How the Labour Party could end Britain’s stagnation
STAGNATION IS MISERABLE, as Britain has discovered. The parliament that ended last month may have the unwanted distinction of being the first in at least 60 years to leave the average Briton worse off than when it started in 2019. A repeat of this sorry feat over the next term is unlikely: the country would be unlucky to face blows to rival the impact of Brexit, covid-19 and the Russian energy shock. Inflation is falling; interest rates should soon start to come down. But doing a little bit better is not enough for Britons, or their next government.
Barring a last-minute collapse in support or a catastrophic polling error, that government will be formed by the Labour Party under Sir Keir Starmer. The campaign so far has solidified Labour’s large poll lead over the beleaguered Conservatives. The decision by Nigel Farage to take the reins of Reform UK, a challenger party, has intensified the threat to the Tories from their right. Increasingly, therefore, the question is not who will win, but what Labour will do in power. And on economic growth, the avowed centrepiece of Labour’s plan for government, the answer is: not enough.
One way of thinking about how fast the economy needs to grow is to look at the fiscal hole that Britain is in. On paper, the Tory government’s tax-and-spending plans meet the fiscal rule that the ratio of public debt to GDP should start falling in the final year of a five-year forecast period. In reality, these plans already imply unrealistic cuts for underfunded courts and denuded local government. Worse still, the spending plans are based on implausibly optimistic medium-term forecasts by the Office for Budget Responsibility (OBR), a watchdog that checks the government’s sums. According to The Economist’s calculations, if Britain grows by the consensus forecast of 1.5%, rather than the 1.8% expected by the OBR, the annual hole in the public finances would deepen by roughly £30bn ($38.4bn, or 1.1% of GDP). Growth of 1.1%, the average since 2008, would create a gap of roughly £60bn.
Such sobering numbers have two implications. The first is that taxes will in fact need to go up—whatever the main parties say and whoever is in power. Borrowing at high interest rates to compensate for slow growth is unsustainable. And the money cannot be found simply by cutting public services further. The pressures on the public purse are rising. For Labour, in particular, raiding public services would be self-defeating, because it wants growth to fund their expansion.
Desperate not to trip up before the election, Labour has pledged to leave Britain’s main tax rates unchanged even though small increases to income tax or VAT would be the most painless way to fill the hole. Labour has other options: if it chose a land-value or a carbon tax The Economist would set off fireworks. More likely is a mess of smaller levies and threshold fiddles that further complicate Britain’s tax system.
The second implication is that Labour should be single-minded in its pursuit of growth. To achieve annual increases in GDP much above 1.5% requires more than a vague promise of political stability. British productivity growth—the ability to make more with the same labour—has been feeble ever since the financial crisis. An ageing population does not help.
Unfortunately, the simplest way to boost the economy is also the trickiest. Brexit made Britain poorer, but negotiations on renewed integration with the European Union would soak up diplomatic and political capital. Unless the Tories become more constructive on Europe, the EU would also be wary of making an agreement that a future British government could immediately undo. A deeper relationship with Brussels ought to be a medium-term goal for Labour. Until then, streamlining food checks, intra-firm transfers and the like, though worthwhile, are unlikely to have much effect on growth.
The big opportunity is fixing the planning system. Britain has no more built-up land per person than it did in the 1990s; last year the number of planning applications fell to the lowest in almost three decades. Labour’s leaders have identified the problem, but their rhetoric far outruns their policies. More planning officers and tougher house-building targets are too timid. Building new towns, a Labour enthusiasm, would be costly and slow: better to make cities bigger and denser. Instead of trying to squeeze more out of the current planning system, Labour should overhaul it. That means allowing building on the green belt, the rings of protected land surrounding many English cities, and moving from a discretionary model to a rules-based one in which projects that meet a design code go ahead automatically.
A Labour government should sweep aside other obstacles to growth, too. Regional mayoralties were a good first step by the Tories, but mayors still lack control of their budgets or the ability to raise enough money. A fragmented pensions system brings poor returns and locks capital out of growth-friendly investments. Restrictive visa rules and high fees dampen valuable high-skilled immigration.
A growth-obsessed government would also smooth out the worst distortions to the tax code. Stamp duty jams up the property market by deterring downsizing; the £90,000 VAT-registration threshold subsidises unproductive small businesses; national insurance is three-quarters lower for the self-employed. Reform all that and the economy would rev up nicely.
The timidity trade-off
Labour is better placed to boost growth than the Tories are. It is less neuralgic on Europe and immigration and its voters want more houses. But its policies are either unequal to the scale of Britain’s economic and fiscal challenge or, as with its green subsidies, likely to do more harm than good.
Sir Keir may have bolder plans for office than he is willing to admit before an election: he ran a cautious leadership campaign in 2020, then ruthlessly reshaped the party after he won. But on both tax and growth he faces a trade-off between being timid now and having a mandate to get things done in office. A Labour government is likely to oversee a modest economic recovery. But it has not yet outlined a path to prosperity. ■
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