is the US, especially after some of the things Labour said about Trump in opposition. But beggars can’t be choosers. Either raise domestic savings so as not to have to rely on foreign states, or swallow hard and take whatever they are willing to lend, and on their terms not ours.

These foreign lenders might want to do a bit more homework too. Each investment promises that UK customers and UK taxpayers will pay the interest and dividends and eventually the capital sum back. But voters and customers do not look at each bill in isolation. Borrowing lots and lots might look attractive, but what if the customers cannot to afford to pay the aggregate of the bills, or voters decide to vote against any government that tries to make them pay. Aggregate investment is all about the affordability – the envelope of money that customers can and will pay – not whatever it costs.

That cost is going up and has been increased further by the 2024 Autumn Budget. Unfunded bits of a budget unnerve the bond markets for good reason. Liz Truss found this out with her unfunded tax cuts. Starmer is finding this out with unfunded public spending. The former was at least argued to increase economic growth; few think that giving the NHS more increases growth, especially in a sector with falling productivity. On the impact of tax cuts, the Germans under Merz, and the Americans under Trump are about to provide more case studies. Sending more money on the NHS may be a “good thing”, but it is not obviously growth-enhancing, especially if the money is unfunded.

This increase in the cost of capital, caused by both the government’s Budget and wider developments, is ultimately about the growth of deficits and government debt. It is easy to say that bond market behaviour is global, but the global bit is the global increase in government indebtedness. The UK government doubled down on this in the 2024 Autumn Budget on an argument that many others have used too: it would lead to more growth, which would bring back down the deficits and debt in due course. We will see whether this happens, or whether the fiscal rules prove as weak as they have in the past.

A proper economic growth strategy

The idea that getting lots of people together (like regulators) and asking them all to come up with five ideas of how to increase economic growth comprises a credible growth strategy is laughable. There is no magic about economic growth, and how to increase it. The problem is not that nobody knows how to do it, but rather the political pain of doing it.

Here are some of the painful options which explain why politicians of all parties duck them. Suppose we really wanted to act on climate change and to increase spending on the NHS and on defence. Suppose at the same time we really wanted to increase economic growth. There are very good arguments for doing all three and there are good arguments for increasing economic growth.

How might we achieve all this? We could pay for the net zero transition out of consumption, and hence either raise taxes to subsidise it or increase customers’ bills, leaving industrial energy costs internationally competitive; pay for extra NHS spending by increasing income tax and VAT; reduce the costs to industry of employment by lowering employer national insurance; and increase the incentives to save and invest by reducing taxes on savings, including on CGT, dividend taxation and IHT. We would admit that short-term targets that are unachievable should be dropped. We would not have a 60-month sprint to net zero electricity by 2030, and a 60-month sprint to build 1,500,000 houses by 2030.

To rebuild the infrastructure requires a huge national effort, and because most of it is capital maintenance, it requires customers to pay for the costs in current bills.

You can see immediately that all of this means that UK citizens would have to stop living beyond their means, would have to start paying for the pollution their consumption causes, and that income and VAT taxes would have to go up a lot. The current economic set-up in the UK (and indeed in other countries, notably in Europe too) is not sustainable.

Because it is not sustainable, it will not be sustained. Trying to make almost daily announcements about new initiatives to increase growth is not going to make it happen. “Unleashing” and “unlocking” make headlines, but spin does not make the economy grow. The “do no harm” mantra would be a better starting point. The path to rebasing is inevitably very painful, and this government is not going to do it ex ante. No government looks likely to do so. The consequences of not doing these things cannot be avoided. They will happen ex post. Things may get worse before they get better, and a fundamental re-set is forced upon us.

And all of this is of course before the UK spends on serious defence…

Dieter Helm

Dieter Helm is Professor of Economic Policy at the University of Oxford and Fellow in Economics at New College, Oxford. From 2012 to 2020, he was Independent Chair of the Natural Capital Committee, providing advice to the government on the sustainable use of natural capital. 

He provides extensive expert advice to UK and European governments, regulators and companies across three key areas: Energy & Climate; Regulation, Utilities & Infrastructure; and Natural Capital & the Environment.

Dieter is a Vice President of the Exmoor Society, a Vice President of Berkshire, Buckinghamshire and Oxfordshire Wildlife Trust, and Honorary Fellow, Brasenose College, Oxford.

His latest book, Legacy: How to build the sustainable economy was published by Cambridge University Press in November 2023.

Original article   l   KeyFacts Energy: Commentary

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