There was a distinct lack of rabbits out of the hat in Rachel Reeves’s speech at the Labour party conference. Setting up a commission to investigate dodgy deals during the Covid-19 pandemic and tightening up government use of consultancies and private jets played well to conference, but will raise just a few billion pounds – a negligible figure.
Instead, Reeves concentrated on ramming home the key messages of the leadership: stability, security and, more than anything else, growth. It is certainly a message voters are in need of hearing after one of the most tumultuous periods in British economic history since the global financial crisis. It is also a message that business probably wants and needs to hear after yet another U-turn on transport infrastructure in the shape of the abandoning of the Birmingham-to-Manchester leg of HS2.
But from where, exactly, will this growth come, given Reeves’s assertion that “you cannot tax and spend your way to growth”, and given that Labour’s “iron-clad fiscal rules” will not allow them to borrow for day-to-day expenditure? And, a second issue: will this growth come in time to restore Britain’s creaking public services?
The party is convinced growth can be generated from classical Keynesian stimulus: a major expansion in capital investment. This will come from both the public sector – in the form of £28bn-per-year investment in green projects by the end of the parliament – and, more importantly, from the private sector. Reeves confirmed Labour will set up a national wealth fund (NWF) and give it a target to leverage £3 of private sector funding from every £1 it invests.
This is much needed. The UK is an anomaly among high-income economies in lacking a major, publicly controlled national investment body. This can provide direct financing to strategically important sectors of the economy and infrastructure, and also incentivise private sector investment into these same projects, rather than pursuing short-term, speculative returns. By taking equity stakes in potentially high-growth firms, an NWF can both provide long-term, patient finance to those firms and also generate returns for the state that can fund further lending or be used to support public services.
Alongside the NWF, the party also plans a major liberalisation of planning rules to speed up strategic infrastructure developments, with mandatory new national guidance on priority projects in sectors such as battery factories, laboratories and 5G – and local communities will be incentivised to support such projects by being offered lower energy bills. This is all welcome; but given the long history of British political parties failing to speed up the rate of infrastructure development, it must be taken with some scepticism. The commitment to a strong and long-term industrial policy will be just as important.
Two big challenges face Labour given this plan for growth. First, will it be able to find sufficient capacity in terms of labour and resources to deliver on these plans? The UK labour market is already tight. Either Labour will have to oversee a major increase in immigration or it will have to start shifting people out of other, less important sectors of the economy and into its priority areas. The green transition requires structural economic change. Labour needs to be talking about reducing subsidies for fossil fuel sectors and raising taxes on them to speed up their retirement and the transfer of workers into green sectors.
The second challenge is the timing of this investment-generated growth. The UK has been near the bottom of the capital investment league tables in high-income economies since 2005. It is not realistic to expect a huge shift overnight that will instantly generate higher levels of growth. Rather, capital investment generates growth in the medium to longer term.
But Labour needs tens of billions of pounds now for investment in education, health and other parts of the public sector after decades of austerity. Some of this is capital investment – notably for schools and hospitals – where there remains some ambiguity about Labour’s fiscal rules. But much of it is required to pay for more teachers, doctors and nurses, police and other public sector workers – that is, day-to-day spending.
A well-educated and healthy workforce is, rather obviously, fundamental to economic growth. More than half a million people left the UK workforce between 2018 and 2022, mainly due to the effects of the pandemic, which overwhelmed the health sector. This is one explanation for the UK’s struggle with high inflation relative to other countries: businesses have had to raise wages rapidly to attract scarce workers.
Labour is right to emphasise the role of government in supporting and steering better private sector investment. But it appears to be missing a strategy for rebuilding not just the physical, but also the social and health infrastructure of the country. Without this, the danger is that business will remain sceptical about increasing investment and the risk of inflation may remain.
Investing in a country’s human, as well as physical, capital is traditionally the job of government. If it does win power, Labour may have to reconsider its borrowing rules or raise taxes – most obviously on wealth.
Josh Ryan-Collins is associate professor of economics and finance at the UCL Institute for Innovation and Public Purpose
