How large might Labour’s ‘dullness dividend’ be?

“Make Britain Boring Again” probably isn’t going to be emblazoned on the side of a bus any time soon. Which is a pity, as it neatly captures Labour’s promise to the electorate. Vote for them, and they will deliver the certainty that businesses crave, supporting investment and growth. It may not be catchy, but it is cheap. How much could it deliver?

In theory, uncertainty can matter a lot. It can chill investment, if executives decide to wait for more information before sinking cash into an irreversible project. It could raise the cost of financing, by affecting lenders’ perceptions of risk. It could frustrate companies reliant on government contracts. And it could put off multinational investors entirely, pushing them to put their money elsewhere.

There is plenty of anecdotal evidence to suggest policy uncertainty has been a problem. The Harrington Review of Foreign Direct Investment published last November reported complaints from businesses that they had withheld investments from Britain because of it. Louise Hellem of the CBI says that although Britain was previously a global leader for investment around net zero, “changes in the tone and substance of recent policy announcements have really put a dent in that, and made the UK seem like a less secure place for investment”.

There is more systematic data too. Even in April this year, a survey of businesses found that two-thirds said Brexit was an important source of uncertainty. Another “Economic Policy Uncertainty” (EPU) index, based on articles referencing “uncertainty” alongside policy-related words, finds obvious spikes around Brexit and Liz Truss’s premiership.

The sort of stability shadow chancellor Rachel Reeves is offering involves fiscal policy with less fizz. She has committed to just one Autumn Budget a year, no more fiddling with the fiscal rules and a “road map for business taxation” capping the corporation tax rate. Reeves will ask the independent Office for Budget Responsibility to publish the long-term effects of public investments, presumably making it more awkward to cancel them.

Step one of quantifying the effects of all this is guesstimating how much uncertainty might fall. The UK’s EPU index has already dropped quite a bit since Truss’s “lettuce-gate”, hovering at about 110 over the first four months of this year. An optimistic projection could see it fall as low as 50, where it roughly was between 2004 and mid-2007. A more realistic reduction might leave it closer to 100, its average before 2011.

Step two involves connecting these falls in uncertainty to changes in economic outcomes. A study of America and 12 other countries by Scott Baker of Northwestern University, Nick Bloom and Steve Davis of Stanford University published in 2016 establishes the relevant correlations. It finds that higher uncertainty predicts bad things, including lower industrial production and employment.

Assuming those relationships estimated for the panel of 12 countries still hold, a fall in the EPU index of 10 points could be associated with an increase in industrial production of 0.1 per cent. (The optimistic projection of a drop of 60 points could boost it by 0.7 per cent.) Given Britain’s anaemic growth, that is certainly not to be sniffed at, though in the long run it is more likely to affect the level of production than the growth rate.

The authors only estimate the effects on investment for America, not the 12 countries including Britain. But the impact on industrial production look remarkably similar. Applying Labour’s dullness dividend to America, there could be a slightly bigger boost to GDP than to industrial production, and a bump to investment of as much as 0.7-4 per cent. I’d take it, and I’m sure Labour would too.

Now for the caveats. Proving causal connections in the data is tough. These figures could be overestimates if they muddle the effects of uncertainty with those of changing expectations about the future. (To give a more recent example, did investment fall because firms didn’t know what Brexit would bring, or because they expected it to be bad?) Even a drop of 10 points in the EPU index could be challenging if, say, uncertainty around monetary policy lingers. Even Reeves suggests that stability may be a necessary but not sufficient condition to generate investment.

On the other hand, the numbers could be underestimates if they miss the effects of a creeping background level of uncertainty, which might not be newsworthy but puts off international investors and undermines companies’ ability to plan. A column about uncertainty wouldn’t be complete without pointing out that the figures are uncertain.

soumaya.keynes@ft.com

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