How fire and cookies are choking growth

Morning all,

If you publish enough documents called a strategy does it amount to having a strategy? Well, if you were hoping for a quiet life after the Spending Review the Government has other plans (and so, tragically, does the world but we leave that to other commentators).

We’ve tackled the infrastructure strategy (published yesterday) in Chart of the week, and check out Something for the Weekend for everything you need to know about the upcoming industrial strategy.

No rest at Resolution towers either. We’ll be talking about regional pay inequality on Monday and launching our annual Living standards outlook on Thursday – hope to see many of you there.

Have a great weekend – enjoy the summer solstice!

Ruth

Chief Executive
Resolution Foundation

Handheld echo chambers. The rustle of excitement you heard passing through economics BlueSky this week (which is on the way out, according to some) was due to the publication of a new Acemoglu paper. We know social media can polarize opinions, but it now appears AI-driven recommendations worsen this effect by creating echo chambers, serving users content they already agree with, and are more likely to engage with. As well as creating informational bubbles, AI-driven recommendations for paid digital ads also exacerbate polarisation – an effect most pronounced among ‘naive’ users (who believe political ads are generally factual). The really dangerous feedback loop here is that once voters have been polarised (radicalised?) by their online communities, political parties react by drifting closer to those positions themselves.

Burning down the house. What a lovely sunny week! Not that the heatwave is being welcomed by Lib Dem voters… Maybe they’re just worried about wildfire risk massively increasing in the UK. So, what a good time to consider this paper.  It focuses on how American wildfires between 2007 and 2019 affected the labour market. The impacts are slight but can accumulate quickly in smokey years. So, each day with wildfire smoke reduces quarterly earnings by around 0.1 per cent – but over the course of a typical year that means average earnings were reduced by “nearly 2 percent of U.S. annual labor income ($125 billion in 2018 dollars)”. Turns out, everything being on fire is bad for business! Remember to wear sun cream this weekend.

Latching onto the ladder. More mortgage lending will help First Time Buyers (FTB) onto the housing ladder – right? Not according to the Bank Underground. Historically (2005 – 2020) increases in mortgage lending have not improved rates of British home ownership, potentially even making it *harder* for FTB to get on the housing ladder and pushing up house prices. A 1 per cent increase in available mortgage credit increases UK house prices by 0.6 per cent. This vibes with the most basic tenets of economics, no? Increases in demand without an uplift in supply will bring up house prices. Given that they’ve already doubled in the past two decades (and earnings… not so much), we need to think harder about which policies will effectively support young people with the cost of housing.

Cursed cookies. Nobody appreciates a cookies banner (Reject! Reject! Reject!) but turns out GDPR might have had even more serious consequences. Analysis (more recent paywalled version here) has found it was bad for venture capital investment in the EU, causing these deals to decline by more than a fifth. Since GDPR came into force in the EU (including the UK, who were still technically members during the 2014-2019 period studied), the additional cost and uncertainty seem to have turned away many American investors. Specifically, the authors found a 21 per cent drop in the number of monthly EU deals led by US investors. This is not small change, amounting to $1.58 billion in lost investment. Although many people would argue that this is a reasonable price to pay for data security, it certainly wasn’t an intended effect of the legislation. So just remember the price we paid so that you could click “reject all”.

Something for the weekend? | Mission industrial

The word on Old Queen Street is that the long-awaited Industrial Strategy (IS) will drop next week. Now, the good thing about a strategy is that it’s long-term (we’re big fans). While this isn’t the UK’s first rodeo, we’ve heard positive noises. But a lot’s changed since the Green Paper was launched in November. Will the strategy be nimble enough (others have noted the need for flexibility) to adapt to future economic and geopolitical shocks? Will it be bold enough to boost economic growth? Here’s what you need to know.

The strategy focuses on eight high-growth potential sectors (advanced manufacturing, clean energy, creative, defence, digital and technologies, financial services, life sciences, and professional services). We can assume the role of defence has grown.

As the country (and half of the RF office) braces for Glastonbury, what better time to think about effectively steering the behemoth British creative sector (worth 5.2 per cent of GVA in 2023). This is a good example of where earlier industrial policy has paid off. But the activism of other governments (look at the notorious Hobbit law in New Zealand) means we need to step up to the plate again to keep the UK competitive.

One area of the Green Paper last Autumn we said lacked clarity was an objective on regional growth. Focusing on high-potential sectors is good for growth but will most likely widen existing regional inequalities. Is this a trade-off Britain is willing to accept? Watch this space.

I’ve also heard conflicting takes on what actually happened to R&D spending in the SR, with some hailing growth-boosting investment, and others feeling short-changed. Let’s clear this up. According to HMT’s numbers, R&D spending (mostly via DSIT) will be 10 per cent higher in real terms this financial year than it was in 2023. That suggests 5 per cent annualised growth – inarguably a decent settlement against a constrained fiscal backdrop. Like much of the SR, though, it was frontloaded and defence-focused. So, we will have to see if it is sufficient to deliver an ambitious Industrial Strategy.

Chart of the week

Last week, the Chancellor detailed how she would spend over £200 billion on public services and was still accused of ushering back austerity. So she went all in yesterday with a new £725 billion, 10-year infrastructure strategy. How big is this capital spending splurge really? As COTW shows, that huge figure is not enough to stop such infrastructure spending falling as a share of the economy. The Government says it’s a floor, not a ceiling but they will need to get over the small hurdle of winning an election to implement it. We have previously called for long-term investment planning, to end the boom and bust we’ve long seen in investment spending. Happily, public investment is now set to remain well above its 1970-2020 average. And what are we spending £725 billion on? We’re little the wiser after yesterday, with specific projects beyond five years accounting for only a sixth of the headline figure. That’s sensible – it’s too soon to know now what we should be investing in come 2035. But it does make the £725 billion headline seem somewhat aspirational.