Labour has a huge lead in the opinion polls and seems likely to win the next general election. A big part of the reason is that the economic record of the UK under the Conservatives has been dismal. But can Labour turn this round? Some improvement is no doubt possible. But it is essential to recognise the huge challenges any incoming government would confront. One might be tempted to argue that things have gone so badly they can only get better. Alas, that shows a lack of imagination.
That things have gone badly is unquestionable. In April 2023, average real weekly pay was the same as in August 2007, just before the global financial crisis. According to the Conference Board, gross domestic product per employed person (measured at purchasing power) fell from 81 per cent of US levels in 2007 to 68 per cent in 2021. This is the second-largest relative decline in the G7, ahead only of Italy. A report from the Resolution Foundation published last year describes the UK as “stagnation nation”. Nobody could seriously disagree.
Economic stagnation makes everything harder. It is harder to find the resources needed to improve public services. It is harder to meet the demands of an ageing society. It is harder to do much about regions that have fallen behind. It is harder to manage the distributional struggles triggered by negative shocks.
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A credible programme for restoring economic growth is therefore the most important priority for the UK. On this, Labour has quite understandably latched on to what is happening in the US. In a speech on May 24 during a visit, Rachel Reeves, shadow chancellor, declared that “I am here in Washington today because, while the old ‘Washington consensus’ might have been swept away, a new one is emerging. At its heart is what Treasury secretary [Janet] Yellen has called ‘modern supply side’ economics. The Biden administration is rebuilding America’s economic security, strength and resilience.” This view was elaborated further in “A New Business Model for Britain”, published at the same time.
This justifies a far more active state. Reeves understands that what might work in the US (itself still open to question) will not do so in the UK. Thus, her plan states: “The aim is not to try and lead in every field . . . Labour’s ‘modern supply side’ approach in Britain will not seek to turn us into a British version of the US or Germany.” So far, so sensible. Nevertheless, its centrepiece is “The Green Prosperity Plan”, which “will see the state make public investments in industries that are vital to Britain’s future success, paving the way for significant further private investment. To make sure this delivers for British workers, as well as British businesses, policies that encourage investment will include minimum standards to ensure that well-paid and secure jobs are created as a result.”
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Alas, once just about every politician “knows” which industry of the future to promote, we can be quite sure the world will end up with chronic oversupply and failed investments. This is not to deny that the energy transition itself is vital. But the idea that it also offers the Holy Grail of renewed growth for every country is, to say the least, optimistic. In the UK in particular, a big part of what is needed, especially the transformation of home heating, will be expensive and unpopular. In most cases, moreover, the most efficient thing for the UK to do will be to buy cheap equipment abroad, definitely including from China. It may be good politics to sell the green transformation as a growth and jobs strategy. It is less likely to prove good economics.
So, what might end the long period of economic stagnation? Here are two obvious hurdles on the way.
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First, the UK invests and saves far too little. According to the IMF, the UK’s average gross investment rate between 2010 and 2022 was just 17.4 per cent of GDP, the lowest in the G7. This has to be raised substantially. Yet, still worse, the UK’s gross national savings averaged 13.6 per cent of GDP, far below that of any other G7 country. Thus, despite having the lowest investment rate in the G7, the UK was also more dependent on foreign capital to finance the investment than any other G7 country. If the investment rate is to rise substantially, so then must savings. Where is this to come from?
Second, British people are beginning to realise they were sold a pup on Brexit. In response, Reeves promises to “fix the Brexit deal”, while remaining outside “the EU, the single market and the customs union”. Progress can indeed be made on areas such as food standards and mutual recognition of qualifications. But the damage will, alas, endure.
Labour deserves a chance. But it does not offer answers we need. Maybe, nobody can. If so, the future looks grim.
martin.wolf@ft.com
Source: Economy - ft.com
