Explaining Labour's economic policy

Good morning from New Economy Brief.

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Labour put the economy front and centre of their party conference in Liverpool, arguing for a new programme of ‘securonomics’ to address the cost of living crisis and generate growth. 

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In this week’s New Economy Brief we map out this programme, analyse the announcements in recent days, and explore the politics of economic policy ahead of the general election.

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Paradigm shift. “Globalisation, as we once knew it, is dead”. These were perhaps the key words in Shadow Chancellor Rachel Reeves’ speech on Monday, and the basis of the economic argument that followed. Labour economic philosophy springs from the belief that challenges from climate change to China's rise necessitate a new way of doing economic policy. At the heart of this is the idea of economic security - hence ‘securonomics’. We have covered this concept before, but in essence the argument is that economic policy should aim to secure Britain against financial shocks (for example by increasing supply of domestic clean energy and ‘friend-shoring’) and to give individuals more economic security in their daily lives (for example through stronger rights at work and more affordable housing). Sitting alongside this philosophy is the party’s economic mission to have the highest sustained growth in the G7.

• A new role for the state. Labour's central economic argument is that in this new world, economic security and high growth can only be achieved by rethinking the state’s role in markets. Specifically, through a new green industrial strategy where the government and business partner to drive investments in green industries and create the ‘jobs of the future’. Here, Labour is leaning heavily on Bidenomics and the US Inflation Reduction Act, as well as the influential work of UK-based economists such as UCL’s Marianna Mazzucato. The centrepiece of this is the Green Prosperity Plan, including the pledge to invest £28bn a year in climate policies, a National Wealth Fund that would invest strategically to ‘crowd in’ private finance, and creating a new publicly-owned energy company: GB Energy.
• Workers rights. Alongside the industrial strategy is Labour’s ‘New Deal for Working People’ - a package of reforms to workers’ rights including banning zero-hours contracts, ending fire and rehire, and giving workers full rights from day one of a contract (after a probationary period). Perhaps more significant is Labour’s interest in sectoral collective bargaining, starting with the care sector. Labour has strongly defended this package against the charge of being anti-business, with Starmer arguing that “worker rights are good for growth”. Again, the parallels with ‘union man’ Joe Biden are obvious.
• Other priorities. Elsewhere, Labour’s economic offer contains many familiar themes. Devolution, planning reform, a ‘real living wage’, and abolishing non-dom tax status are the signature policies.
• Fiscal credibility. Finally, Reeves has spent a great deal of time and energy stressing Labour’s fiscal prudence, setting out relatively tight fiscal rules including a commitment to cutting debt as a share of GDP by the end of the next parliament, a promise that every pledge will be fully funded, and new powers for the Office for Budget Responsibility (billed as avoiding a repeat of the Truss mini-budget).

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So what’s new? So far, so familiar. Those hoping for big new economic policies from this conference will have left disappointed. It was, overall, a policy-light affair. Some new ideas were eye-catching but not hugely significant, like a ‘Covid corruption commissioner’ to try to recover some of the Treasury’s £7bn fraudulently claimed and wasted during the pandemic. Far more substantial was Starmer’s announcement of ‘new towns’ built across the country, accompanied by reforms to the planning system and extra planning capacity for councils.

• Where is the growth coming from? The emphasis on planning was part of Labour’s efforts to demonstrate how they will achieve economic growth - their central mission. The other part was Reeves’ focus on unlocking private investment, which she called “the lifeblood of a growing economy”. Labour argues that a combination of stability, a renegotiated Brexit deal, planning reform, industrial strategy, and catalytic public investment can help revive anaemic UK business investment, and that this in turn will generate jobs and growth. The industrial strategy will mean these are concentrated in industries of the future and located in previously overlooked areas.
• Investment is the order of the day. Reeves used the word investment twelve times in her speech and there was a step-change in Labour’s willingness to argue for public investment alongside private, and to defend the idea of borrowing to invest and its potential effect on private investment. Reeves announced that Labour’s National Wealth Fund would aim to generate £3 of private investment for every £1 of public money, while a striking passage in Starmer’s speech links investment to fiscal responsibility: “We say yes to sound money. Yes to cutting waste and debt. Embrace the need for stability. Fiscal responsibility is non-negotiable. And if investment can kick-start growth. If investment can save money in the long-run. Can protect jobs, create jobs, crowd in billions of private investment. Then yes – we must get on and do it.”
• Doubling down. This newfound willingness to make the case for public investment reflected a wider doubling down on potential dividing lines which was one of the conference’s key take-aways. ‘Bring it on’ became a mantra, and senior Labour figures embraced differences from the Conservatives on the speed of the climate transition, willingness to invest, and workers’ rights. It looks like the party is comfortable fighting an election on these issues.

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So will it work politically? It is hard to avoid thinking this message is working for Labour given how far ahead they remain in the polls. Focusing on the cost of living and reviving public services mean they are addressing the two issues that overwhelmingly matter most to the voters they need. In contrast, we noted last week how little those issues featured at the Conservative Party conference. Emphasising stability and investment also seems to be winning more business support for Labour, further strengthening their position.

• Potential weaknesses. Conservative attacks on Labour come from three main angles. Firstly, the Green Prosperity Plan represents irresponsible spending, would be inflationary, and would end up costing people more by keeping interest rates higher for longer. Second, the new post-Uxbridge by-election focus on the costs that the climate transition could impose - costs that Labour plan to force on households. Third, the perennial attack that Labour would end up raising taxes. All three could be tricky for Labour - particularly the first, which is likely to cause much debate as the election nears, especially if inflation remains high.
• Retail offer. A potentially more damaging question is whether, for all Labour’s focus on the cost of living, the party really has enough of a ‘retail’ offer that would make people immediately better off. The worker’s rights package, living wage, and investments in clean energy are all designed to help with the cost of living (or ‘economic security’), but they mostly work over the medium to long term. It will be interesting to see if Labour come forward with a more tangible policy with immediate benefits for voters’ living standards closer to the election.

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And will it work economically? We can now be pretty confident that all this will broadly be the shape of Labour’s economic policy heading into the election. The party has certainly worked hard to repeat and flesh out the economic offer, but some areas are still vague (what does a ‘real living wage’ mean? How will it be pegged to the cost of living?). There are also big gaps where very little has been said (the absence of policy on welfare, or a real strategy for addressing poverty, remains striking.)  But the programme’s success or failure ultimately rests on the answers to two questions.

• Delivery. The first is whether these policies really can generate the levels of growth Labour hopes for, as quickly as they need to. As UCL’s Josh Ryan-Collins points out, while the turn to industrial strategy and focus on house-building are welcome, there are serious delivery challenges, not least in terms of the labour force required. 
• Will ambition exceed the current fiscal rules? The second question is whether it is really plausible to attempt such an ambitious programme, ‘rebuilding Britain’ as Labour put it, within the fiscal straightjacket they have made for themselves. As Common Wealth’s Mat Lawrence and JRF’s Alfie Stirling argue, the combination of tight fiscal rules, high interest rates and debt servicing costs (not to mention the cuts already baked into government spending plans) will make it incredibly difficult to invest on the scale needed to fund their green industrial strategy while simultaneously reforming and repairing dangerously underfunded public services and mending a damaged social safety net. Reeves argued that “you cannot tax and spend your way to growth”, but if Labour really are committed to these fiscal rules and to not raising taxes, big questions remain over whether they can achieve their ambitions. ‍
• Go big or go home. These questions are partly why Starmer adopted the slogan “a decade of national renewal” - warning that with such a terrible economic inheritance it will take time to see results. Labour’s worry is that if improvement comes too slowly, the public may decide to cut that decade short.