Who can forget the magic of “Education, education, education”? Keir Starmer’s 2023 remix of Tony Blair’s 1996 promise is “Growth, growth, growth”. People are less excited. Except me.
I am a “growth” bore. I talk about it at parties (I don’t get asked back). But growth matters. And it is an existential challenge for the Labour leader.
Britain has not been short of commentators warning about the risk of this country falling into a “doom loop”, whereby we have higher taxes to pay for higher spending, but we are unable to use higher borrowing, and are cursed by low growth.
This doom loop is worth dwelling on. Today, even the Tory party is arguing for higher spending. A quick look at the needs of the NHS, social care, education, prisons and defence illustrates why. Yet to afford that, it’s hard to see much more work being done by higher taxes. The tax burden is at its highest level for more than 70 years, and while there may be interesting ways to broaden the tax base, the “Laffer Curve” thesis—that sooner or later higher taxes generate lower revenues—is not far from kicking in.
What about more borrowing? Good luck asking bond market traders about that one after the events of a year ago. Britain borrowed big for Covid: £313bn. Then in August 2022, we asked for £40bn, matched by new windfall taxes, to pay everyone’s energy bills. So, when Kwasi Kwarteng asked for yet more to fund tax cuts, the elastic snapped.
I know some of the people we call “the markets”. They want to see you’ve got a credible plan to pay back the loan they’re giving you. And 2010 and 2022 taught us about the politics of borrowing: Labour is only a credible client when it is willing to cut spending, and the Tories are only credible when they’re willing to raise taxes. So, while Labour says it is willing to borrow to invest, will the markets lend to them? And if so, at what price?
All that’s left is growth that, in turn, generates larger government coffers. Without it, Labour will not have the means to deliver any other major promise. No more funds for the NHS. No new clean energy system. No more extra childcare. Begging the question: without growth, can Labour do anything?
Liz Truss gave growth a bad name. But Starmer is resuscitating its brand. And Labour finally has a growth philosophy, set out by Rachel Reeves in “A New Business Model for Britain”, published by thinktank Labour Together in May this year. There are a multitude of other economic proposals and plans from shadow cabinet members. But insiders will tell you that this is the core text. This is scripture.
First, it promises economic policy that is certain and stable. In other words, investors at home and abroad will have the same framework for fiscal rules, industrial strategy and taxation, presumably for a parliamentary term. This may seem simple but, if true, it is big news. Uncertainty is a recipe for falling investment and has sadly been the British story since 2016. Labour will need to make this stability commitment convincing to win over the doubters.
Second, it promises a new supply-side economics in which government plays a far more active role in creating growth industries and simultaneously providing greater security for citizens. This borrows heavily from the rhetoric and policies of Joe Biden and US Treasury secretary Janet Yellen. It’s a move reminiscent of Blair’s appropriation of New Democrat politics in the mid 1990s.
Yet ironically it is also a rejection of New Labour economics. Reeves argues that it was a historic error to believe “the state has little role in the economy beyond correcting market failures and redistributing the proceeds of growth.” She believes instead that “an effective, modern government cannot simply get out of the way and place our economic future in the hands of markets.” This is posed as a critique of Thatcherism, but it also could apply to the Blair and Brown governments in which I served as an economic adviser. We did, indeed, generate growth! But that playbook worked for those times.
This commitment to more activist government is Starmer’s key dividing line with the Tories. I believe that he’s right, and they’re wrong. The growth areas of the UK economy are going to be green science and technology industries—all markets being chased aggressively by our international competitors. All are being heavily subsidised and facilitated by active governments. And all are at a vast, “continental” level of expenditure.
Labour’s target for green public investment is £28bn ($34bn). Biden’s Inflation Reduction Act is estimated at $500bn or more; Europe’s Green Deal is estimated at $270bn; China’s figure is hard to confirm, but 2022 investments were said to be four times that of the US.
This is a hugely inconvenient truth for Rishi Sunak’s Tory party. Sunak is passionate about innovation, science and technology—but sceptical of more interventionist government to support it. In particular, his government is flummoxed by Biden’s Inflation Reduction Act, which uses state support to stimulate green growth.
Our ministers revile that act’s central role for government, feel outdone by its fiscal firepower and are jealous as hell about its smart design to attract private-sector multiples of investment. No wonder the UK’s latest offshore wind auction had no bidders. The Treasury will be proud that it drove a hard bargain. It’s just that no one took it.
This next decade will be one in which government is key to growth. The Tories are on the wrong side of economic history, and Labour knows it, as do UK business leaders. I have spent much of the last six years sitting with large and small businesses who have asked for government leadership and coordination, or sought the pump priming of immature technologies. Ministers and civil servants alike were unmoved: they mistook this for corporate rent-seeking.
Labour is readying itself for a new industrial strategy, two years after it accused the Tories of tearing up their own. To be fair, this is something of an exaggeration. When he was business secretary, Kwarteng used to joke that, after he cancelled his predecessor’s industrial strategy, Boris Johnson simply launched a plethora of new ones.
The third reveal in “A New Business Model” is Labour’s penchant for economic nationalism. It argues that Britain should rely less on international supply chains and have greater domestic resilience.
Britain will have its own sovereign energy company: GB Energy. Ed Miliband, Labour’s shadow climate secretary, feels that the UK relies too heavily on other countries for its energy ecosystem. Companies like Ørsted, which are at the heart of our offshore wind success story, are majority-owned by the Danish government and supported by a Danish supply chain. Why doesn’t Britain have one of these? A noble idea, but one that invites a great deal of scepticism about how effectively Whitehall could create such a thing and fears it will “crowd out” private investment in our green ecosystem.
Reeves then restates her previous commitment that a Labour government will make, sell and buy more in Britain. Good news for homegrown providers of everything from medical supplies to textbooks, and for construction companies. Bad news for international investment. Of course, in this, Labour is swimming with the tide of economic nationalism across the globe. But can our post-Brexit small island afford to raise the drawbridge higher?
The final bit of news is Labour’s commitment to reforming the planning system. There aren’t many MPs who want planning reform “round our way”. It’s convenient for Labour that the green belt is mostly Tory heartlands. But planning reform is also needed to launch major infrastructure projects in metropolitan areas that need more power cabling or, dare I say it, fewer listed buildings? It requires the extended public sector to move faster and be less precious about all kinds of regulation and protections. Nevertheless, this is a rich vein for Labour—planning reform is a rare elixir: growth that doesn’t cost a penny.
So far, so good. Labour has cracked the ideological challenge of what left-of-centre growth philosophy looks like. It has doubled down on what the government’s role should be. It has tripled down on green growth at a time when the Tories, to everyone’s astonishment, are walking the other way. And it offers this along with stability and certainty—the precondition to anyone investing in Britain. On all these fronts, it has outflanked the government and won the goodwill of business.
It’s good ideology, good policy and good politics. But it’s not a plan for how Britain can compete for domestic and global investment. Competitiveness is the path by which firms grow and therefore the economy does too. Policymakers like to discuss growth conceptually. They draw on the theories of the Oxford PPE classroom, spiced up with a little of their own ideology. Well, forgive my vulgarity, but if you want growth, you need to follow the money. You need to understand firms and what makes them confident enough to invest. Otherwise, what you offer is growth in principle, but not in practice.
Labour’s plan for active government and a stable framework is necessary but insufficient. Competitiveness comprises a range of both macro- and microeconomic factors—including market size, regulation, labour market efficiency, skills, technological innovation and financial market development. This is where the Labour proposition is yet to develop or be tested.
Here, the Brexit effect comes into play. Today, British competitiveness is like the Black Knight from Monty Python and the Holy Grail. Remember the guy who gets his arms and legs chopped off and still begs for more punishment?
Brexit chops the legs off the British economy. I don’t wish to reopen an old debate and I, unlike many “Remoaners”, believe we can grow heartily post-Brexit. But it clearly and deliberately detaches the UK from a market of 450m people.
A year ago, I had breakfast with a stellar cast of British unicorns (new companies worth $1bn) to discuss what it would take to grow into Decacorns (worth $10bn plus). These folks were everything Sunak wants the UK economy to be. And yet, all of them agreed that Brexit had delivered a blow to their growth ambitions. It might still be possible to serve European customers, but it would be far more expensive and cumbersome. This made the US a more far attractive market for growth.
With our legs chopped off, British competitiveness relies on strengthening our other limbs. This is where Labour—and indeed the Tories—are not ready or willing to budge. Our politicians have not yet accepted that, after Brexit, we must make far tougher political choices if we want the economy to compete.
Take immigration. Immigration drives up GDP: that is a mathematical fact, endorsed by the independent Office for Budget Responsibility. GDP is number of hours worked (labour supply) multiplied by output for every hour worked (productivity). Given the UK’s endemic productivity problem, most of the growth in the last decade and forecast in the coming years is from labour supply, with immigration core to that. But both parties want less, not more.
Take regulation. The Labour party has always wanted more stringent regulation of the private sector and this is likely to continue. Labour has recognised that voters are feeling unstable because of what Starmer called in his party conference speech a new “age of insecurity”. Labour’s instinct is to offer protection from destabilising forces, much of which will be manifest in more regulation. In fairness, the Tories have begun that journey: regulation of the internet against harm; regulation of financial service companies to change the burden from caveat emptor to caveat vendor.
Labour doesn’t seem interested in a better balance between protection and growth. It needs to look again.
Or take employment rights. The Labour deputy leader, Angela Rayner, has been working with trade unions for several years to develop a package of employment rights in Britain similar to that in continental Europe. There is little to defend about insecure work or zero hours contracts where only the employer is benefitting from flexibility.
The bigger concern is on Labour’s proposal to introduce day one employment rights, in contrast with current law in which rights are accrued over two years. Where this matters is on the right to claim unfair dismissal immediately after an initial probation period, which brings the two-year window down to a few months. Again, this may be justifiable on a moral basis, but this element of labour market flexibility has given the UK a competitive edge over the rest of the EU for years. Making it harder to fire people can encourage employers to automate more instead of hiring people. That’s the story of France. But I’m not sure Labour really wants more robots and fewer people.
Cutting immigration. Increasing regulation. Strengthening employment rights. All areas where there is a powerful and popular case for Labour’s offer. But each of these actions cuts off another limb of British competitiveness. Taken together with Brexit, this depresses the case for why anyone should invest here.
The killer blow is likely to be the inability of the Starmer government to compensate for all this with significant fiscal firepower. If you believe in modern supply-side economics, Biden-style, then you need to have the balance sheet to back that. You need to fund tax incentives for companies to invest, as well as government spending on infrastructure, reskilling and local economic development.
Yet Labour is committed to fiscal prudence, as set out in its national policy forum document circulated to party leaders in September. Already some pledges have been reined in, including delays to the full introduction of green energy infrastructure and overseas aid increases. Tax rises likely to go ahead—on private schools, private equity and non-doms—are already allocated to investment in the public sector workforce. This iron discipline means that the investment in growth that is needed in modern supply-side economics is likely only possible through greater borrowing.
It feels that Labour has a convincing plan for a more secure and just country. And it is convincing on the management of public finances. But it’s not yet convincing on delivering growth.
Not that business seems to care. Businesspeople believe Starmer is going to win, and that he and Rachel Reeves are able stewards of the economy. Most of those I know are natural Conservative supporters who see Sunak and Jeremy Hunt as able, pro-business, responsible leaders—who are leading a party that doesn’t really want them in charge.
Many have noted the “scrambled egg and smoked salmon” offensive waged by Starmer and Reeves over breakfasts in the City. I have sat in many of those meetings and witnessed genuine listening on both sides and the growing realisation, on the part of UK CEOs and the world’s largest investors, that Starmer can stabilise the great ship Britannia. What they don’t yet see is anything that overcomes Britain’s current set of disadvantages. They don’t yet see “an offer”.
Countries need an offer to attract international and domestic investment. Biden offers them tax credits to locate their clean energy projects in the US. The Germans and Spanish proactively offer subsidies to attract global car companies. The EU offers sheer market size with zero trade barriers. India offers manufacturing at scale and a growing middle-class customer and employee base. Poland offers increasing amounts of digital talent. Ireland offers low corporate taxes. The French offer is targeted, professional and brought to you from the Versailles Palace by Monsieur Macron himself.
What does Starmer’s Britain offer the people who drive growth? That is now the exam question.
Here are some answers—five things that would make boardrooms sit up and investment flow. They would look pretty special in either a Labour or a Conservative manifesto for growth.
The first is a two-tiered tax system for companies that invest in Britain and those that don’t. Investment is the Achilles’ heel of the UK economy. So let’s blend the smarts of Sunak with the bravery of Starmer. Sunak as chancellor launched the Super Deduction. The idea was that companies’ tax bills would go from 19 to 25 per cent overnight, but any company that invested here would get significant deductions. Sadly, it was made temporary, but Hunt extended the idea of tax incentives to invest through the new capital expensing regime announced in the budget this year. That too is a finite measure. But imagine a new government confirming in its first 100 days that this would apply for a full parliamentary term and beyond. Now that is something you can take on a roadshow for Britain.
The second is a complete revamp of the way we think about the skills we need to grow. It is not hard to forecast the growth industries in the UK for the next decade, and the professions that will grow and those that will shrink. This is not, however, the way we think about the labour market today. We should combine immigration and skills into one approach, one process, one body. Experts should outline the skills the country needs in the next decade; identify where we have short-term gaps; use fixed-term immigration to fill them; and all the while update the education and training system to grow those skills at home for the medium term. If we know we need more welders or HGV drivers or radiographers, then make immigration for people in those professions immediately available and attractive, while shifting more of the further and higher education budgets or apprenticeship levy funds to those fields in the medium term.
The third is an adaptation of Labour’s green energy plan. As money gets tighter, government will be less able to implement this alone. The focus will need to shift from how much can government spend, to how much private sector spend can government unlock. Reeves now says that public investment must be met threefold by the private sector. The principle is right, but the mechanism sounds like the usual Treasury “value for money” test that means the government never makes bets. This is very much the chatter of green industry chiefs at home and abroad. Labour needs to persuade UK capital markets, UK-based green businesses and globally owned energy companies that the country will compete on private sector-led green growth. It should now build the expertise that Whitehall has so far lacked to design green market mechanisms. GB Energy can be a nationalised energy company, or it can be the lynchpin of a broader market attracting inward investment.
The fourth requires a total mindset shift from Labour to see “technology” as opportunity, not harm. Sunak is deeply passionate and knowledgeable about technological innovation and its role in UK growth. He is right. Tech sectors—AI, biotech, life science, quantum, fintech—are high-growth, high-productivity sectors. They create well-paid jobs everywhere in the country. And we are really good at them. But Labour lacks a champion for these sectors. A genuine devotee who believes that Britain can lead the world and knows how to get there. Everyone in the industry knows it. Not since Tom Watson in 2009 has the Labour party had a technology champion. The harms of tech are dwarfed by its opportunities—but it’s not clear that Labour believes that.
Finally, we need an answer to our smallness. Brexit shrank our market and caused a double whammy. We lack fiscal firepower in sectors that depend on continental-sized budgets such as energy and life sciences. And we lack the market size for growth because of divergent market rules from Europe. This isn’t easy to fix. It requires a more normalised trading relationship with Europe that is more relaxed about alignment now that the “first-principles” question of sovereignty has been resolved. It also requires Britain to forge partnerships that can liberalise global service sector trade. Manufacturing and agriculture are important in Britain, but services dominate. If we can’t create a more open world trade regime for services, then, as the biggest beast in that jungle, we will struggle to grow our market. Economic nationalism doesn’t suit Britain.
What next? Well I can predict that, in 2024, most UK business leaders and economic commentators will not be asking the current government for much. Instead, they will be focused on Labour—asking for more clarity and precision on how it will grow Britain.
Starmer is right on the priority. And Reeves is right on the philosophy. But no one has yet mapped out the practicality. Scrambled eggs is a good way for Labour and the private sector to make friends. But Labour needs to make plans. There’s a lot of gritty work to do. So let’s replace breakfast with takeaway pizza and lock everyone in a room until we’ve got a plan.
The IMF has just forecast that Britain will struggle to get one helping of growth in the year ahead. For Starmer to deliver three of them—growth, growth, growth—we will need something very different.