For both major political parties, the priority is to design measures to boost productivity, resource allocation and long-term growth.
As in many other developed countries in recent times, both main political parties in the UK have made economic growth their top policy priority. After the volatile 49-day experience of Liz Truss’s government and its “race for growth” in 2022, however, both parties stress that there are no financial shortcuts to the path to growth. Rather, it is about designing policies to boost productivity, resource allocation and long-term growth. In this respect, the opposition Labour Party has a head start over the governing Conservatives, although both are still working out the details of actual implementation.
Dynamic, sustainable and inclusive growth is essential for a country where older generations risk seeing their children end up worse off than they were. This has not happened for decades. Only growth can provide the resources needed to raise living standards, improve public services, support sustainable energy initiatives, limit the scale of across-the-board tax increases and address inequality of wealth, income and opportunity.
In short, this is about raising the limit on economic growth. The Bank of England estimates that the potential growth of the British economy could be as low as 1%. At this rate, most of the country’s ills are likely to get worse rather than better over time. Moreover, this already low growth potential could deteriorate further if the problem is allowed to fester.
There is no single initiative, no silver bullet, that can change this outlook. Many British politicians are still haunted by the Truss saga. The then-new prime minister tried to use unfunded tax cuts to stimulate the economy, which led to a damaging bout of financial instability and forced a change of government. It is now widely accepted that after so many years of underinvestment and falling productivity, quality growth requires a comprehensive policy approach that builds on many intermediate objectives.
The Labour Party has gone further in specifying these structural reforms. Its programme includes proposals to reorganise the planning system, boost infrastructure, improve trade relations, attract domestic and foreign private investment (including by boosting a public fund, the National Wealth Fund), remove tax distortions and implement sectoral initiatives. The party has also identified promising public-private partnerships aimed at increasing investment funds, while encouraging innovation and efficiency.
Labour has indicated that it will try to “toughen up” many of these reforms by strengthening existing institutions. To ensure that all its policies remain consistent with financial stability, it has committed to adhering to the same public debt “rule” as the current Conservative Party.
The challenge now is to design a detailed implementation plan. It will need to include a monitoring system with very frequent readings, to provide real-time feedback and allow for timely course corrections, if necessary. Any economic policy roadmap must prioritize comprehensive reforms over piecemeal ones. These reforms must be implemented simultaneously, rather than sequentially, and they must occur as early as possible.
As Labour demonstrated with its successful take-off after coming to power in 1997, a new emphasis on growth would benefit from serious measures to bolster credibility. This was done by Gordon Brown, then Chancellor of the Exchequer, with his surprising and insightful decision to hand the reins of interest rate policy to the Bank of England, thus enshrining the principle of central bank independence.
It is to be hoped that the current Labour leadership has not ruled out too much policy flexibility in its quest for a decisive electoral victory. Some of the most powerful measures they propose require upfront resources, but their growth and financial benefits will only materialise over time. The next government will also find itself confronted with a more complex and increasingly fragmented international system; it will need to ensure the continued buy-in of the private sector, which will ultimately have to do the heavy lifting.
Another related task is to improve the functioning of existing growth engines while supporting the development of sectors and industries that will drive growth in the future. Finding the right balance may prove the most difficult part of the challenge, given the country’s resource constraints and the fact that some key initiatives are better pursued at the regional level. (The European Union currently faces a similar problem: it lacks sufficiently robust regional initiatives to drive innovation in artificial intelligence, life sciences, and sustainable energy.)
Promoting high, sustainable and inclusive growth has never been easy after so many years of neglect. The need to revamp the UK’s existing growth engines and kick-start new ones makes the task even more complicated. But to paraphrase a famous speech by US President John F. Kennedy, the winning party will have to do these things and “others, not because they are easy, but because they are hard.”
Project Syndicate, 2024.
www.project-syndicate.org
