Britain's economy is not doing too badly, but that has nothing at all to do with Labour, says HAMISH MCRAE

Whisper it low, but the UK economy isn’t doing too badly. It has nothing to do with this Government. 

And it’s perfectly possible that John Healey will make as big a mess of things in his Budget this month as his predecessor, Rachel Reeves, managed to achieve.

No, the modest progress is partly the result of the natural resilience of British businesses, and partly because many of them seem to be rather good at deploying artificial intelligence to cut costs and boost output.

It’s irritating when ministers say we’re the fastest-growing big economy in Europe as that’s a low bar. We’re doing far worse than the US, Canada and Australia.

But, in the 12 months to the end of August, growth has been 2.1 per cent – not bad at all. 

And, while construction is down, services, manufacturing and investment seem to be picking up. So why the uplift? Insofar as you can generalise, it looks like the toxic effects of Reeves’ two budgets have begun to fade.

Faced with a big increase in labour costs, companies had to put up prices and trim payrolls. Roughly 150,000 jobs have gone over the past two years.

But, while there’s still plenty of gloom, firms have managed to increase output by using contractors and, in particular, by deploying artificial intelligence.

The argument for using AI instead of making a new hire is obvious. An AI ‘employee’ doesn’t pull sickies and won’t take you to a tribunal if things go wrong.

Crucially, you don’t have to pay their National Insurance or contribute to their pension.

For many small firms, this not only means you can expand without the risk of taking people. It also frees up senior staff who don’t have to do so much drudge work running the operation.

It may be that AI tilts the advantage held by big enterprises back to smaller ones. Let’s not forget that small and medium-sized enterprises produce half the private sector’s output and employ 60 per cent of its people.

Of course, there are tasks that can’t be done by AI. It can’t pull a pint. But some sectors that are hugely important to the economy are already being transformed.

Nearly 60 per cent of UK exports are services rather than goods, and, of that, more than half are business and financial services – so 30 per cent of all exports. This is the area where AI is already changing everything.

Around three-quarters of companies report using AI in some way or other, and for legal services it’s more than 90 per cent.

And, if you look at growth – that 2.1 per cent figure – half is coming from sectors such as consultancy, law and market research, the strongest adopters of AI.

AI might be a particular bonus for the UK because of the relative importance of services and of knowledge-based activities.

The Organisation for Economic Co-operation and Development reports that AI will benefit us more than any other G7 country bar the US. I think it may even help us more, given we’re even more reliant on service exports.

Our new Prime Minister doesn’t understand any of this and, as in so many other aspects of economic life, he has a steep learning curve ahead of him. That leads to a final question. Will AI increase productivity in the public sector?

The record there is dreadful, for the Government is doing no better now than it was when Tony Blair became Prime Minister in 1997. 

The private sector, by contrast, is between 42 per cent and 45 per cent more productive.

To be fair, it’s tougher to boost productivity in many things Government does. It’s hard to cope with fewer teachers or nurses. Nonetheless, a lot could be done.

Last year, the Government did a trial involving 20,000 civil servants, which calculated they could save two weeks’ work a year by using AI for admin. Looked at another way, that would mean they could get rid of 1,000 jobs.

This the report did not acknowledge, saying staff could ‘focus on higher-value tasks, innovation or public service impact’.

We are not doing too badly, but, my word, we could do so much better if the Government could raise its own game.