The Labour leader Keir Starmer has warned that if his party wins the next UK general election, he will not be able to “turn on the spending taps”. Speaking at a thinktank event focused on the stagnation of the UK economy, he said the country was “in a hole” after 13 years of Conservative rule.
So if Labour were to win the next election, what would would its economic vision look like? And is it prepared to deal with the stagnation that has turned off those metaphorical taps?
For although the shadow chancellor Rachel Reeves has previously talked about what she calls “securonomics” – a promise to build an economy from the bottom up to provide security for working people – what that means in practise is not entirely clear.
And the planned policies – revitalising the NHS, boosting house building, providing clean energy across the UK – would all require significant public expenditure.
Reeves has also insisted that she would be fiscally prudent – that money would only be borrowed to invest, and public debt would fall. But that prudence will also have to tackle the time bomb that has now been placed under public finances: £27 billion of tax cuts announced by the chancellor in the 2023 autumn statement, and effectively secured by reducing real expenditure on public services.
So where will the resources come from to fulfil Labour’s ambition? Apparently from growth rising again after 13 terrible years.
And many agree that lack of growth is indeed at the core of the UK’s problems. But UK stagnation is not simply the result of successive Tory governments.
A similar malaise is afflicting some of the biggest economies in the world, and its roots can be found in the impact of two trends that have hindered growth for years.
First is globalisation – the aggressive spreading of production and trade across borders, controlled by huge multinationals.
And then there is “financialisation”, which may be defined as the way financial markets, institutions and elites gain greater influence over economic policy. This has involved the aggressive buying and selling of increasingly complex and multilayered financial assets across the world.
The failure of globalisation and financialisation became clear in the financial crisis that stretched from 2007 to 2009. And since then, most wealthy countries have been unable to find a new path of sustained growth.
If it is broke, fix it
Our new book, The State of Capitalism examines this seemingly impossible situation – where the old ways can no longer continue but a new way has not yet emerged.
We found that globalisation has undermined the forces of domestic investment in wealthy countries, while creating volatile supply chains across borders, the great risks of which became clear during the pandemic. Financialisation meanwhile, has promoted profit making through transactions, encouraging speculation and undermining investment in productivity. These conditions are far from conducive to sustained growth.
This can be seen in the US, in Japan and in the EU (especially Germany, which is currently in recession).
In the UK, productivity growth has been appalling, especially over the last 15 years, as the Resolution Foundation thinktank’s report noted. Poor productivity is at the heart of stagnating growth. The vaunted new technologies are simply not raising productivity rapidly enough.
The Resolution Foundation also noted that low productivity is associated with persistent weakness of private investment.
The point here is that weak investment is closely related to the financialisation of big businesses and the globalisation of productive capacity. Large enterprises with a global footprint hold huge amounts of liquid funds that are used in financial transactions, including the payment of dividends, instead of being productively invested. Productivity growth suffers.
And research suggests that when productivity growth is weak, profitability also suffers and relies on keeping wages low.
Confronting the challenge of UK stagnation, therefore, calls for real boldness. It requires moving away from globalisation and financialisation and a change to the structure of the economy to focus, above all, on manufacturing. And here Britain could build on some of the strengths and competitive advantages it holds in sectors like pharmaceuticals, clean energy and new technology.
Our book concludes that the answer to stagnation in wealthy countries, including Britain, is not more growth of the service sectors – especially finance – which have a poor record in raising productivity. Rather, Britain needs a wave of public investment in its productive sector and a sustained effort to reduce inequality. In simple terms, there must be a decisive shift away from capital and towards labour.
Decrying the economic failures of the Tories is easy. But confronting the economic disaster currently facing the UK requires a complete reset. “Securonomics” offers little evidence that the Labour Party is aware of the magnitude of the challenge it hopes to face.