Labour has two visions for the economy, only one is even close to credible
The Labour Growth Group is making the case for a capable state that builds while the Tribune Group is calling for fiscal rules, a wealth tax and unburdening themselves from the bond markets. Only one of these plans is serious, says Dr Valentin Boboc
Following some disappointing local election results and building expectations of a leadership challenge, Labour’s backbenches wasted no time putting forward new visions for what a Labour government could look like after Keir Starmer. The Labour Growth Group’s fresh publication, An Honest Day, makes the case for a capable state that builds, whilst the Tribune Group has set out its own essay collection calling for looser fiscal rules, a wealth tax and a Budget process unburdened by the bond markets. Both claim to address the cost of living crisis and the concerns of ordinary citizens. Nevertheless, only the former makes a serious effort to engage with the question of what could help Britain achieve more economic growth.
Whoever ends up in charge, Britain will face a series of economic constraints they must address or ignore at their peril. In no particular order, here is a list of slightly dramatised facts. The tax burden is the highest in 70 years and there is no political mandate to raise it further. Gilt yields are at their highest since 2008, which limits any government’s room to borrow its way out. UK industrial electricity prices are the highest in the developed world, roughly four times the American level. There is a chronic housing shortage and demographics are doing some slow and steady work on the welfare budget.
Anyone serious about governing the country should have a theory of how they address the above. So how are the two movements faring?
First, the Tribune Group’s general take is that these constraints don’t really exist, or rather that people are unhappy because successive governments haven’t been bold enough to ignore them. Britain has been too cautious for too long, and a bolder government willing to tax wealth, borrow against a longer horizon and run a more generous welfare state would unlock both fairness and growth in one motion. The underlying assumption appears to be that the economy is doing well, but the proceeds just happen to be distributed unjustly. It follows that the task of politics is to redistribute more aggressively while topping up demand with fiscal transfers, price controls and a higher floor under wages.
One thing that is hard to accept is that the British government is too cautious when it comes to borrowing and fiscal transfers
One thing that is hard to accept is that the British government is too cautious when it comes to borrowing and fiscal transfers. Public sector net debt stands close to 100 per cent of GDP, levels last seen in the early 1960s. A state that spends nearly £1.4 trillion a year, runs a deficit larger than the entire transport, justice and education budgets combined and dedicatesa quarter of all spending to social security is not one that has been starved of fiscal ambition.
The Labour Growth Group, on the other hand, argues that Britain has built an “extraction economy”, where plenty of things are arbitrarily rationed. Land is rationed by the planning system. Power is rationed by an energy system that cannot scale generation or grid. Capital fails to back challengers because the regulatory architecture protects incumbents. The tax code bears down too hard on work. The result is a state which spends ever more compensating people for the costs its own architecture created. This is a supply-side, pro-growth agenda written in social democratic language, where the end goal is growth but also the creation of a ‘capable’ state with ample capacity to do things. The paper focuses less on what the scope of the state should ultimately be, so as always, the devil is in the details.
Theories of state
The two approaches also imply very different theories of the state. Tribune wants a larger transfer state running familiar policy on a longer leash, where political ambition isn’t held back by fiscal arithmetic. The Growth Group wants a state that does less compensating and more building, with fewer vetoes, less process and sharper accountability for regulators and quangos. One treats scarcity as a moral problem of distribution. The other treats it as a structural problem of supply. Ultimately, both call themselves Labour, but the resulting political economies would look entirely different, and the country would feel that difference in the cost of housing, the price of energy, and the willingness of firms to put capital to work in Britain rather than somewhere else.
Of the two, the Growth Group’s prospectus represents the first time in a generation that a sizeable bloc of Labour MPs has put its name to an agenda arguing that higher living standards run through planning reform, reduced regulatory burdens and a tax code that stops punishing work. The really difficult part will be selling this agenda for growth to their own MPs. Last summer’s welfare reform bill, an attempt at modest fiscal consolidation, produced the largest Labour backbench rebellion of this Parliament, with the government forced into successive U-turns on PIP eligibility and winter fuel before scraping a watered-down bill through.
With or without a new Prime Minister, Labour seems keen to change gears. At some point, MPs and perhaps party members will be asked to choose between these visions. So, by extension, will the country.
Dr Valentin Boboc is senior economist at the Institute of Economic Affairs