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After six months of talking down the economy and warning of tough times ahead, the UK chancellor Rachel Reeves has changed her tune. She is now much more optimistic about Britain’s economic prospects and has announced a raft of measures including major pension reforms designed to unlock cash to boost growth and productivity.
But Labour’s political problem is that none of her plans will have an immediate impact on the UK’s anaemic growth rate – the economy has virtually flatlined for the last six months. From day one Reeves has put growth at the centre of her plans, and a lack of it will mean tough choices in the spring, when she must spell out government spending plans for the next three years.
The government is focusing on a wide range of “supply side” reforms, including unleashing pension funds to invest in Britain, as well as relaxing the planning system and building infrastructure – many of which have an uncanny resemblance to measures once proposed by former prime minister Liz Truss.
At the heart of these plans is a big increase in investment in infrastructure to boost productivity – things like roads, public transport and technology – where Britain lags behind its major rivals.
But there’s a big catch. The independent spending watchdog, the Office for Budget Responsibility (OBR), estimates that it will take years – or even decades – for infrastructure projects to transform the British economy, with only a 0.1% boost in growth in the near term for every additional 1% on public investment.
Without other measures that have a more immediate impact, the political risk to Labour is that its pledge to make everyone better off may feel hollow to voters.
The challenges are particularly acute for big transport projects, as the debacle of HS2 illustrates. Even with changes to the planning system, work on expanding Heathrow airport is unlikely to start before 2030. And major projects like the Lower Thames crossing between Kent and Essex and the Sizewell C nuclear reactor in Suffolk have been in the planning stage for nearly 20 years.
Electricity supply is another crucial area, with the need for more renewable energy and an expansion of the grid. This will now need to be financed largely by private capital as the government has scaled back its “green new deal”.
So how exactly will all these big plans be financed? The government is hoping to unleash additional investment from the UK pension fund industry, by changing the rules to allow defined benefit (sometimes called final salary) schemes with surpluses to invest more widely.
Although there is currently £160 billion available in these schemes, this could change if interest rates fall. It is also not clear how attractive such UK infrastructure investment would even be. Many projects, such as in privatised industries like water and electricity, will at least partly be funded by increased charges to consumers.
The government’s own spending plans to increase public investment are relatively modest. These plans bring government capital spending (which allows for borrowing under the fiscal rules) just slightly above the historic average.
Planning reform could also prove problematic. Although the government is changing some of the rules, especially in relation to housebuilding, planning decisions will be still made by local authorities. In many cases these will face strong local opposition, potentially delaying decisions.
This points to the larger political problem for the government. The changes will not eliminate the tension between the government’s growth and environmental objectives, with the latter potentially a crucial issue in many of the marginal seats won by Labour in the last election.
Prime Minister Keir Starmer has described the need to pull out the “weeds” of regulation as vital to growth plans. He has already sacked the head of the key regulatory agency, the Competition and Markets Authority. But allowing more consolidation of British industry could create monopolies, which tend to raise prices, increase profits and neglect investment.
There are even greater concerns over possible deregulation of the financial sector, which could abolish many of the safeguards established after the global financial crisis in 2008.
What’s missing?
The government is much less clear on what it is going to do about the supply of skilled labour than the availability of capital. Shortages of skilled workers could limit progress on these big infrastructure projects if workers are also needed to build housing.
Government plans for boosting skills training, and the funding for further and higher education, are still works in progress. Meanwhile, limits on immigration will reduce the number of skilled construction workers. And the details of the government’s plan to boost the labour force by getting more people on disability benefit back to work have yet to be spelled out.
As Labour sets out its long-term growth plan, dark clouds are looming. In particular, in global terms the British economy is one of the most dependent on international trade and investment. But most of its trade is with its two largest trading partners – the EU and the USA.
Growing protectionism in the US, coupled with a lack of access to EU markets caused by Brexit, could have a significant effect on Britain’s growth. The UK economy is projected by the IMF to grow by just 1.6% this year, which is still weak by historic standards.
It may be of little consolation to the public if this is higher than in France and Germany. Reeves may well find that’s simply not enough to satisfy the expectations of voters.
Steve Schifferes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
