Labour can still rescue Britain’s growth prospects

What a mess. Rachel Reeves lamented a “world that is changing before our eyes” as she laid out, in her Spring Statement on March 26th, a cobbled-together set of cuts that kept the government just on the right side of its fiscal rules. But blaming chaos abroad (and, without naming him, Donald Trump) is too easy a get-out for Britain’s chancellor. The government is stuck in a hole mostly of its own making.

Economically, Ms Reeves had left herself a wafer-thin fiscal space of £10bn ($13bn, 0.4% of GDP) in October’s budget, a gamble that failed. Politically, the walls have been closing in. Since winning power, Labour has wasted political capital on trifling issues such as winter-fuel payments for pensioners, inheritance taxes for farmers and an inexplicable ministerial craving for free concert tickets.

That has left the government adrift and the public finances at the mercy of bond vigilantes and an erratic White House. Vital reforms, such as a rethink of the ballooning health-benefits bill, have been rushed through to meet the arbitrary timelines of the Office for Budget Responsibility (OBR), the fiscal watchdog.

Troublingly, there could easily be a re-run of Wednesday’s scramble in the autumn. Ms Reeves’s restored fiscal buffer is back at £10bn. But gilt yields are already above the latest forecast’s assumptions. And the OBR also flagged a “downside scenario” to its rosy productivity estimates. Even a slight downgrade would wipe out tens of billions in fiscal space at the next budget. Extra urgent spending on defence is also possible.

The temptation will be to finagle more borrowing, perhaps by fiddling with the fiscal rules, as Ms Reeves did in October. That would be an error. Britain’s economic problems are too severe to be massaged away. The country needs growth. Ms Reeves insists she has been bold in pursuing this, but Labour’s thinking has been nowhere near radical enough.

The government now has an opportunity to put this right. The voters who would most oppose sensible reform—Eurosceptics, NIMBYs, pension zealots—are already cross. Charm will not win back their support, but a serious boost to growth might. Laying out growth-boosting policies, and persuading the OBR of their merit, might fire up a virtuous cycle of higher tax receipts and kinder economic forecasts to finance Labour priorities such as the welfare state.

So far, Labour’s best idea for growth has been to build more infrastructure and housing. But flagship projects, like Heathrow’s third runway and a railway between Oxford and Cambridge, will not be finished until the mid-2030s. Contrast Labour’s insouciance with Josh Shapiro, Pennsylvania’s governor, who in 2023 marshalled the full forces of his government to fix a collapsed motorway in 12 days, instead of the expected 12 months or more.

On housing, the government wimpishly ducked the chance to end Britain’s blocker-friendly, case-by-case planning system in its landmark planning bill earlier this year. But the law is still working its way through Parliament. It is not too late to add in deeper changes, such as permission-by-default for new housing near railway stations, a presumption in favour of building to four storeys in cities, or piloting a policy of proper zoning in at least one city.

America’s chaos brings opportunities, too. A decent offering for high-skilled migrants could lure talented scientists who are anxious about ideological crackdowns and the risk of losing research funding. The contours are already clear for a sensible deal with the European Union, which would include greater freedom of movement for young people and using agricultural trade as a test case for better regulatory alignment.

That leaves taxes. Labour’s pre-election pledge not to touch Britain’s main taxes was always foolish, and was broken in spirit if not in letter by October’s employers’ national insurance rises. A future budget could raise much-needed cash by nudging up VAT, levying national insurance on the same base as income tax (including income from savings, pensions and property), or by paring back the “triple lock” that ratchets up the state pension. Better yet, some of that windfall could be used to get rid of stamp duty, which jams up the housing market, or to fix destructive tax traps for high earners (see Bagehot).

Second chances are a rare thing in politics. With its huge majority, Labour has at least one more of them. Counting this government out would be premature. But if the mess of the past few months is not a stern enough wake-up call, then perhaps it really is beyond saving. ■