The Productivity Gap: Rishi’s Plan for Crypto Britain

“We are caught in what we might call a ‘great slowing down’ across the western world… Productivity, living standards, and dynamism are not growing fast enough.

Over the longer-term, the most important thing we can do is rejuvenate our productivity.”

That’s the then chancellor and now the new Prime Minister of Great Britain and Northern Ireland, Rishi Sunak, while delivering the Mais lecture in February.

“So the question we face today is urgent and it is consequential: How do we accelerate growth, and, in doing so, restore people’s faith in the free market?”

He asked, indicating clearly that whether Truss or Sunak, or indeed a Labour government, the question at number 10, number 11, and all Western capitals is the same.

Growth has been non existent in Europe for 14 years, and has been non existent in the United States too beyond the tech sector.

The Great Stagnation is credited with causing both Brexit and Trump, a rise of nationalism, a rise of authoritarianism, a generational wealth gap, and an overall sense that this problem has been ignored for far too long and now something must be done.

The ‘radical’ plan of Truss is not that something at least for now, but interestingly neither Sunak nor Labour have a much different plan.

That’s perhaps because a general consensus may be developing that the state has simply become too big, that taxes are far too high, that there’s just too much business regulations, and yet that the austerity of the last decade not only didn’t work, but has left us with more debt.

The only way out is growth, yet there’s as many views as Britaly has backbenching Prime Ministers on how to achieve that.

For Sunak, part of the answer is investing in Research and Development. That’s one key statistic that seems to very directly correlate with growth and overall economic dynamism, with Sunak promising during his summer election campaign to increase it by £5 billion to £20 billion a year.

That’s still not even 1% of the GDP. You need to get that to 3%, and that’s exactly what Sunak promises with a commitment to ensure total R&D spending reaches 2.4% of GDP by 2027.

“We need to build a 21st century economy that is fit for the future and science and innovation is pivotal to achieving that,” Sunak said.

Science, innovation, startups, entrepreneurship and capital formation also means crypto, with Sunak stating last year the Treasury is “consulting on pioneering reforms to support the safe adoption of cryptoassets and stablecoins.”

There’s plenty that can be done on that front. Somehow promoting the adoption of a GBP stablecoin, similar to USDt, could go some way towards keeping the pound global in the digital economy.

The most pressing issue for the crypto industry however is reforms of the century old capital formation laws that were enacted during the New Deal as the then answer to the then rising communism.

Some blame the very strict nature of these securities laws for the rise of monopolies, which can act as a drag on productivity.

These are not new laws, so why might they be a problem now when there has of course been productivity growth over the last century.

One potential answer may be digitization and the replacement of paper systems with code. That allows for global and direct capital formation from the public without going through intermediaries like brokers, VCs or banks.

This new efficiency can not be tapped by entrepreneurs because the law prohibits them, which means despite the digital transformation, capital formation still occurs the same way it did a century ago.

We thus have tech monopolies, and the worst part is that while the VC scene is fairly developed in US, it is almost non existent in Europe and fairly behind in UK.

Therefore while US can afford, and arguably is forced by those VCs to not reform those laws, UK can’t and neither can Europe.

So France came up with an attempt to slim down such requirements to simply the publishing of a legally/contractually binding prescribed disclosure document for startups.

As the shining Paris skyline attests, their capital has been doing well even though their GDP has also stagnated, but where global businesses are concerned, their relatively high tax rate makes it less appealing.

The French president Emmanuel Macron has tried to lower those tax rates, but that led to massive protests in 2019.

The United Kingdom however is also raising its corporate tax rate to 25% from 19%, a huge rise that brings it to the French levels of 26%, without the French access to all of Europe.

That’s significantly higher than the 21% rate in US, but lower than Germany’s 30%, which puts all of Europe at a competitive disadvantage.

Sunak however wants to lower the base income tax rate to 19% from 20%, and down to 16% by the end of next Parliament.

So taking with one hand and giving with the other as businesses presumably will just pay lower wages to compensate for the rise in corporate tax in view of the fall in income tax, raising the question of just how much more appealing UK can become for the crypto industry even though Sunak promised to review crypto taxation as well as a potentially more liberal framework for investments in stating:

“The government will legislate to establish a financial market infrastructure (FMI) ‘Sandbox’ that will enable firms to experiment and innovate in providing the infrastructure services that underpin markets, in particular by enabling Distributed Ledger Technology to be tested.”

Just when the new government will get to the crypto part is to be seen with the focus for now being on inflation.

Sunak may therefore scrap Truss’ energy cap for far more targeted assistance to the poorest households.

Thankfully that’s while natural gas prices have fallen to $5, so the removal of the cap might not affect inflation as much as in August.

The solution to inflation instead seems to be balancing the books to remove the deficit, that is new government borrowing.

Just how you do that exactly is anyone’s guess with the initial strategy being spending cuts and higher taxes, which may well lower the tax intake if the economy does not do too well.

There’s no detail on just what efficiencies and where they’ll find them, with the budget to be delivered on Monday.

Nor does anyone think the deficit can really be addressed without tackling the low productivity which has fallen from growing 2.3% a year from 1974 to 2008, to just 0.5% a year since.

One key reason is low business investment, Sunak says. He therefore wants to cut taxes on capital investment as he says UK’s “overall tax treatment provided for capital investment is much less generous than the OECD average.”

He also wants to use the tax system to encourage business investment in research and development, as well as on innovation more widely and on training employees.

He is against government intervention, or support, in industry, calling it picking winners and losers.

Nor does he talk much about infrastructure investment, with the new tech industrialization limited to just tax treatment.

While Germany has plans for hydrogen pipelines, among many investments in new industries, UK is very much playing catch up.

Germany’s federal spending on R&D however is €40 billion, and total investment including from the industry is $140 billion, while for UK it’s at just $50 billion.

That’s far too low with innovation also being a national security matter as satellite internet is now showing.

The main takeaway from the new premiership however is that the focus will very much be on innovation, and that means promoting the crypto industry as well.

But whether it will be enough to address the productivity gap is to be seen, with UK probably also needing some industry strategy because whether Sunak likes it or not, the government does pick winners and losers as it is the biggest spender and by far.

The rise of SpaceX moreover shows that private-public partnerships can do wonders, while UK does not even have a space industry, relatively speaking, with a federal budget of just half a billion compared to France’s $9 billion.

Expecting any growth from just a £5 billion investment in R&D therefore might be unrealistic, while any shuffling of taxes to incentivize business investment might be cancelled by a rise in corporate taxes with Sunak initially also planning to increase national insurance.

Labour on the other hand plans to invest £8 billion on new British industry, keeping a share of these investments to create a National Wealth Fund.

That £8 billion would be spent towards eight new battery factories, six clean steel plants, nine renewable-ready ports, a hydrogen electrolyser plant and net zero clusters.

That’s part of a wider Green New Deal, with Labour sort of copying Democrats in planing to further promote Made in UK.

Sunak therefore may have to develop further his plan for the economy as we near the election period next autumn, with the two sides probably moving closer to each other’s position in a new consensus in the West.

That consensus is still forming and remains fuzzy, but the betrayal by Russia which turned on Europe after it was welcomed, and the rigidity of China’s government is leading towards a gradual industrial re-alignment which some call de-globalization while others might describe it as more globalization for democracies and some other allies like the Gulf.

Onshoring is very popular right now and the public wants the government to be seen to be doing something to promote it, with Labour so promising some new national industry council as well as new policies on merges and acquisitions.

Their Made in UK therefore is naturally popular, and investing in battery factories is probably exactly the sort of thing you’d expect from a government that wants to secure the new future because batteries will be vital in a solar powered world where transport is electrified.

As a fairly new technology in this sort of usage, any innovation in batteries can leap gains, and therefore you want their production to be domestic to be the first to potentially benefit from such innovation.

In addition the stagnation also kind of coincides with the then new consensus of becoming a service economy which hasn’t worked too well because the new service was digital tech and US kind of took all of it, and even there it’s mostly California that benefited with it now overtaking Germany’s GDP.

A lot of both US and UK regions instead saw significant decline, with the thought so being that the new industrial technologies – chips, batteries, renewables, and in due course robotics – can potentially revive these regions again or the portion of the population that is more hands on rather than academic.

Ignored for so long therefore, industry is moving towards the front-seat with Labour’s plan probably being a vote winner, which may well mean Sunak has to copy some of it to at least try and keep his job come election time.

The other realization is that the state has become a bit too big and that’s probably because the private sector has not grown.

Both Sunak and Labour therefore plan some tax cuts, though they claim they won’t be unfunded.

Yet neither has quite addressed just how exactly they’ll deal with the rising interest rates which will increase significantly the amount they will pay on new debt.

And that’s probably because we all know they’ll just cover it with more debt as the public is unlikely to accept any spending cuts after a decade of austerity, and doesn’t really want to pay more taxes either.

Leaving whoever goes in or out of Number 10 with Trussonomics, even if they really don’t want to call it that, albeit at a slower rate and with the veneer of orthodoxy when that orthodoxy has failed as it has given us huge debt levels without any growth.

Debt fueled spending usually leads to a boom, but somehow they’ve achieved a productivity slump instead, suggesting there’s something a bit wrong with the way the government is spending the money.

Just what, would probably need an analysis of how contracts are rewarded, a technical matter that bores the public and therefore isn’t covered much in the media.

But the billions spent on High Speed 2 and it taking some two decades to build clearly suggests that the government may be paying too much for too slow of a delivery.

The debt-fueled part therefore might have been eaten out by the private sector just overcharging the government, with a lot of these contracts rewarded based on lobbying and ‘donations.’

As such, rather than spending cuts, a look at these pipelines might be more effective, but that would require going against entrenched interests which know how to donate.

Save for an increase in R&D spending therefore, UK may be in for a redo of 2010, but only for a few months because there’s an election coming and whatever bond markets might say, the public wants both tax cuts and higher spending on tech industrialization and they’ll vote accordingly.

Which is why Sunak may try and rush unpopular policies to give some carrots next autumn, but Labour has found an effective attack line in blaming the conservatives for the stagnation. Therefore he’ll need to deliver growth if he is to keep his job and increasing taxes while cutting spending will probably deliver the opposite.

And however much he might try to blame markets, it didn’t work for Labour in 2010, so it probably won’t work in 2023 either if these policies deliver a recession.

Making Sunak’s job the most difficult in G7 because he is telling the public what it does not want to hear, and that public did not even vote for him, and hearing another conservative Prime Minister say there’s no money left after a decade of hearing the same mantra, probably won’t go down very well.

But he’ll have some months to persuade the public he can address the stagnation, with Sunak still being a very new public figure that has enjoyed a very fast rise and therefore may attract some benefit of doubt as UK waits to see just what he will do exactly.