Civil service red tape ‘a £50bn tax on Britain’s growth’

Civil service bureaucracy is acting “like a tax” on the economy and must be overhauled to close a £50bn-a-year investment gap between the UK and other rich nations, according to a major government review.

Lord Harrington, who was commissioned by Jeremy Hunt to lead a report into UK foreign direct investment (FDI), will warn on Wednesday that a revolving door of senior ministers and “willing amateur” civil servants are holding back the economy.

In a report published alongside the Autumn Statement, the Tory peer will urge the Chancellor to make attracting investment a priority in Whitehall.

It will call for a new “business investment strategy” led by a senior cabinet minister with dedicated resources to attract foreign cash and create more British jobs.

The Telegraph understands that Lord Harrington will reject assertions that a decline in inward UK investment over the past few years has been driven by Brexit.

However, the review, which was partly sparked by AstraZeneca’s criticism of the UK’s “discouraging” tax regime after it chose to build a new factory in Ireland, will also say that Rishi Sunak’s decision to hike corporation tax from 19pc to 25pc is not solely to blame.

Foreign direct investment (FDI) is crucial because it involves international companies building facilities, hiring workers and creating new products and services in the UK rather than just buying shares in British companies.

The number of FDI projects in the UK has fallen sharply over the past few years, according to the Department for Business and Trade, while investment as a share of GDP has consistently lagged behind other G7 nations.

Extracts of the 125-page report seen by the Telegraph lay bare the concerns of more than 200 businesses, banks and sovereign wealth funds which repeatedly highlight a lack of investment expertise across Whitehall. 

It adds that a “risk-averse” system consistently outsources investment decisions to other bodies including the British Business Bank and UK Infrastructure Bank, creating further delays and bureaucracy. 

“We have heard time and time again about government systems that are too often disorganised, risk-averse, siloed and inflexible when it comes to the needs of modern investors,” Lord Harrington, who served as a business minister under Theresa May, will say.

“We have developed a system where civil servants and politicians alike will do anything to de-risk a decision, by shoving financial decisions to a series of semi-arms length institutions as well as a series of ‘competitions’ as a system on allocating taxpayers’ money.”

Highlighting that there have been seven business secretaries and as many chancellors since the 2015 election, it adds that constant turnover in the civil service has also resulted in a “lack of depth in officials’ business experience”.

The report says: “They often move on quickly, creating a sense in industry of dealing with a ‘willing amateur’,” which creates “a sense of investment and investors not being prioritised at the highest levels of government”.

Lord Harrington will say the UK’s language, location and market size has made Britain one of the most attractive places for overseas companies to invest.

But he will add that the UK is squandering some of its potential and has consistently lagged behind other G7 economies on investment when measured as a share of the economy since the start of the millennium.

He will say: “Competitors have about 12pc of GDP in business investment both domestic and foreign, our equivalent is 10pc.

“The difference is about £50bn per year. If we can attract a sizeable portion of that from abroad, the effects on the economy would be very significant, helping to make the country more prosperous, with better-paid jobs, and tax receipts to fund public services.”

The report also warns that Britain’s planning system is one of the biggest barriers to both domestic and overseas investment. It will call for urgent action to speed up the time needed to deliver energy infrastructure as Britain transitions to net zero.

It is understood that the Government will accept all six of Lord Harrington’s recommendations, which include strengthening government accountability, fixing the current disjointed approach to investment and beefing up the Office for Investment, a dedicated body that works across government to attract investment into the UK.

The Treasury declined to comment. Lord Harrington declined to comment.

Why Jeremy Hunt must take a leaf out of Emmanuel Macron’s book to boost Britain’s growth

Analysis by Szu Ping Chan

Emmanuel Macron presides over a country that has arguably turned red tape into an art form. Yet when it comes to doing business, many of the world’s top chief executives and chairmen would rather deal with the Élysée Palace than Downing Street.

That’s according to a major review of the UK’s global attractiveness expected to be published on Wednesday alongside the Autumn Statement.

Its author, Lord Harrington, has spent the past six months talking to more than 200 global leaders about what motivates them to invest.

Executives often cited France as an attractive country to put money into, not because its tax regime is competitive or because doing business there is easy but because the French president makes an effort to pick up the phone.

Many told Lord Harrington that they had become accustomed “to receiving texts directly from President Macron, being invited to the Palace of Versailles and having ‘the red carpet rolled out’,” according to extracts of the report seen by The Telegraph.

By contrast, investors seeking to do deals in Britain are most often greeted by “willing amateurs” and passed from department to department. Those who do persevere must then navigate Britain’s tax system, a regime compared to “the world’s worst maze” by one entrepreneur.

Lord Harrington, a former business minister, remarks that a “striking number” of businesses all say the same thing: keeping in touch is the “foundation of winning investment”, the report commissioned by Jeremy Hunt reads.

The strategy has helped France attract the most inward foreign direct investment (FDI) projects in Europe in 2022 for the fourth year running, with 1,259 new projects or expansions, according to EY. The UK was a distant second, with 929 projects.

The Harrington report warns that Britain’s disjointed approach to investment often leaves executives dealing with a revolving door of senior ministers and civil servants.

One major investor expressed frustration with “having to troop from department to department to meet different secretaries of state covering different areas of responsibility related to their investment, many of whom will have changed office before an agreement was secured”. This “added up to a sense of investment and investors not being prioritised at the highest levels of government”.

Bureaucracy and repeated policy changes have created an investment gap between the UK and other rich nations over the past few decades.

While average business investment in the G7 club of rich economies has been 12pc of GDP since 2000, it stands at just 10pc in the UK.

“The difference is about £50bn per year,” according to Lord Harrington’s report. “If we can attract a sizeable portion of that from abroad, the effects on the economy would be very significant, helping to make the country more prosperous, with better-paid jobs, and tax receipts to fund public services.”

The solution? Reform at the heart of government. Lord Harrington believes Rishi Sunak should be acting more like the chief executive of a company, with the Civil Service working to ensure deals get done.

In short, if the Government wants to send a signal that it’s open for business, it should act more like one.

No chief executive is effective without a competent finance chief and Lord Harrington wants the Chancellor to lead a new cross-government “Investment Committee” responsible for driving growth.

A new Investment Minister should also be appointed and given the “seniority, visibility, and authority to reflect the importance of investment to government” with regular input to Number 10.

While not necessarily a cabinet minister, Lord Harrington recommends they should “attend cabinet where necessary to update on how the Government’s strategic approach to investment is being implemented”.

Civil servants should also be “incentivised to stay and pursue their careers within specific sectors to build expertise, in a model comparable to industry,” the report adds.

As it stands, climbing the career ladder often leads to high turnover within the Civil Service, creating what Lord Harrington describes as “a sense in industry of dealing with a willing amateur” instead of seasoned professionals.

Lord Harrington believes the Office for Investment, which is responsible for attracting overseas cash, should be beefed up with clear lines of communication between the UK and prospective investors.

Tax also matters and Lord Harrington has previously said that the move by Rishi Sunak to raise corporation tax has not helped the UK’s case for overseas investment.

It’s not a coincidence that low-tax economies such as Ireland and Singapore are attracting the most so-called “greenfield” FDI, where companies build investment from the ground up, as a share of the economy.

“A clear point of consensus amongst all investors was that UK tax rates would benefit from reduced complexity and longer-term consistency,” the report says.

There are other barriers to growth, including a planning system that all too often prioritises “local over national interest”. The report points out that the UK is one of just a few countries where the amount of built-up land per capita has actually fallen since 2000. Reform to the energy grid is also vital to unlock growth.

For all the UK’s flaws, sources said Lord Harrington remains optimistic in the report. The UK’s total stock of FDI remains the highest in the G20. Tata’s decision to invest £4bn in a battery gigafactory shows that companies are still betting on Britain.

However, Lord Harrington believes the deal says something about a world where “capitalism has changed”. Investment was only secured with a £500m government subsidy.

Joe Biden’s Inflation Reduction Act and the EU’s Green Deal are funnelling subsidies worth hundreds of billions of pounds to companies in return for investment.

While the UK can’t compete pound for pound, Sunak must accept we now live in a world where “many of our competitors chase investments via their industrial strategies, backed by substantial government support”.

“They identify which ‘races’ they want to be in, which sectors and sub-sectors they have a competitive advantage in, and how they are going to attract the finest businesses in the world to their country,” the report says.

While the UK may not be engaged in the business of “picking winners”, publicly-funded state support measures can and have been effective. One example is so-called contracts for difference that guarantee energy prices to suppliers and have helped to trigger “high levels of investment” in renewable energy.

Lord Harrington’s report was commissioned after AstraZeneca decided to open a factory in Ireland instead of the UK.

Tom Keith-Roach, the UK boss of the drugs giant, believes the UK is now at a fork in the road.

Keith-Roach is quoted in the report as saying: “The UK is fighting for inward investment in an increasingly competitive global market, with other countries becoming far more proactive, aggressive, and fast acting. This doesn’t seem to be well understood in the UK government and we risk being left behind.”

All six of Lord Harrington’s recommendations are understood to have been accepted by Hunt and he and the Prime Minister will soon have a chance to put some of the report’s advice into practice.

Next week, Sunak will welcome some of the world’s biggest financiers to a summit designed to drum up much-needed UK investment.

Jamie Dimon, the chief executive of JP Morgan, and David Solomon, chief executive of Goldman Sachs will join the bosses of Britain’s top bankers at the summit at Hampton Court. Buckingham Palace will also play a role, with the King drafted in to charm business leaders at the event on November 27.

On that day, Hunt and Sunak will be able to make the case for why investors should choose Britain – but, if Lord Harrington’s report is to be believed, what will really make the difference is if they keep in touch after the champagne stops flowing.