8 July 2024

Will Labour really be able to boost Britain’s growth?


Since the shock delivered by the global financial crisis in 2008-09, UK economic growth has rarely failed to do anything but disappoint. Annual average GDP growth in the 2010s was less than half the 3% or so rate achieved over the ten years to 2007. And ironing out more recent Covid-related volatility, growth outturns have been similarly poor over the last few years. 

It is this post-financial crisis slowdown which helps to explain many of the problems the UK faces today. These include negligible growth in productivity and real wages, dissatisfaction with the state of public services, political polarisation, a broken housing market and a general feeling that the economy simply isn’t working as it should.

That the Labour Party has set out an ambition for the UK to have the fastest sustained rate of growth in the G7 at least displays some ambition around such a fundamental issue. But it’s hard not to be sceptical when it comes to politicians suggesting that they can raise economic growth.

A poor track record is one reason. Efforts by the Conservative government of Edward Heath in the early 1970s to achieve unrealistic growth targets helped fuel the high inflation of that decade. And the economic boom and bust of the late 1980s was partly a consequence of then-Chancellor Nigel Lawson’s over-optimism that economic reforms under the Thatcher government had lifted growth onto a permanently higher plateau. 

An independent Bank of England and the commitment of both major political parties to fiscal prudence mean present-day politicians’ growth ambitions shouldn’t pose the same inflationary threat. In any case, structural barriers mean that realising those ambitions won’t be easy.

One obstacle is vested interests. Back in the 1970s, the economist Mancur Olsen argued that political and economic stability could carry the seeds of its own undoing by creating a privileged class more concerned with holding on to what it had than accepting the creative destruction that inevitably accompanies economic change and growth. Martin Wiener in his book ‘English Culture and the Decline of the Industrial Spirit’ (published in 1981) saw this anti-growthism as a problem the UK (or more specifically, England) was particularly prone to, reflecting the hostility of the middle- and upper-classes towards industrialism and growth and their hankering for a mythical ‘green and pleasant land’. Half a century on, it’s not clear that much has changed as far as resistance to development is concerned.

Another obstacle to raising growth is known to economists as the Baumol effect, after its originator, Arthur Baumol. The premise here is that the tendency for the services sector, where scope for productivity growth is typically limited, to expand as a share of the economy weighs on total productivity growth and ultimately results in economic stagnation. 

A third complication is the finding by some economists that long-run growth is largely determined by global factors, with efforts by national governments in areas such as tax, R&D, education and investment having no significant effect on GDP performance. 

Do these obstacles mean that Labour’s ambitions should be pooh-poohed? Not necessarily. For one, the right government policies can make a difference. In confronting Nimbyism, if a Labour government sticks to its intention to liberalise planning laws, the experience of other countries suggests the effect on growth could prove powerful. 

Meanwhile, raising the productivity of the services sector may be less challenging than in the past, thanks to the spread of artificial intelligence. The types of businesses which are most likely to use AI are already seeing significantly faster growth in productivity than elsewhere. The speed at which AI is currently being rolled out and its effect on growth could prove fortuitous for the new government.

So a combination of policy and lucky timing could see Labour preside over a pick-up in underlying growth. But in the endeavour for more growth, a Labour government could be its own worst enemy. The new government has committed to increase labour market regulation, while its intention to decarbonise the economy more rapidly than previous plans risks cementing the UK’s relatively high energy prices. Keir Starmer and his Chancellor Rachel Reeves have both talked a good game on going for growth, but actions speak louder than words. 

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Martin Beck is an economist and writer.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.