How Labor can reap the benefits of economic growth

This week’s autumn statement was quite pessimistic about Britain’s growth prospects. The accompanying OBR analysis projects growth to average below 1.5 percent over the next five years, and even by the end of the period, growth in potential output is just 1.75 percent. And on this point, the OBR is much more bullish than some other forecasters, notably the Bank of England.

I think that’s wrong and growth is likely to pick up. That presents an opportunity for a new Labor government. Labor has seen the potential here and is announcing its own growth plan. But it can be much better. Let me explain how.

First, let’s see why the current analyzes are too bleak. Growth in the UK has been slow since the Great Recession. We are caught in a trap of low growth, with interest rates approaching zero and debt only being phased out. The current period of inflation and interest rate hikes may well jolt us out of that (at the cost of a nasty recession, of course) into something more akin to pre-Great Recession normality.

In recent years we have also seen absolutely massive economic disruption caused by Covid, which has initiated a transition to a new kind of economy where many more of us are working from home and shopping online. Entering and exiting such a disruption will incur cost growth. We would be very unhappy if we had to deal with something similar again before 2030.

We have also adapted to Brexit. That probably led to transition costs of about 2 percent of GDP in lost growth. From now on, we can expect to exploit more of the growth potential of Brexit.

The coming years also hold the promise of the harvest of important new technologies that have been maturing for some time but are yet to come to fruition. Green energy, AI, self-driving vehicles and cancer vaccines are just a few examples of which the use may increase significantly in the period up to 2030.

So, of course, growth could go faster in the future. Labor has announced a seven point growth plan: ‘green prosperity’; insulation; investing in renewable energy sources and nuclear energy; ‘modern industrial strategy’; start-up review; ‘fixed business rates’; ‘fix holes in Brexit deal’.

There are a few promising things in there. But let me add some more concrete ideas to the mix – 14 more ideas to add to Labour’s first 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 Labor innovation in 1997. The current framework for inflation targets is outdated and has not kept pace with the changes in targets used by other central banks (eg the US Federal Reserve). Labor could reform it.
  2. Increased immigration of the highly skilled, perhaps targeting specific sectors such as higher education or green technology.
  3. Specific tax benefits for emerging green or high-tech.
  4. Income tax reform, which makes the starting threshold much higher and the basic rate higher. They could also perhaps lower VAT and replace it with higher income taxes.
  5. Removing the tax shield from debt interest.
  6. Encourage more unionization, but require unions (e.g. by the CMA) to compete with each other in the provision of union services.
  7. Reinventing the private company so that employees have more role on boards of directors and more automatic profit sharing through earnings-related compensation.
  8. More focus on ‘trade’ in education and less on ‘professions’, resulting in more plumbers and electricians and fewer accountants.
  9. More housing in the green belt – maybe some new cities.
  10. Less focus on routes to the south east in transport policy and more on regional connectivity in the north of England.
  11. Reshape the functioning of public services so that greater inflows of funding to regions or public sector units are contingent on the achievement of measurable output targets.
  12. Expand the opportunities for companies to adopt positive equality strategy policies – for example, more all-female companies, or senior-only teams, or gay-only teams.
  13. Require royalties from any company that uses Crown resources (perhaps call the “Common Treasury” if “Crown resources” seem problematic) – for example, for any energy, water, or fishing company (domestic or overseas).
  14. Increasing regional and local fiscal autonomy. The UK has a very centralized tax collection. OECD data suggests that more fiscal decentralization could lead to faster growth. Labor’s strong local government presence could also benefit from this.

These measures could all boost growth and they should all be in line with Labour’s underlying philosophy. By pursuing growth-enhancing policies at a time when the economy is naturally growing faster anyway, an incoming Labor government in 2024 could have the opportunity to evolve with economic forces and reap the rewards over time.

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