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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a fellow at the Centre for European Reform and the author of ‘French lessons for Britain’s economy’
If I moved out of the city and into a bigger, suburban house, would that make it more likely I’d get a pay rise in the future? Clearly, the answer is no. I’d have more living space and a bigger garden and if I valued those things more than bars and restaurants on my doorstep, I’d be happier. But my employer is not going to reward me for my move with a pay rise, because it wouldn’t make me any more skilled or productive.
But listening to the debate in the UK, you would be forgiven for thinking that planning reform will supercharge growth. This consensus has it backwards, however. We can afford better houses when productivity rises. Dismal productivity growth since the financial crisis has meant that wages have stagnated, so we have not had the money to make big improvements to housing. And the reason productivity has stagnated is that the private sector has not been investing enough.
There was no outbreak of “planningitis” in 2008, when private sector investment sank, nor in 2016 when the Brexit vote snuffed out its recovery.
It may seem strange to praise France, given the political turmoil in Paris, but on important metrics it has been outperforming Britain. Since 2008, UK property investment has been growing more quickly than in France, partly because the population has been growing more rapidly. But output per hour worked in France has kept pace with the US since then, while Britain has fallen behind. Average French incomes are similar to British ones largely because they choose to bank productivity gains by working fewer hours. And the main reason for that growing productivity gap is lower business investment.
To be fair, the global financial crisis blew a bigger hole in the UK’s economic model. Productivity in finance fell more in the City of London than in Paris, and the hit to the UK’s manufacturing sector was larger. But the decision to leave the EU has further damaged those two relatively productive sectors, which are also important sources of export income.
Yet there are hopeful signs that other sectors are taking their place, and these should be at the heart of Labour’s new industrial strategy. Despite the crash and Brexit, the UK still has an exporting advantage in professional services. And, while the US tech sector has streaked ahead, growth in the UK’s tech output and exports has been improving rapidly. These industries are less affected by the trade barriers that Brexit has imposed, and are less at risk from Donald Trump’s tariff wars, which will largely affect goods trade.
How might the government help these sectors grow even more rapidly? The French offer some ideas. Britain’s “‘full expensing” system, which chancellor Rachel Reeves made permanent in her Budget, largely provides tax benefits to physical capital such as machinery and buildings. France provides tax breaks for a broader range of intangible assets, including software and branding, which are important to the knowledge economy.
Improvements in skills levels have been a bigger driver of French growth over the past two decades than in Britain. While the salaries required to get a visa are similar, France’s visas for knowledge workers are more competitive. The “talent passport”, a four-year visa for knowledge workers from outside the EU, costs €225. The UK equivalent costs £719, and it imposes an “immigration health surcharge” for use of the NHS.
All this is not to say that newer, shinier buildings wouldn’t help, if they make cities — the engines of the knowledge economy — more productive places. France’s urban areas are denser. And because transport infrastructure is better, French people spend less time commuting, making the labour markets in cities bigger and offering workers more potential jobs. But housing spread across the country will not “spark growth”; for that to happen, Britain needs to help the industries that Brexit hasn’t hobbled.
