The need for a 'new deal' for businesses
The British economy has many strengths, despite doom-laden headlines. The UK has some world-leading sectors characterised by extraordinary innovation, high productivity, strong exports, highly skilled jobs, and good pay. The UK is a scientific powerhouse, a world-leader in the creative industries, a hub for tech innovation, and leads the pack in some green industries. But IPPR shares a desire with businesses across the country to see more of these success stories, in more places across the country, benefitting more of our citizens. British business at its best can be pathbreaking, innovative, and deliver real gains for broader society. At IPPR we want to see the UK economy, and the best of British business, grow and flourish. We want a system where profit is the reward for helping solve the world’s problems.
Even with these underlying strengths, the UK faces profound economic challenges. At the heart of these challenges is stagnant, unequal, and unsustainable economic growth:
- Stagnant: The UK economy has failed to bounce back from Covid-19. The IMF forecasts that our economy will shrink in 2023: a worse performance than any G20 country including Russia. Moreover, this is part of a longer-term trend. Growth and productivity in the UK have stalled since the 2008/9 financial crisis with some of the lowest levels of investment in the OECD.
- Unequal: The gains from the growth the UK has experienced are unevenly shared. The UK has seen a decade and a half of pay stagnation for the majority, whilst household wealth (for those who have it) has surged. These inequalities are also spatial, with deep divides between regions and places in terms of income, employment levels and productivity.
- Unsustainable: The UK has done more than most countries to decouple its growth from its carbon emissions, however, the UK’s not currently on track to meet future targets (notably, the carbon budget for 2030). Our economic model is also failing to protect and restore nature.
In response to these challenges, the UK must aim toward faster, fairer and greener growth. Both the government, through Rishi Sunak’s five pledges, and the opposition, via Keir Starmer’s five missions, have set out their ambitions for what economic policy must achieve. IPPR has long advocated a mission-oriented approach. This is important because it’s not just the policies of government that have brought us to this point of challenge, but the overall approach of government too. A mission-oriented government would be a shift away from the damaging approach that has characterised economic governance over the past decade: short-termism, 'just trust the market', the false economy of cuts, chopping and changing policies, and an unwillingness to make choices. Instead, government’s missions should act as orienting targets that serve as an alternative to choosing the policy that is simply lowest cost. As part of this approach, the UK should be aiming to achieve faster, fairer and greener growth:
- Faster: GDP growth rates returning to higher levels on a consistent and sustainable basis, closing the gap between us and other advanced countries in the G7 and OECD.
- Fairer: Economic growth and productivity improvement needs to be seen across the UK’s nations and regions. Everyone should share in the growth of the UK economy, not just a lucky few.
- Greener: The economy needs to reduce its environmental impact. This means sticking to our carbon emission targets, but also protecting and conserving the natural environment.
UK businesses will be critical to achieving these goals and solving the challenges of today and tomorrow. Businesses can and many already are driving fairer and greener prosperity. Private sector investment is a major driver of growth and businesses will and must be at the heart of this transformation. It will also need to draw on the talents and commitment of communities and wider society. As Paul Drechsler, former CBI president, recently said “I cannot find you a serious employer anywhere who thinks it is good business to go after the trade unions. We employ these people. We value them.” Meanwhile, the public sector is critical in underpinning and shaping this shift, for example the CBI has also been pushing the UK government to step up with green investment dependent upon government action.
The government should make a clear commitment to businesses formalised in a 'new deal'. The state has a crucial role to play in creating an enabling environment and setting the 'rules of the game' to spur growth, drive fairness, and steer towards sustainability. Government should be clear on its side of the bargain. This means doing two things; first creating the right environment for British business to flourish and second doing the things that the country needs that the private sector will not or cannot do alone. Government’s offer to business should include the following:
- An open strategic partnership around guiding missions giving a clear indication of direction of travel.
- Stability and consistency in both policymaking and in the macro-economic environment.
- Ambitious industrial strategy to support existing strengths and tomorrow’s sectors.
- A regulatory and tax regime (the 'rules of the game') that drives investment and innovation in an open and dynamic economy.
- Catalytic public investment in the physical, digital, and intangible infrastructure needed for prosperity and growth (transport, skills, health, knowledge).
In return for this commitment, the state should be clear about its expectations of businesses. Partnership is a two-way street. At the heart of this partnership should be a clear 'offer' from government and in exchange an explicit expectation for businesses operating in the UK to commit – as many already do – to business practices and models that help achieve faster, fairer, and greener growth. This means committing to at the very least 'do no harm' but also to go further and create real value for both their shareholders but also for their customers, workers, and society as a whole.
Getting this right will mean government supporting and incentivising business leaders and using a firmer approach with laggards, a tactic demonstrated by President Biden. A partnership approach means being pro-business when it comes to businesses that work with purpose and in the interests of society, but also acknowledging that not every firm in every sector does that. We think it is essential that doing the right thing for society shouldn’t mean firms being uncompetitive, it should be the right thing for the bottom line too. So, support from the state cannot come without 'guardrails' to stop it becoming a form of corporate welfare. This should include reforms to competition policy towards open and competitive markets, implementing the OECD minimum corporation tax rules, and legislating towards a system of corporate governance that recognises stakeholders as much as shareholders. The approach being taken in the USA under the leadership of President Biden as part of the Inflation Reduction Act and the CHIPS and Science Act serves as a useful model. In this case, state led investment is available, but only for firms which commit to a set of standards (as set out above). This approach could and should be used in the UK alongside other forms of regulation and smarter tax regimes to incentivise innovative and socially responsible business.
Not only is this the right thing to do, but this approach is also popular with the public and with businesses themselves. In 2021 the UCL Green Innovation Policy Commission, a business-led coalition including representatives from Arup, Veolia, and UPS, made it clear that the UK’s regulatory and net zero approach had to be made up of incentives to support the greenest leaders combined with clear limits and regulations to shift the laggards. Equally the IPPR Environmental Justice Commission hosted a series of citizen juries around the country to determine a path to net zero with public support. Across all the citizen juries, we found clear public support for the idea of the state combining carrots and sticks in an approach to transform the British economy to be greener. Ultimately, these businesses and the public are right; a solid partnership between the state and business can drive faster, fairer, and greener growth.
At IPPR we believe that we need to make doing the right thing for society, the right thing for the bottom line. Profit should be the reward for solving the world’s problems, not creating them. This calls for a ‘new deal’ between the state and business to drive faster, fairer, and greener growth.
George Dibb is head of the Centre for Economic Justice at IPPR.
Harry Quilter-Pinner is director of research and engagement at IPPR.