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
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%
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.
Peter Hain is a Labour peer, former cabinet minister and author of Back to the Future of Socialism. @peterhain
When it was announced over three years ago, Labour’s ‘green investment plan’ shone like a beacon of hope in the UK’s bleak political landscape. In short, the plan offered a real prospect of tackling climate change whilst creating huge numbers of skilled jobs and increased prosperity. Yet Labour leader Sir Keir Starmer will today announce a scaling back of that plan, specifically removing the financial pledge that would have made it happen.
The scheme involved the investment, from the start of a new Labour government, of £28bn every year over the five-year period. Predictably, the Conservative Party and their media allies rubbished the plan, on the spurious grounds that financing it would break fiscal rules (specifically, the requirement to reduce government debt as a proportion of economic output).
Very soon, the shadow chancellor, Rachel Reeves, in particular, and her boss Starmer, appeared to duck and run for cover. In 2023 Reeves announced that the start of the green investment plan would be delayed for two years. And today, as reported in the Guardian and elsewhere, Starmer will confirm that “the party is no longer planning to spend £28bn a year on environmental schemes, given the economic uncertainty caused by the Conservative government”.
But Labour should be crystal clear – and boldly in favour of going ahead with its green deal ASAP. This is made abundantly plain by the progress of similar policies in the USA. President Biden’s Inflation Reduction Act (IRA) constitutes a huge and ambitious programme to reset the US economy whilst driving down greenhouse gas emissions and is already showing positive results.
Wikipedia records that US emissions have been reduced “by an amount equivalent to the combined emissions of France and Germany”. Additionally in December 2023 the Financial Times reported that the IRA, together with another federal act, “had catalyzed over £224 billion in private sector investments and created 100,000 new jobs”.
Conservatives ‘game’ the rules
Part of Reeves’ back-story is having worked at the Bank of England and as an economist in the UK embassy in Washington. Possibly this experience has made her excessively deferential towards ‘fiscal rules’. The latter are the government’s advertised self-imposed restrictions designed to prevent reckless spending.
But Oxford economist Professor Simon Wren-Lewis makes clear that successive Conservative chancellors have not only tweaked the rules to their advantage but then have still gone ahead and ‘gamed’ them. He adds:
“Crucially their fiscal credibility rule makes the distinction between current spending that does need to be covered by taxes in the medium term and investment spending that does not, because future generations benefit from that investment. The Green New Deal is all about investing now to improve the welfare of future generations.”
The Conservative government expects to lose power at the next election and is now engaged in making mischief by putting in place fiscal rules that will render the financing of the green deal very difficult. In this, chancellor Jeremy Hunt and co are assisted by their pals in the right-wing media and the general level of public ignorance about Keynesian economics. For evidence of Keynesianism working, see the two previous paragraphs. As Wren-Lewis comments: “No fiscal rule should be used as a pretext to stop vital work to green the economy.”
Finding the money
Taking that last point, Kate Aronoff has written, “the costs of the climate crisis far outweigh the cost of acting on it”. She quotes a study showing that under present policies, the cost of not going further and faster now in the UK would mean that by 2100 the annual cost of mitigating environmental damage will be £168bn or 7.8% of GDP. A recent Guardian editorial pointed out “New green industries could be worth $10tn to the global economy by 2050. Britain risks being left behind”.
A previous article of mine in Yorkshire Bylines discussed a potential new source of tax revenue that the government might use to help finance the green investment plan. Essentially this involves a one-off tax on the holders of significant wealth. But Reeves has already set her face against any new move to ‘tax the rich’, despite the obscenely unfair way in which wealth has become distributed in the UK.
It is now estimated that leaving the EU has caused the flow of UK national income to fall by £100bn. That hit to our GDP means the Treasury losing out on over £30bn of tax revenue that would be there if Brexit had not happened.
A smart move would be to agree with the EU to align ourselves with the single market, kickstart growth and begin to recoup that missing £30bn. However, Labour under Starmer and Reeves are refusing to consider moving back so closely to the EU. Another opportunity missed.
Labour must re-engage
Why does this all concern me personally so much? For years I have been a Liberal Democrat voter. However, my parliamentary constituency is Shipley and my MP is the right-wing Conservative Philip Davies. In 2019 Labour came within 6,200 votes of taking the seat and probably stand a 50:50 chance of winning at the next election. Labour’s Anna Dixon is a credible candidate whose views and values are close to mine. I would like to vote tactically for her, but given the recent performances of Reeves and Starmer, I will not be doing this with a song in my heart.
Aronoff in her recent Guardian article did not pull her punches. The fate of Labour’s green investment plan was in doubt, in her words, “thanks to the political cowardice of people such as the shadow chancellor, Rachel Reeves”. Aronoff argues that Labour must re-engage with the green investment plan and go full steam for early implementation, “otherwise the difference between Tory and Labour rule will keep getting harder and harder to spot”.
Now that this U-turn on tackling climate change has been confirmed, it will focus voters’ minds even more acutely.
