Is the big state back in Britain?
The Labour Party’s first month in power has given scaremongers plenty to work with. Britain’s new government has begun to unveil what looks to be the most interventionist economic agenda the country has seen in the past 50 years. Railways are to be re-nationalised. An activist state is spending billions on industrial policy and setting up a new energy behemoth. Teachers and doctors will receive big pay increases. A workers’ rights agenda is to come—as are, almost certainly, increases in taxes on capital gains.
Tilt the lens slightly, though, and this programme appears less alarming. Labour’s enthusiasm for industrial policy is never going to be something that The Economist shares. But the details differ from the slogans. Behind the statist rhetoric, Labour’s actions so far amount to a fairly orthodox agenda of supply-side economic reform. Indeed, if anything, the big risk to the mission of boosting growth is not Labour’s headstrong interventionism, but its lack of audacity.
Look first at what the government does, rather than what it says. GB Energy, a new publicly owned entity, was first billed as a state-run energy supplier. But what Labour has set up is closer to a regulatory concierge; its initial focus is on shepherding offshore-wind projects through onerous approval processes before selling them on to private developers. A new National Wealth Fund (NWF), designed to catalyse private funding in green industries, is to be run at arm’s length from government by City financiers. Taking charge of the railways is, in some ways, a formalisation of existing arrangements, after the state bailed out train operators during the covid-19 pandemic.
Britain’s frail public services need better funding; those pay increases were recommended by independent bodies and match gains made by workers in the private sector. And the government’s early steps on the planning system—approving solar farms, lifting England’s onshore-wind ban, making housing targets binding and signalling a willingness to build on the green belt—have all been encouraging.
Opportunities will certainly arise to boost interventionism. Ed Miliband, the energy secretary, seems keen that GB Energy should eventually own and operate wind farms and other ventures. The steel industry, which governments of all stripes have propped up in defiance of economic logic, features heavily in the NWF’s mandate. If not carefully drafted, Labour’s planned employment law risks gumming up Britain’s labour market. It was only in February that Labour dropped its commitment to a colossal £28bn ($36bn; 1.2% of GDP) in annual green spending: what might it do if it had the cash?
Despite that fear, the evidence so far suggests the risk is not that Labour is too red, but too timid. “Treasury brain”, the finance ministry’s penny-pinching scepticism about plans for long-term spending, beats big-state mania but it is hardly a recipe for productivity growth. Rachel Reeves’s first fiscal announcements as chancellor on July 29th suggest that she has a nasty case of the disease. “If we cannot afford it, we cannot do it,” she has repeated, inverting John Maynard Keynes’s dictum that “anything we can do, we can afford”.
To help fill a hole in this year’s public finances, she cut nearly £800m-worth of transport investment, including projects that have languished for years in planning purgatory—a strange signal for a politician who, in opposition, decried stop-go capital investment. Her search for new savings risks more raids on capital budgets in the National Health Service, where the cumulative cost of the efficiency-wrecking maintenance backlog was already projected to exceed £15bn by 2028.
Labour has shown no appetite for difficult-but-vital reforms like rationalising Britain’s growth-choking property taxes. On Brexit, the country’s single biggest productivity headache, the mood music with Europe is better than it was under the previous Tory government, but incrementalism still reigns. On planning, the real test of Labour’s mettle will be whether it can shift to a more rules-based system; on devolution, it will be how much control and cash it gives up to local authorities.
Stability and orthodoxy make for a much more appealing economic pitch than unfettered dirigisme. But it is not a million miles from the promises of Rishi Sunak and Jeremy Hunt, who took over after the chaos of Liz Truss’s government. A serious agenda for growth needs more than an iron chancellor: it also requires changes to the way the government thinks about transport, housing, taxation, Europe and more. The real danger is that Labour does too little, not too much. ■