UK economy: Does Labour’s economic hotchpotchism matter?
Chancellor Rachel Reeves has endured a tough start to the year.
Turmoil in the gilt market in early January sparked comparisons to Liz Truss as well as prompting (slightly far-fetched) calls for her resignation.
Although gilt jitters have eased, the embattled Chancellor now faces a new and far more serious criticism.
Over the past few days a number of commentators have come to roughly the same conclusion: Labour does not have a growth plan.
Worse, it has fragments of different plans stitched together into an unconvincing whole, no matter that the different parts appear to be inconsistent. Less socialism, more hotchpotchism.
This point was made by Professor Ben Ansell in a piece published on his Substack last week. Ansell goes on a whistle-stop tour of five different theories of economic growth, all of which feature in the government’s thinking.
There’s orthodox neoclassical economics, based around attracting private sector investment, as well as a dash of Gordon Brown’s ‘endogenous growth theory’, which stresses the power of government spending in key sectors to catalyse technological innovation.
Throw in some ambitious state-led development in energy, a bit of supply-side deregulation on housing, and a half-measure of Schumpeterian creative destruction on technology and you have something approaching the government’s economic agenda.
The argument goes that the government has taken aspects of each school of thought without noticing the contradictions, or perhaps just hoping that the theoretical contradictions do not matter in the real world.
The worry is that different aspects of Labour’s plan will cancel out. “You can’t treat grand, clashing economic schools of thought like a jaunt through Woolworths pick and mix,” Ansell writes.
To take one example, Reeves claimed that she would lead the most “pro-business” Treasury in the UK’s history before entering office, a fairly clear pitch for private sector investment.
Just a few months later and businesses were at the sharp end of a £25bn increase in payroll taxes, the proceeds of which will go towards the public sector.
The government’s ambitions on AI are also a little difficult to square with levelling up workers’ rights, given the disruption that AI is likely to cause in the jobs market.
All of this lends the government’s most recent growth announcements – which are centred on stripping back unnecessary red tape – an air of desperation.
Is this part of a plan? Or is this just one possible ‘growth lever’ among many that can be pulled?
Commenting on this theme in the Times, Paul Johnson, director of the Institute for Fiscal Studies (IFS), identified another problem with Labour’s hotchpotchism.
“If there is no guiding philosophy it is hard for ministers and civil servants to have a sense of which way the prime minister or chancellor will swing when it comes to any individual decision. That makes it harder for the civil service to advise,” he wrote.
The problem, it seems, is as much about messaging as it is about theory. Different parts of the government seem to be pulling in different directions.
Labour’s growth push
This is a serious issue, particularly for a government that promised to deliver policy stability and economic credibility. But all is not lost.
Although Labour has taken a lot of criticism for the Budget, it is worth remembering there are a number of important pieces of policy in progress which have the support of many in the business community.
First and foremost there is planning reform, which has long been seen by both businesses and Reeves as the most important obstacle to economic growth.
Since entering office, the government has pushed for reforms to open up parts of the green belt for construction and reintroduced mandatory housing targets for local authorities.
Angela Rayner has also intervened in a number of planning decisions around the country, helping to ensure that housing developments and important pieces of infrastructure get the green light.
“I have not seen a government act this quickly (on planning)… in many, many years,” Jennie Daley, boss at Taylor Wimpey said last week.
Reform also continues apace in Canada, with the government pushing ahead with the long-awaited consolidation of fragmented pension schemes, which could unlock billions of investment in the economy.
As a recent Morning Wire editorial noted: “The City is home to perhaps the largest number of government supporters that it’s possible to find in the business community.”
This is among the kindest things written about Starmer’s government in Morning Wire’s editorial pages thus far.
Finally business groups have high hopes for the industrial strategy, which will be released in the spring. The hope is that this will provide stable policy foundations for businesses in key sectors to be globally competitive.
Following last week’s disappointing GDP figures, Ben Jones, lead economist at the Confederation of British Industry, said there was a “pressing need to develop an effective industrial strategy”.
The government still has time to turn these measures into a coherent growth push, but it should move fast before the narrative moves entirely beyond its control.
After all, politicians do not have to be entirely consistent – they are always liable to nailing their colours to the fence – but they must at least set a clear direction of travel.