Observer editorial 

The Observer view on the UK economy: Labour is holding back when it should be bold

Ministers should stop wasting their time – and their hefty mandate – trying to make failed Tory policies work
  
  

Head and shoulders photograph of Rachel Reeves gazing down to her right.
‘Zero growth over a two-month period is never a reason for panic’ – but it does illustrate the problem the chancellor, Rachel Reeves, has inherited from the Conservatives. Photograph: Darren Staples/PA

Rachel Reeves had some sobering news last week about the UK economy and how much it grew in July. The message from the Office for National Statistics was that it didn’t. And that it flatlined in the previous month as well.

Zero growth over a two-month period is never a reason for panic. What it does indicate though is that the economic inheritance left by Rishi Sunak lacks the momentum claimed by the former Conservative administration.

Businesses up and down the country are trading without investing. Workers are leaving the labour market, citing health problems. The public sector remains shellshocked from more than a decade of austerity and a series of debilitating crises, the spike in inflation being the most recent. The growth enjoyed by the economy in the first six months of the year, which Sunak believed mistakenly would propel him back into No 10, was merely a bounce-back from the recession he can take part of the blame for creating in 2023. A glance back to last year shows that whopping personal tax rises, a refusal to acknowledge Brexit trade hold-ups and the sense of a government devoid of fresh ideas or hope, added to an already difficult situation and gave consumers and businesses all the excuse they needed to hunker down and stop spending. Nine months into 2024 and the best we can say about the economy is that it is stagnating. As inheritances go, it is a miserable one.

We also learned about the dire state of the public finances. Not just the £22bn hole Reeves says was left by Jeremy Hunt, who as chancellor had failed to account for public sector pay rises recommended by independent pay review bodies, ignored a shortfall in Home Office funding and overseen a deficit in the defence budget. The Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, told us there is also a widening deficit in the public finances over the longer term.

Looking ahead 50 years, the OBR said there will be a high price should the UK government carry on spending and levying taxes much as it currently does. That price will be to accumulate debts three times the level we now live with. An interest bill that hovers around £80bn a year would balloon to £240bn by 2070 – 12% of the government’s budget rather than the 4% it pays today.

The OBR doesn’t do blame. Yet it is clear from the study that 14 years of austerity and a lack of public investment has shorn the economy of vital funds to overhaul a legacy of creaking infrastructure. As Lord Darzi’s report on the NHS shows, much of its estate is unable to cope with modern methods of care; some hospitals and GP practices cannot even keep out the rain. Local authorities are going bust, as are universities. Britain’s cultural heritage operates on meagre handouts after years of cuts to funding. Then there is the rail network, left in disarray by the HS2 debacle. And the road network, which is pockmarked with holes deep enough to wreck a car’s suspension.

Everybody knows that the list of poorly managed projects and neglected issues is long. And how Brexit has permanently damaged the economy. It’s why so little attention is paid to the Tory leadership contest, where the manifestos of the candidates lack credibility and the party’s reputation for competence – always a victory of marketing over reality – lies in tatters.

Taken in the round, the economy is slightly larger than it was in the first three months of 2019, a year ahead of the pandemic – but not much. National income, or gross domestic product (GDP), is 3.4% higher than it was five and a half years ago. Looked at from the perspective of the individual, the situation is even worse. GDP per head is 0.1% lower than it was in the spring of 2019. Reeves might have hoped that the Bank of England would come to her rescue with lower interest rates to give mortgage-paying families a bit more spending power. It did cut the cost of borrowing once but officials appear to want to take their time.

There is a drive inside many Whitehall ministries to press on with reforms and investment to make things better, based on the recommendations of experts previously ignored by the Conservatives. This provides hope for the rest of the parliament. Yet, there is a worrying lack of confidence among some ministers and officials that manifests itself in attempts to turbocharge misguided Tory policies rather than question why they never really worked.

Housing is a classic example. Labour says it will give construction companies more incentives and clear ground on which to build after a bonfire of planning rules. Why, when this has been shown to fail on so many levels, from the low number and poor standard of the homes built to their exhorbitant cost?

Other European countries dictate what developers can do and where. So can we. It is just one example of how Labour has constrained itself despite having a mandate to press the reset button and in many cases, like housing, jettison decades of failed policies. When the economy is struggling to grow and the longer term prospects for the public finances are dire, Labour needs to be bold. It must absorb reports like Lord Darzi’s to improve the health sector and steer the housing market.

Quick wins are what all ministers want, but they shouldn’t be achieved by pulling the same old levers and hoping for something new to happen.

 

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