Labour’s plan for the economy: Right to focus on economic growth, wrong to think it can come via increased spending

Jan 25, 2022

Connor MacDonald l Head of Economics and Social Policy

In the view of many, Rachel Reeves has given Labour a newfound economic credibility. This is helped not only by Reeves’ economic credentials as a former Bank of England economist, but by the fact that the bar she needed to clear was a rather low one. In any case, though, the depth of the economic thinking behind her speech last week should be welcomed.

For one, she was right to note that growth is a missing ingredient in British economic policy. She mentions the word twenty times throughout her speech, and points out that the UK is on a trajectory to underperform its peers. This will in the future have significant implications for the ability to pay for public services in the future without raising taxes, and the Shadow Chancellor grasps this.

The Shadow Chancellor is also right to say that taxes are too high, though she is fuzzy on how they are going to pay for it. Interest rates being where they are, it is perhaps though a greater sin to propose huge tax increases than to imply large deficits (which will be a continuing feature of the UK’s public finances in the near-term).  Similarly, the Shadow Chancellor addressed one of the key challenges for the British economy over the long-term: productivity. Since the 1950s, when the United Kingdom was more productive than France and Germany , both our continental partners have opened up a substantial lead. Reeves emphasises that this is partly a result of the failure to spread economic opportunity and productivity gains across the United Kingdom. As former Chief Economist of the Bank of England, Andy Haldane has argued that a long-tail of unproductive British firms is a substantial reason for the UK’s substandard economic performance. The Shadow Chancellor focuses on productivity here by suggesting that what’s needed is “driving up pay and conditions in the everyday economy”. This is indeed well-advised: the UK economy would be much stronger if the tail was smaller and higher.

However, as much as Labour gets many of the problems right, they are still a long way off on the solutions. The Shadow Chancellor’s solution to the UK’s pressing growth and productivity problems is more spending, as if more government intervention is necessarily what the doctor ordered. I don’t think this can be taken for granted. For one, Reeves suggests that what is missing is an industrial strategy. Accompanied by significant green spending – £28 billion per year for the rest of the decade – this is the basis of ‘catalytic public investment’. However, the OECD, which studies regional development very closely, notes that economic development in the past has tried to attract inward investment, but that “past policies have failed to reduce regional disparities significantly”.  Furthermore, even with the best will in the world, it is highly unlikely this scale of investment, especially given the uncertainty of climate investment, will necessarily attract the highest returns. Both a 2020 NAO report on achieving net zero and a 2021 NAO report on the evaluation of government spending suggest that making money work effectively is a tall order. To quote the 2021 NAO report, “much government activity is not evaluated robustly, or not evaluated at all” .

And given the scale of the spending, it’s revealing what’s not in the speech: there is nothing at all on inflation (the word does not appear once), and it is silent on reform of the state, either in public services or in terms of powers for local government. For example, the word Mayor does not appear, and while local government cuts are mentioned, there is really no economic agenda for local economic empowerment that doesn’t flow through Whitehall. It’s striking that even something as obvious as business rates wasn’t used as a launching point for local economic empowerment. Local government only got a mention as an attack line to point out “Tory cuts”.

In light of the huge productivity and growth challenges facing the UK, it’s a shame that neither political party is taking reform of the state all that seriously, and even more so that the Opposition has decided entirely to fight the Conservatives as a higher spending, more interventionist option, as if the major reason for Britain’s slow growth is the size of the cheque Whitehall writes. The Shadow Chancellor had plenty of opportunities to connect economic policy with a broader reform and localist agenda (especially around an alternative to business rates) and chose not to. As a result, even if the Shadow Chancellor is trying to chart a new economic course, it hearkens back to old Labour tax and spend. Labour would be wise to think harder, at least rhetorically, about what it actually wants to do with the big sums it throws around.

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