How Labour can reap the benefits of economic growth

The week’s Autumn Statement was quite pessimistic about the growth outlook of Britain. The accompanying OBR analysis forecast growth will be below 1.5 per cent on average over the next five years, and even by the end of the period the growth in potential output is only up to 1.75 per cent. And on this the OBR is much more optimistic than some other forecasters, most notably the Bank of England.

I think that’s wrong and growth is likely to pick up. That presents an opportunity for an incoming Labour government. Labour has spotted the potential here, announcing its own plan for growth. But it could be a lot better. Let me explain how.

First let’s see why current analyses are too gloomy. Growth has been slow in the UK since the Great Recession. We have been caught in a low-growth trap, with interest rates close to zero and debts only gradually being worked away. The current period of inflation and interest rate rises may well shock us out of that (at the expense of a nasty recession, of course) to something more like pre-Great Recession normality.

The past few years have also seen an absolutely enormous economic dislocation created by Covid, triggering a transition to a new sort of economy in which many more of us work from home and shop online. The in-and-out of such a dislocation will have cost growth. We would be very unlucky to face anything similar again before 2030.

We have also been adjusting to Brexit. That is likely to have created transitional costs of around 2 per cent of GDP in lost growth. From here on we can expect to start garnering more of Brexit’s growth upside.

The years ahead also offer the promise of the harvesting of major new technologies that have been maturing for a while but not yet come properly to fruition. Green energy, AI, driverless vehicles and cancer vaccines are just a few examples where the period to 2030 may see a large upswing in their use.

So growth may naturally be more rapid in future. Labour has announced a seven-point growth plan: ‘green prosperity’; insulation; invest in renewables and nuclear; ‘modern industrial strategy’; ‘start-up review’; ‘fix business rates’; ‘fix holes in Brexit deal’.

There are a few promising things in there. But let me add some more concrete ides to the mix – 14 extra ideas to add to Labour’s initial seven – all intended to be consistent with Labour’s political philosophy.

1. Improve the Bank of England’s mandate. Operational independence for the Bank of England was a Labour innovation in 1997. The current inflation-targeting framework is now out of date and has not kept pace with changes to the targets other central banks use (eg the US Federal Reserve). Labour could reform it.
2. Increased high-skill immigration, perhaps targeting specific sectors such as higher education or green tech.
3. Specific tax breaks for emerging green or high tech.
4. Reforming income tax so the starting threshold is much higher and the basic rate is higher. They could also perhaps cut VAT and replace it with higher income taxes.
5. Removing the tax shield from debt interest.
6. Encouraging more unionisation but having unions required (say by the CMA) to compete with one another in providing union services.
7. Reinventing the private company so workers have more of a role on management boards and share more automatically in profits via profit-related pay.
8. More focus on ‘trades’ in education and a bit less on ‘professions’, so we get more plumbers and electricians and fewer accountants.
9. More housebuilding on the green belt – perhaps some new towns.
10. Less focus on routes to the South-East in transport policy and more on regional connectivity in the north of England.
11. Reform the functioning of public services so that increased funding inflows to regions or public sector units are conditional upon the achieving of measurable output targets.
12. Increase the scope for business to enact positive equalities strategy policies – for example, more all-women businesses, or all-older-people teams or all-gay teams.
13. Requiring royalties from any firm using Crown resources (perhaps calling it the 'Common Treasury' if ‘Crown resources’ seems problematic) – for example for any energy company, water company or fishing firm (domestic or foreign-based).
14. Increasing regional and local fiscal autonomy. The UK has very centralised tax-gathering. OECD evidence suggests more fiscal devolution can lead to faster growth. Labour’s strong local government presence might take advantage of this too.
    These measures could all potentially boost growth and all should be consistent with Labour’s underlying philosophy. By using pro-growth policies at a time when the economy may naturally be tending to grow faster anyway, an incoming 2024 Labour government may have the opportunity to push with the grain of economic forces, and reap the dividends over time.