Good afternoon. Labour has made much of its plans for growth, starting with a splashy investment summit last October, to be followed by a promised industrial strategy in the spring that will act as the hub around which a series of new policy initiatives will turn.
With money hard to come by, the government needs to “crowd in” foreign and domestic investment, which is why it’s useful to listen to what investors actually want when formulating policies and initiatives designed to attract them.
To that end, this week I chaired three interactive panels of business people and government officials at the launch of the annual Spanish Investment Barometer – an annual report by the Spanish Chamber of Commerce in the UK that tracks sentiment among Spanish investors in Britain.
Spain is consistently among the UK’s Top 10 inward investors, focusing mainly on financial services, telecoms, real estate and air transport. According to ONS analysis Spain contributed an average of over €11bn a year in net FDI flows to the UK between 2013-22. Not as much as France or Germany but more than Belgium or Italy.
So what do Spanish investors expect from the new Labour government? In short, better business mobility, a meaningful ‘reset’ with Brussels and more investment in filling the skills gaps that make it hard to grow businesses. Or as the report put it:
An improvement in relations between the UK and EU, and attention to certain dysfunctions in the British labour market emerged as two of the main economic policy areas where the Spanish firms surveyed hope the new British government will introduce changes.
Nearly seven out of 10 of the firms surveyed felt the election of Labour could provide a “turning point” for relations with the EU, while nearly as many (63 per cent) said they expected to see far-reaching changes to the British labour market as a result of the election.
No pressure then.
There was plenty of Anglo-Spanish backslapping at the event at the Spanish Embassy in London’s Belgrave Square, but there was a moment of bluntness from Amparo López Senovilla, the Spanish minister for trade.
“[We know] the difficulties faced by Spanish companies in recruiting workers to meet their needs and companies tell us [UK] government immigration rules do not meet their necessities,” she said.
So while the Barometer found that Spanish business sentiment toward the UK has improved, with investment flows rebounding in early 2024 reflecting in part a ‘stability dividend’ from Labour being elected, this new optimism comes with expectations attached.
Promises, promises.
The UK government is doing its best to roll out the red carpet – investment minister Baroness Poppy Gustafsson was recently in Madrid visiting Spanish tech and consulting firm Indra – but words can only go so far.
Douglas Alexander, the UK’s trade minister, talked the usual talk. He said the Labour government recognised the “fundamental and enduring importance” of deepening trade ties with the EU, adding this was “critical to our growth mission” and repeated the manifesto promise to “tear down the barriers to trade” with Europe.
But as everyone knows – and yes, it’s boring but necessary to repeat this – the Labour government is committed to the very same red lines that erected those barriers to trade in the first place.
And even beyond those technical ‘red lines’ – no single market, customs union or free movement of people – new political red lines are emerging.
After last week’s net migration figures came out, Sir Keir Starmer promised further curbs on legal migration. It is pretty clear that the domestic politics of immigration mean that the ability to import talent to service investment in the UK is unlikely to get easier.
Eduardo Barrachina, president of the Spanish Chamber of Commerce in the UK sounded resigned to the status quo. “Mobility remains an issue, and it seems as if it may remain so for a while…to the extent arrangements can be made more agile and easier, it’s something that companies will value,” he said.
Fixing what can be fixed
Spanish business leaders at the event suggested dropping the £1,035 per annum NHS Surcharge; making visas for professionals cheaper and easier to obtain; or, ideally, agreeing mutual business mobility arrangements as part of the ‘reset’.
This feels unlikely given, as I reported this week, that even a youth mobility scheme is looking politically deeply problematic for this government.
One panellist bravely argued that the UK government “needed to argue the case” to the British public that professional immigration facilitates investment. Again Starmer’s fearful performance last week suggests that will not happen.
On UK skills gaps, Alexander acknowledged that only 35 per cent of companies surveyed in the Barometer said their needs were being met, but in the absence of importing skills, consoled his Spanish audience with the announcement of Skills England.
That’s the new quango that Alexander said will provide “vital strategic oversight” of the UK’s post-16 system, but as last week’s newsletter observed, there are growing concerns that that body is already looking very under-gassed.
Other issues raised include the frictions caused by the EU’s coming carbon tax, or CBAM, and genuine bafflement that the UK is not taking more urgent steps to ensure that this doesn’t become another barrier to trade – which it already is, as I reported last week in that story about Infinity Engineering. This is an area the UK government can fix if it wants to.
Supply chains also remain a huge struggle. One panellist suggested that more could be done to streamline trade via the existing committees of the Trade and Cooperation Agreement, but outside the customs union and single market, there are clearly limits.
Take the chemicals business Holiferm – a great British success story based on tech spun out from Manchester University – which has seen shipping times to the EU go from three days to two weeks, and regulatory burdens adding 20 per cent to their costs.
As Richard Lock, the managing director told me, when the time comes to scale up production to serve European clients, these are frictions that will point them to building factories in the EU, not the UK.
These are the factories that ‘might have been’, the ones that the British voters don’t see (because they are never built) but add to the silent drag on growth and investment that the Governor of the Bank of England Andrew Bailey reminded us last month is costing the UK.
Time to start talking
While there is a growing sense of internal paralysis in UK government thinking on the ‘reset’, beyond Whitehall there is some good thinking being done about how to address some of these issues, notwithstanding the ‘red lines’.
This paper from Ignacio García Bercero at the Bruegel think-tank has some interesting ideas (not all of which the European Commission will like) and this paper on the promised EU-UK veterinary agreement from the Centre for Inclusive Trade Policy is good on the challenges of reconverging EU and UK regulations.
But saying is not doing: having raised the expectations of investors (domestic and foreign) Labour will need more than warm words, or next year’s Investment Barometer may point to a less sunny outlook for investing in Britain than the current one.
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Britain in numbers
It’s often said, at least by the politicians, that the UK civil service is ‘not fit for purpose’ but this week’s chart suggests that things aren’t quite as bad sometimes portrayed.
It comes from a new international index of civil services created by the Blavatnik School of Government in Oxford which ranks bureaucracies around the world according to four broad metrics.
These are: Strategy and Leadership (the ability to set direction), Public Policy (core public administrative functions) National Delivery (direct public service delivery at a national level) and People and Processes (what it’s like to work for the public administration).
It’s a complex rating system, but the UK comes a creditable 6th place, with Singapore at the top and, in Western Europe, only Norway, Denmark and Finland are ranked higher. Those are small, rich countries. The UK places above more comparable EU countries, like France, Spain and Germany.
Digging a bit into the detail:
Excluding the Nordic nations, the United Kingdom is the highest ranking country in Western Europe for the Strategy and Leadership domain (ranking 7th) and the Public Policy domain (ranking 3rd), and with France is the joint highest ranking country for the People and Processes domain (joint 10th). Germany is the highest ranking country for the National Delivery domain (ranking 2nd).
I don’t suppose the UK ranking will suddenly convince everyone that all is well in Whitehall, but it might be something that Sir Chris Wormald, the newly anointed Cabinet Secretary, can use to rally the troops when he takes over as the UK’s new top civil servant this December.
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