With growth seemingly elusive, many remain skeptical about strategies pursuing it. But by the OBR’s own analysis, Labour’s plans deliver growth in the long-run – so why won’t Starmer-Reeves make a clearer case for their approach? Director Theo Bertram explores.
There is an Eeyore-ish view of the world that Western economies are doomed to sluggish or non-existent growth. For years, these democracies have been borrowing from their futures to avoid pain in the present but this approach has been maxed out beyond its limits to deal with the economic and social crisis of the pandemic
On top of this, the great 20th Century progress of longer life expectancy comes with several additional costs in the 21st Century for countries that now need to provide social and health care for more people for longer and at higher cost. What is more, public services, like health and education, are less amenable to automation than the private sector, and we will need to spend an ever greater share of our income on their delivery. As a result, Western economies now have debt burdens and social obligations that require higher spending and the only way to fuel this is through higher taxes and higher borrowing, which in turn hold back growth. Hence, the Eeyore-ish view is that we are stuck in a doom loop of stagnation.
This is the view of the world that Liz Truss and Kwasi Kwarteng shared and their answer to the problem was shock treatment. To break the cycle, they announced £45 billion of tax cuts and they did so by trying to duck the checks and balances of the OBR, which they knew would try to hold them back. It was a step too far for the markets, which promptly forced up the cost of government borrowing, prompting interest rates to spike. Instead of breaking the cycle, Kwarteng and Truss merely added to the pile of costs. Today even Kwarteng says his attempt ‘to reverse that trajectory was too dramatic and abrupt a shift. I can see that clearly now.’
Left to pick up the pieces with an election around the corner, Rishi Sunak and Jeremy Hunt took a less dramatic approach: continuing the higher spending, taxes and borrowing but without the radical tax cuts or the attempt to bypass the OBR that ultimately drowned their predecessors.
Now we have Rachel Reeves’ first budget, we can start to gauge whether Labour intends merely to maintain the status quo of managed decline, or if there is something more radical to get us out of the doldrums. On the face of it, the answer is gloomy: an enormous tax rise of £40 billion to feed an NHS that will never be sated, with the tax rising on the backs of businesses that may struggle to grow as a consequence, and once again borrowing against the future, with growth forecast to fall back just as Labour seeks re-election. That does not seem like a bold plan but more like a bog-standard Labour budget.
The odd thing is that Labour does have a more radical plan, they just don’t want to talk about it. Instead of creating demand for growth by cutting taxes, Labour is trying to stimulate supply as a means of driving growth. First, the government made a point of removing obstacles, such as planning obstructions, then it hosted a summit to encourage investment, and now Labour is doubling down by front-loading public expenditure in the next two years and borrowing even more to invest in infrastructure.
There are good grounds for Eeyorism about this approach and lots of questions about whether it will work. The OBR have acknowledged that this will give a bump to growth in the short term but the costs of borrowing and tax rises on the back end of this Parliament would cause growth to fall. Moreover the risk of government using taxpayers’ money to invest is that the effect is not to stimulate but simply to crowd out private sector investment. Conversely other economists, more favourable to the government, argue that the compounding effect of getting higher growth in the first few years will reverb positively across the economy in ways that the OBR has failed yet to measure. And if one looks at the long run, towards the 2030s, even the OBR is predicting growth.
The odd thing about all of this is that Labour is not making the bigger argument. Starmer and Reeves have focused unendingly on the ‘black hole’ they inherited from the Conservatives but neither consistently make the case for growth stimulated by supply-side economics. It is understandable that they are wary of appearing to experiment with ideology in the way that Truss and Kwarteng did. However there is a political and economic argument that needs to be won, just as George Osborne did with austerity or Margaret Thatcher did with privatisation. Labour’s strategy in opposition was one of caution and not wanting to box themselves in or commit themselves to things that were unpopular. But while you can be stealthy about your economic plans in opposition, you cannot in government.
After Truss, they are right to be cautious about appearing too ideological or radical but the risk in avoiding making the case for their strategy, they appear either equivocal about their plans or rudderless on their direction. Now that the Budget red book has closed and the markets have settled, Labour needs to talk about its supply-side plan for growth and to explain how this was not just a typical Labour budget – tax wealth and business to fund public services – but a genuinely new and bold attempt to move the economy out of its long term stagnation.
