Stagnation nation. That’s an apt two-word description of the UK, where after 15 years of sluggish economic performance the prospect is for a shallow recession this year.
Politicians know they have a problem. In the past 13 years, David Cameron, Theresa May, Boris Johnson, Liz Truss and now Rishi Sunak have all proposed different ways of fixing things, none of which have moved the dial that much. Jeremy Hunt says his budget, on 15 March will be all about growth, but don’t hold your breath.
One suggested remedy for curing the UK’s economic ills that will certainly not be tried any time soon is rejoining the EU. There are those who argue that Britain should go down this route, but they don’t include either Sunak or Keir Starmer.
The opposition leader and the shadow chancellor, Rachel Reeves, say they want to secure better relations with the EU, but under a future Labour government there would be no attempt to be part of the single market or the customs union, let alone an application for full membership.
With both the main parties committed to making Brexit work, the search is on for policies that will not just get the economy moving again but do so in a way that spreads the benefits of growth to the left-behind parts of the country. They could start by taking a look at what Joe Biden is doing on the other side of the Atlantic with his Inflation Reduction Act (IRA).
The IRA is a bit of a misnomer since it has little to do with tackling the cost of living in the US. Instead, it offers subsidies to companies that set up clean energy plants in the US and generous tax credits for consumers who buy new electric vehicles produced there. It represents protectionism on a grand scale, and it was the talk of Davos last week.
In the heyday of the drive to open up markets in the 1990s and early 2000s, the IRA would have been universally condemned by those attending the World Economic Forum’s annual talkfest. But those days are over, at least for now. The trend is towards deglobalisation, with production either on-shored or sited in a country deemed to be friendly. Tellingly, there were plenty of Davos attendees who strongly backed the IRA. Larry Summers, the former US treasury secretary said it was a “historically positive measure”. France’s finance minister, Bruno Le Maire, said it was a good thing the US was providing incentives for investment in climate-friendly technology, and that Europe should do the same.
The EU will find it difficult to emulate what Biden has done, because it is not a fiscal union, but the European Commission has plans for a new fund to boost green investment, and will relax the rules on state aid, which are designed to promote a level playing field across member states. Having initially raised concerns about the discriminatory nature of the IRA, the EU seems to have come round to an if-you-can’t-beat-them-join-them approach.
This makes sense. While the EU could clearly take a case to the World Trade Organization over Biden’s use of subsidies, the bigger picture is that it is welcome news that the US is getting serious about tackling global heating. If the IRA encourages other countries to do likewise, all well and good.
That list of countries ought to include the UK. The head of the CBI, Tony Danker, said earlier this week that it was possible for the UK to lead the world on green growth but only with a change of mindset. Britain, he said was “on the verge of being relegated from the Champions League by the Americans and the Europeans: both [are] in an arms race to win global market share. Not only are they spending money, they’re abandoning regulatory barriers including state aid to win the prize! That’s a lesson for us on what it means to go big.”
Unfortunately, the current UK government is thinking small. Grant Shapps, the business secretary, said in Davos that Britain didn’t need its equivalent of an IRA because it had taken an early lead in renewable energy and the Americans were now playing catch-up. Kemi Badenoch, the trade secretary, made clear her concerns about a global subsidies race in her talks with the Americans and the Europeans.
Realistically, a different approach will require a change of government, and it was notable that Starmer used his visit to Davos to promote his idea for a green prosperity plan – a blueprint for a net-zero transition that would require a more activist state. While it won’t please all Labour supporters, Starmer’s thinking has evolved since the days when he was backing a second EU referendum. Leftwing supporters of Brexit have always argued that leaving the EU provided an opportunity to use state aid, subsidies, tax breaks and procurement to strengthen the UK’s industrial base, and the Labour leader seems to be slowly warming to some of those ideas.
Clearly, it would be daft to imagine that the UK could ever outspend the US, but it makes sense to borrow for investments that would boost the prospects of faster sustainable growth. Nor does a UK equivalent of an IRA have to break the bank, because, as Danker said in his speech, there are smart ways in which the government can spend money to support green growth.
And if the CBI can get behind funding immature technologies where markets don’t yet operate fully or providing incentives for locally sourced goods, then there is no earthly reason why Labour should not do the same.
Larry Elliott is the Guardian’s economics editor
