Michael Jacobs 

Labour’s economic agenda has all the right ideas – but it’s a race against time to make it work

This government needs to reverse at least three decades of financial woes, and it needs to show progress before its plan gets Trumped, writes economist Michael Jacobs
  
  

Keir Starmer and Angela Rayner at a construction site in Cambridgeshire, 12 December 2024
Keir Starmer and Angela Rayner at a construction site in Cambridgeshire, 12 December 2024. Photograph: Getty Images

Economically speaking, it has not been a happy new year for Keir Starmer and Rachel Reeves. The Office for National Statistics has revised down the latest quarterly growth figures to zero. The Confederation of British Industry reports its members are planning to cut hiring and output in the first three months of 2025. And the Bank of England has held back from another interest rate cut, forecasting higher inflation and stagnant growth in the coming year.

Yet these are all very short-term indicators. In recent years, the need for governments to focus on immediate crises (Brexit, Covid, inflation, Liz Truss) has allowed us to forget that longer-term economic policies are also possible. But look behind the headlines, and it’s clear that Labour is trying to address some of Britain’s deep economic problems.

The UK economy has long underperformed its major competitors in Europe and North America. We have had, in general, lower investment, lower productivity, a worse trade balance and greater regional inequality. From 1992 to 2008, this was both masked and exacerbated by the performance of the City of London, which drew in overseas capital even as it drained the rest of the economy of talent and business investment. An ultra-flexible labour market kept employment high. And, like other countries, the UK rode the wave of globalisation, low commodity prices and new information technologies, leading to buoyant growth.

But the financial crash put paid to that. Since 2008, productivity has barely risen, leaving household incomes also scarcely higher. Austerity kept investment in the public sector and business low. Employment has remained high, but at the expense of job security, with more than 1 million workers now on zero-hours contracts and nearly 4.5 million people self-employed. And nearly 2.8 million people of working age (an increase of more than 25% in the last five years) are now long-term sick. With inflation still above the Bank of England’s 2% target, and the continuing drag of Brexit, none of this provides the basis for the economic growth the government so desperately wants.

So what is Labour doing about it? You don’t tend to hear this in the political messaging from No 10 and the Treasury, but the government has in fact embarked on a programme of quite ambitious structural economic reform. It has four key elements.

First, it is seeking to increase and accelerate infrastructure investment, especially in housing, railways, energy and broadband. Infrastructure is key to productivity growth, giving firms faster communications and cheaper power, enabling workers to live where new jobs are created and to travel easily to them. Labour has signalled a ruthless reform of the planning system, prioritising national policies over local objections and speeding up decision processes.

It is also using public ownership. The creation of Great British Energy, the complete renationalisation of the railways, and the powers given to local authorities in England to take back control of bus services and again build council homes show a government unwilling to be held hostage by private infrastructure firms. It will be particularly interesting to see whether GB Energy, both competing and collaborating with private generators, is able to accelerate the transition to clean power by 2030 as Ed Miliband intends.

Second, the government is attempting to cajole private sector investment into key sectors and underinvested regions. Labour’s industrial strategy is not particularly new, though it has a welcome focus on devolved powers for mayoral combined authorities. But it is using a degree of interventionism not seen since the 1960s. By creating a national wealth fund as a public investment bank, the government is seeking to use taxpayer equity to leverage private capital into industries and places it would not otherwise go. By amalgamating the UK’s fragmented pension funds it is trying to increase their investment in UK businesses. Institutions of these kind are commonplace in other countries, but unprecedented here.

Third, the government is attempting to raise labour productivity in the service sector by driving up labour costs. This might seem surprising. But it is the necessary effect of new employment rights, a higher minimum wage and the hike in employers’ national insurance contributions. It has been apparent for some years that the ease with which firms can employ (and get rid of) an extra hour of low-cost labour has helped suppress investment in training and equipment, keeping productivity low. At the risk of increased unemployment in the short term, but with the ultimate goal of stronger growth, Labour is trying to create a higher-wage, higher-productivity labour market.

Fourth, it is striving to enlarge and upskill the labour force. Through higher NHS spending and reform, the creation of a new national jobs and career service, and a new body to coordinate vocational training in England, the government hopes to reduce the numbers of economically inactive workers and raise skill levels, thereby both reducing welfare costs and raising tax revenues. Past experience suggests it may be hardest to achieve results from this policy, but the perceived political need to reduce legal migration will give it added momentum.

A striking feature of the government’s economic strategy is how different it is from that of the last Labour administration. New Labour eschewed nationalisation and industrial policy; apart from the minimum wage, its structural economic reforms were minor. But this is not surprising: the state of the UK economy and wider global conditions are quite different now.

Will the new strategy work, overcoming some of the UK’s longstanding weaknesses and inducing faster growth? It is obviously too early to say. And politically, the key question is not whether but when. In its October forecasts the Office for Budget Responsibility was pessimistic: it put growth in 2028 at just 1.5%. It was criticised for this: many economists believe the OBR has underestimated the productivity benefits of Labour’s policies, and the “multipliers” by which higher public spending and investment raise growth rates.

But this is still a race against time for Starmer and Reeves. If Labour is to win the next election, its long-term economic strategy will need to generate some medium-term results. In the meantime, in view of the incoming US administration’s unveiled threat of trade wars and geopolitical turmoil, the prime minister and chancellor will have to hope that their policies are not about to be Trumped.

  • Michael Jacobs is professor of political economy at the University of Sheffield and a visiting senior fellow at the thinktank ODI Global

 

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