Sir Keir Starmer’s serious and sombre address to the nation on the coming Budget demonstrated how far the Labour Party has changed. Strong fiscal discipline is important for governments, particularly Labour governments. The British economy has effectively endured 14 years of stagnation and years of austerity under the Coalition and then Conservative governments did little to stimulate the economy. As Labour seeks to go for growth it must focus on making the UK an investment led economy with a competitive tax environment and not repeating the mistakes of the past.
The austerity measures introduced by the Conservative government in 2010 were ostensibly designed to reduce the national debt and stabilize the economy after the global financial crisis. However, the reality of austerity in the UK has been far more damaging than beneficial. Public services were drastically cut, leading to widespread social and economic hardship. The National Health Service (NHS) faced chronic underfunding, local councils were stripped of vital resources, and social safety nets were eroded, leaving the most vulnerable populations exposed to poverty and insecurity. The deep cuts led to social divisions and dissatisfaction and decade of huge political upheaval. We cannot allow this to happen again.
The problem with the UK economy is very simple, we are just not competitive enough. It is far cheaper and consequentially more profitable to produce goods in other countries. We are largely a service economy which pays little attention to industry, and yet it is industry where the higher productivity gains can be achieved leading to higher growth. It is very difficult to improve productivity in services and all those economies around the world that are booming, such as the United States, are placing a heavy emphasis on revitalising industry and becoming an export led economy. Labour should look to the United States as a model for growth.
The economic rationale for austerity has also been widely discredited. Austerity policies contributed to a sluggish recovery, with economic growth stalling and productivity remaining low. Far from restoring fiscal health, austerity deepened economic inequalities and stifled long-term economic potential. With a fragile recovery from the pandemic and soaring inflation caused by the war in Ukraine, we need to focus on competitiveness and not revert to austerity. When Rachel Reeves delivers her Budget in October expanding the size of the economy should be the mission.
In the drive for growth the government needs to do one thing and that is make Britain more competitive. We have lost investment in this country under the Conservatives because business taxes soared. With Ireland having a Corporation Tax rate of 12.5%, and the EU average being 21.5% while the UK’s is more than double at 25%, it should come as no surprise that companies are choosing Ireland and the EU. Keir Starmer said that a high tax economy is a low growth economy and that is still correct. We also need tax incentives to encourage industry to invest. The super deduction introduced by the previous government is a good example of that sort of thing. In her Budget, Rachel Reeves should look at incentives for research and development, plant and machinery, skills and training. This is fundamental if the UK is to compete in any meaningful way and if we are to have the economy where reshoring is possible as the world becomes a more uncertain and dangerous place.
The government has announced that it will reform the planning system to increase house building. This is to be welcomed. But it also needs to ensure we are planning for industry. When serving as Shadow Chancellor, Rachel Reeves said that she wanted the UK to make more things. We can only do that if the planning system accommodates expansion of plants and factories and provides the necessary infrastructure such as road and rail to meet the needs of an expanding industry. Industry also needs energy security. The government was right to announce GB energy to build on renewable energy for the future. But we also need to ensure that while we transition to net-zero we still have the capacity to exploit and utilise our own natural longstanding energy resources.
Successive governments have tried to respond to the UKs poor performance in terms of productivity relative to other comparable economies, and yet the UK still lags. The government cannot improve productivity in the private sector, this can only happen through investment in areas of the economy such as automation, digitalisation, power and technology. The government will be re-elected or removed from office based on whether it can grow the economy and the only way we will achieve growth is if we increase investment. The government should establish a Productivity Commission charged with examining the fundamental reasons for the UKs chronically weak levels of investment. That Commission should explore all options including the valuation of sterling and its competitiveness relative to other currencies, as well as tax and regulation.
For Sir Keir Starmer and the new Labour government, the choice is clear, and the consequences are also clear. Growth is the mission and a failure to deliver the growth we need could have dire consequences electorally given how volatile British politics is. The failures of austerity are well-documented, and the risks of repeating such policies are too great. The government should embrace a progressive and perhaps radical, investment-driven approach that focuses on rebuilding the economy, addressing inequalities, and fixing the foundations of the British economy.
