The good news confronting the next UK government is that it will be hard for economic performance to get worse. The bad news is that it will also be hard to make it much better.
The wise bet must be on continued slow growth. But, in a country with an ageing population, resistance to still higher taxes, a strong desire for higher public spending, already high public debt and a tightly constrained fiscal position, the political fruits of continued stagnation could be bitter. So, what might be done to escape this trap?
The Mais lecture by Rachel Reeves, Labour’s shadow chancellor of the exchequer, was an attempt to answer that. It was not a bad one in the circumstances. But the circumstances are grim.
In 1997, the incoming New Labour government, led by Tony Blair, enjoyed the luxury of rapid economic growth: according to IMF data it averaged 3.4 per cent a year from 1997 to 2001, inclusive. Gordon Brown, his chancellor, had a cornucopia to distribute.
Reeves, if she indeed becomes chancellor, will not. Her task would be far harder. It would also be correspondingly more important. New Labour had to avoid messing things up. Today, a new government would have to effect a transformation.
As I noted in a column on Jeremy Hunt’s recent budget, if economic growth had continued on its 1955-2008 trend, GDP per head would now be 39 per cent higher. The UK has not been the only high-income country to fall into stagnation. But its fall has been among the steepest.
The lecture started, rightly, by recognising the priority of ending stagnation. This, Reeves argues, demands a new model of economic management guided by three imperatives: stability; “stimulating investment through partnership with business”; and reforms that will unlock productivity. Her big theme here, one on which we should agree, is that without widely-shared growth, democracy itself could be in peril.
Behind her analysis lies awareness of the failures of the past and the challenges of the future: shifting geopolitics; new technologies, notably artificial intelligence; and the climate crisis.
She concludes from this that “globalisation, as we once knew it, is dead”. Her response is belief in an active government. She cites Janet Yellen’s “modern supply-side economics”. But her own label is the hideous neologism, “securonomics”, which “advances not the big state but the smart and strategic state”.
So, how might all this work? On stability, Reeves intends to maintain the mandate of the Bank of England and strengthen that of the Office for Budget Responsibility. Sensibly, she wants to focus on the full public-sector balance sheet while targeting the current, rather than the overall, fiscal balance. This should reduce the tendency to slash investment whenever fiscal difficulties emerge.
However she persists with the foolish rule that debt is to fall as a share of GDP, but in the fifth year of the forecast.
On investment, Reeves states that “contrary to siren voices on left and right alike, commitment to growth is not measured by the size of the deficit you are willing to run”. In other words, public investment would be tightly constrained. There would also be a host of new institutions – a new British infrastructure council, a revived industrial strategy council, a national wealth fund and Great British Energy. I am, I regret, confident that the treasury would strangle them all. But she has sensible ideas for consolidation of the UK’s fragmented defined contribution pension funds.
Finally, on reform, she rightly emphasises the need to deal with the country’s ossified planning system. If Labour tackles that, something important would have changed.
She also emphasises the need to achieve growth across the country. It is indeed neither economically workable nor politically acceptable for growth to be limited to London and the southeast. As argued also by Ed Balls and co-authors in a recent paper, “A Growth Policy to Close Britain’s Regional Divides: What Needs to be Done”, substantial decentralisation of government is needed to achieve this.
Reeves also argues, controversially, that “greater in-work security, better pay and more autonomy in the workplace have substantial economic benefits”. This looks like the most distinctively “Labour” part of the manifesto.
I see no reason why her plans would make things worse. But I also see little reason why, given all the constraints, they would make them much better. Moreover, pressures to raise spending and taxes will be hard to contain. How would Labour try to deal with this challenge?
Yet the biggest question is whether more radical reforms might create better results. I will return to this quite soon. – Copyright The Financial Times Limited 2024
