Comedian Jasper Carrott used to tell a great joke about the “awesome speed” of the lightweight three-wheeler car, the Reliant Robin, as it “hurtled downhill early each morning, slipstreaming a milk float”.
A fair description of the UK economy since the 2008 global financial crisis, with GDP growth stalled by Tory austerity, and the IMF now expecting it during 2023 and 2024 to be slower than all the G7 major economies except Germany, at about 0.5 per cent per year. More Benny Hill than Graham Hill.
What a contrast with the Labour decade 1997 to 2007 when UK growth averaged 3.0 per cent per year. Fast growth which, by generating extra tax revenue from the expanding economy, meant Chancellor Gordon Brown could afford budgets that cut child and pensioner poverty, slashed NHS waiting times, delivered record investment and reform in the public services, and saw average living standards grow over the entire life of the 1997-2010 Labour government.
Growth since 2010 has also been dramatically slower than during the years following World War Two, because the cross-party consensus then on pro-growth Keynesian economic policy was abandoned when a Thatcherite Tory party embraced neo-liberalism instead.
Then from 2010, savage Tory austerity cut both current public spending and public investment by £180 billion in today’s terms, with further cuts to come if they were to have their way. The result: a Britain on the slide, not just socially but economically too.
Small wonder that Keir Starmer told the Resolution Foundation in December 2023 that “growth will have to become Labour’s obsession if we are to turn around the economy”.
Labour’s focus must be faster, fairer, greener growth
Latest IMF forecasts show UK economy 9th out of 10 largest world economies for GDP growth in 2023 and 2024 and equal 7th out of 10 projected for 2025. A pretty dismal growth performance for post-Brexit and post-Pandemic Britain. pic.twitter.com/TNuVwbNYun
— Andrew Sentance (@asentance) January 31, 2024
The priority for an incoming Labour government must be to pursue growth that is faster, fairer and greener than anything we have ever experienced.
The key to success lies in boosting investment, and public investment in particular, since doing so can both trigger an upsurge in private investment and help to shape the pattern of development of the whole economy, taking the UK in a new direction, a greener, high-tech, high-skills direction.
We have to expand Britain’s productive potential by boosting capital expenditure on new equipment, constructing and kitting out new workplaces, developing new supply chains, and recruiting and training a new workforce. Above all, investing in green technology like a £6bn per year home insulation programme and a one-off £8bn sovereign wealth fund for low-carbon infrastructure, with the aim of achieving a zero-carbon electricity grid by 2030.
Britain can only return to fully funded public services and rising real living standards if Labour revives rapid economic growth and generates the revenues to pay for it. That means raising our woefully low national rates of investment and saving. According to the IMF between 2010 and 2022 UK investment as a share of GDP was the lowest in the G7.
The Resolution Foundation in March 2023 found that, had Britain matched the average OECD rate of public investment over the past 20 years, UK public investment would have been a massive £500bn higher. Rishi Sunak’s administration is now planning for public investment to fall as a share of GDP in each of the next five years.
Resolution Foundation economists reckon that setting public investment at a stable three per cent of GDP, about £75bn per annum, would boost UK economic growth by nearly one per cent per year over five years, and stay within the debt rules accepted by both Labour and the Tories. But the government’s present plans envisage public investment dropping from £72 billion this year to only £57 billion in five years’ time.
The independent National Infrastructure Commission chaired by Sir John Armitt agrees that decades of inadequate infrastructure investment have held UK productivity back, singling out public transport, home heating and insulation, and water networks as all being in urgent need of renewal.
It advises that making the UK’s infrastructure fit for the future will require an extra public investment of £30bn per year, plus at least £40bn per year from the private sector – well within what Labour’s leadership announced a couple of years ago.
The GPP will boost growth – but Starmer’s rowback is prudent
Ben Zaranko of the Institute for Fiscal Studies estimates that Labour’s 2021 plans for an extra £20bn per year of government green investment in low carbon projects (on top of £8bn of emissions-reducing spending already announced by the Tories) would see public sector net investment average 2.6% of UK national income over the next parliament, compared to the 1.6% averaged over the 45 years 1978/79 to 2023/24, still short of the OECD average of 3.2%
3) Relative to those plans (which a Labour government would inherit), an additional £20 billion would deliver high levels of investment by recent UK standards – but would still leave investment on a falling path over the next parliament. pic.twitter.com/p5f2KkrHAd
— Ben Zaranko (@BenZaranko) September 5, 2023
Unless of course Chancellor Jeremy Hunt uses his March budget to squander his fiscal “headroom” on tax cuts in a scorched earth project to undermine the fiscal viability of Labour’s green investment plan.
Paul Johnson, also of the Institute for Fiscal Studies, says that an extra £20bn of green investment in five years’ time probably isn’t “affordable” – doubtless part of the reason why Keir Starmer has just scaled back on the quantity of investment whilst remaining committed to the principle.
The key question Paul Johnson also opens up is whether extra green investment will trump everything else for Labour. If so, it will constrain action elsewhere and Labour should accept that other targets may have to take second place to the green transition.
What will be affordable in five years’ time will depend in part on how much fiscal leeway Jeremy Hunt squanders on tax cuts in his March budget. It will also depend on how fast the economy grows in the coming five years, of course.
The Tories and their many media friends are desperate to depict Labour’s green investment plans as the precursor to higher taxes brought on by the need to avoid paying for the extra investment by borrowing more than the government’s debt rules allow. A bit rich since Johnson, Truss, Sunak et al have ratcheted up tax massively amidst a financial mess.
They conveniently fail to acknowledge that extra investment will strengthen the economy. Giving GDP a demand boost will accelerate Britain’s growth rate, generate higher tax revenues as production quickens, job vacancies fill, and incomes and spending rise. A more buoyant economy will be a firmer base on which to build a greener future.
Labour must keep defending investment per se
Much of the media has become obsessed with the old Tory tactic of labelling every element of Labour policy as “a tax bombshell” regardless of the merits of the case. It worked for them in 1992 and Keir Starmer is prudently thwarting an action replay in 2024.
Nevertheless it’s a pretty desperate ploy, intended to divert attention from the success of Keynesian economics, notably in stopping a slide into slump during the 2008-2009 global financial crisis and promoting the early resumption of growth, as well as successfully rebuilding war-torn Britain after 1945.
The alternative of neoliberal economics has proved to be damaging nonsense. Even the previous high priests of orthodoxy, the International Monetary Fund, are now supporting Labour in urging the UK government to increase key public investments to boost growth and hit Britain’s net-zero carbon targets.
Labour should hold its nerve and face down the economic bankruptcy of Tory leaders and their echo-chamber commentators.