Hm Treasury
Introduction
It is a pleasure to be with you this evening and a privilege to deliver this speech for an organisation founded by Keith Joseph and Margaret Thatcher 49 years ago.
Over that time the CPS can be proud of the profound impact it has had on the way we think about freedom and enterprise.
And I am delighted - as Chancellor - that even though you will soon reach the ripe old age of 50, there is absolutely no prospect of you taking early retirement, something impossible to imagine under the energetic leadership of Lord Spencer and Rob Colvile.
Today, I want to talk about one of the governments five priorities growing our economy which alongside reducing inflation and bringing down debt, is central to our economic mission.
Because just as when the CPS was founded, it is growth that will prove declinists wrong, unleash prosperity through enterprise and give families confidence in their prospects.
Rob himself pointed this out in his excellent essay, the morality of growth when he said:
If there is one thing that Conservatives need to do that we all need to do it is to remind people ceaselessly of the importance of growth.
Productivity and growth
Growth is critical for many reasons.
It is the way we increase peoples living standards.
It is the way we increase opportunity with high wage, high skilled jobs based on the innovation that will define this century.
And it is the way we make sure our private sector is not strangled by an ever-expanding state.
According to the OBRs long-term forecasts for the public finances from the end of this decade, our economys long term trend growth rate is 1.6% but public spending - even excluding debt interest - will grow by 2% a year.
So every year, the OBRs projections suggest that the size of our state will be growing by nearly half a percent more than the size of the economy.
Now we are not the only ones facing this dilemma. OECD projections say Germany, Italy and Japan will have even lower growth over the next 25 years, with France about the same and the US only marginally ahead. Many of those countries have even steeper demographic challenges than we face and all face pressure to increase the burden on taxpayers.
You dont need brilliant Treasury analysts to tell you the consequence of a state growing faster than the economy: higher borrowing, higher taxes or a combination of the two.
The OBRs analysis suggests that without any action, the result of these demographic pressures could be a public sector debt of 217% of GDP by 2071, more than double the current proportion.
I think it is wrong - morally and economically - to pass on that level of debt to future generations.
Other political parties might look to tax as the solution to this problem.
But to keep up with projected spending pressures that would mean increasing annual tax revenues by 200 billion by 2071 in todays money, or to think of it more simply at least doubling the basic rate of income tax and main rate of employee National Insurance.
I reject that prospect, because that is the path to socialism: less freedom, less enterprise and less prosperity.
But to borrow an extra 28 billion would have exactly the same impact.
Higher inflation would lead to higher interest rates and higher debt repayments.
Rachel Reeves herself said such an approach would spook the markets.
It would be an illusory dash for growth which would increase the burden on taxpayers, shake confidence in the UK and pass on unsustainable debt to future generations.
So we need to find a smarter way out of the challenge faced by so many advanced economies.
Tackling inflation relentlessly must be the immediate priority. High growth needs businesses and investment and consumer confidence, none of those are possible with inflation.
High growth needs low inflation.
But tackling inflation is the starting point not the end point.
Higher living standards means growth in GDP per head, not just growth in GDP. That means growth driven by increases in productivity.
If we were as productive as Germany, our GDP per head would be 6,000 higher per annum. If it reached US levels, it would be 8,000 a year higher.
In my Bloomberg speech in January I identified the four pillars necessary to achieve productivity-rich growth. I called them the four Es: Education, Enterprise, Employment and Everywhere. Education, so we tap into peoples talents by investing more in skills; building an Enterprise economy by reducing the burden of tax and regulation; removing the barriers to Employment so businesses can recruit; and spreading growth Everywhere so all parts of the country are levelled up.
Now the productivity challenge applies to both the public and the private sector.
If we increase our productivity growth in the public sector by 0.5% a year, we stabilise the proportion of GDP consumed by the state by closing the gap between anticipated growth and anticipated spending up to 2050.[1]
And if we replicate that productivity growth in the private sector we start to increase living standards as well.
That would mean a boost not just to GDP, but GDP per capita. It would mean increasing tax revenues without increasing tax rates.
And it would put us on a sustainable path to lower taxes.
It is also the route followed by Margaret Thatcher whose union reforms, privatisations and support for competition delivered lasting growth and productivity.
Public sector productivity
Lets start with the public sector. It is the sector over which governments have the most direct control - and that matters because, excluding benefit system transfers, it accounts for about 20% of our national output.
The long-term pressures, whether an ageing population or the need for stronger armed forces, wont change.
But the way we meet those pressures can change. We can be much, much more efficient.
We start, I am afraid to say from a low base. Public sector output is 5.7% lower than pre-pandemic compared to private sector output which is 1.3% higher.
What does that tell you? Our innovators, job creators, entrepreneurs and risk takers have bounced back but the public sector is still feelings the effects of a once-in-a-lifetime pandemic.
But now, with that pandemic behind us, we need a renewed focus on public sector reform.
Patricia Hewitts review into how we significantly reduce the number of top down-targets in the NHS made a series of recommendations to help empower local leaders, something I am pleased the NHS has already started to take forward.
A recent review by the National Police Chiefs Council (NPCC) has already identified that 443,000 officer hours are spent filling in forms and dealing with unnecessary administrative tasks.
And Conservative Way Forward recently highlighted that 10,000 public sector workers are focused predominantly on equality, diversity and inclusion initiatives, with nearly 800 of those in local councils alone.
Breaking down barriers for disadvantaged groups should be everyones responsibility not something you tick a box to achieve at further cost to taxpayers.
So I have asked John Glen, the Chief Secretary to the Treasury, to lead a major public sector productivity programme across all government departments which we will report on in the Autumn.
He will assess how we can increase public sector productivity growth, both in the short and long term, and look at what it would take to deliver that additional 0.5% every year that would stop the state growing ever bigger as a proportion of our output.
We also need to be better at measuring productivity.
The UK is one of the few countries to include public sector output measures as well as input data in its productivity statistics, which is a good start. But we can still do better.
Crime, for example, is down approximately 50% since 2010, great achievement. That excludied fraud and computer misuse (which wasnt measured then.) But it barely makes a dent on their policing productivity figures because our productivity figures dont capture crime outcomes.
Likewise on defence we measure what we spend, but not how safe that makes us.
And where we do measure outputs and the quality of delivery, mainly in the NHS, we count the number of hospital treatments but not the value of preventative care, even though that saves lives and reduces cost.
So I have asked the National Statistician to review how we can improve the way we measure public sector productivity which he has agreed to do.
I want this to be the most ambitious public sector productivity review ever undertaken by a government, with the Treasury acting as an enabler of reform. So we will spend time getting this right.
But if we do, the rewards are clear.
More innovation in the NHS, building on the success, for example, of the new surgical hubs that reduce waiting times and will give us 1 million extra procedures by 2024-25.
More innovation in our education system, building on the success of places like Oak Academy which has helped deliver over 150 million online classes.
And more innovation across our public services by harnessing the potential of AI to boost public sector productivity, building on cutting edge initiatives like the NHS AI lab and the Foundational Model Taskforce.
More innovation. Better public services. Less pressure on the public purse. A growth mindset that delivers more for les