A Labour government that comes to power after a prolonged period of unbroken Conservative rule. A sense in the country that something has gone seriously wrong with the economy and that change is needed. A backdrop of rapid technological change. For 2024, read 1964. For Sir Keir Starmer, read Harold Wilson.
Wilson came to power with a national plan to grow the economy by 25% by the end of the 1960s. Starmer has a national mission to make the UK the fastest growing economy in the G7. We’ve been here before, but there is a chance – no more than that – that things may turn out better for Starmer than they did for Wilson.
The 1964 Labour government was hamstrung from the start by Wilson’s determination to defend an overvalued pound – a decision that eventually led to devaluation, austerity and defeat at the 1970 election.
Last week, the financial markets greeted Labour’s landslide victory with a big yawn. The pound was unmoved, shares rose and there was absolutely no sign of international investors heading for the exit.
In her first press conference as chancellor, Rachel Reeves said she had looked at the books over the weekend and found the public finances to be in just as a big a mess as she had assumed while in opposition. Labour was saddled with the worst inheritance of any government since the second world war, she insisted.
Let’s be clear, Reeves has not been left with the best of hands, but the pound can find its own level in the currency markets, the national debt is not out of control, and the interest payments on government borrowing are coming down now inflation has fallen back to 2%. All the stuff about money being tight is simply a way of blaming the Tories for the tough measures that new chancellors tend to announce in the first budget after an election. Fair enough. That’s politics.
Far more interesting was what Reeves had to say about Labour’s economic strategy, which is unashamedly focused on the pursuit of faster economic growth. There is a green tinge to Labour’s approach, but no more than that. The government’s mantra is simple: growth is good.
The free-market thinktanks love all the deregulation stuff, praising Reeves for having the courage that the Tories lacked to take on the growth blockers. Those who question the quest for ever-increasing gross domestic product and worry that plans to build on parts of the green belt will result in urban sprawl are going to struggle to get a hearing.
A degree of scepticism is warranted. No government since the 1970s has managed to build 300,000 new homes a year, let alone the 1.5m over a single parliament that Labour is targeting. There is a tension between nationally mandated housing targets and plans to devolve more power to local authorities. Attempts to force through development will be challenged in the courts. Any boost to growth from changes to the planning rules is likely to be more modest, and slower in coming than Reeves hopes.
Nor is the new national wealth fund likely to be a gamechanger. The idea is sound enough: provide extra funding to the national infrastructure bank so that it catalyses private sector investment in the growth industries of the future. But even assuming the state money is well targeted, the amount being pumped in by Reeves – £7.3bn – is too small to make a real difference.
All that said, there are still reasons to expect the UK’s economic performance to improve in the years ahead. The first is that after 15 years of low investment, nugatory increases in living standards and the poorest productivity growth since the early stages of the Industrial Revolution, the only way is up.
The second is that Labour is focused on improving the supply side of the economy. Wes Streeting, the health secretary, says his department should no longer be thought of as a public services department but as an economic growth department, and that makes good sense. The number of people employed in the UK is lower than before the pandemic, partly as a result of the direct effects of Covid-19 on mental and physical health, and partly because of longer NHS waiting lists. A fitter nation is a happier and more productive nation.
Finally, there will be a boost to growth from structural changes happening to the economy: the main one being the rapid advance of AI. For the past 15 years, the UK (and other developed nations) have been battling against headwinds: AI is a potential tailwind – and would be, no matter which party was in power.
“AI is coming,” says Erik Britton, of the economic consultancy Fathom. “It’s weird and scary and has the potential to transform our lives, for better or worse. Along the way, it will boost productivity, and not before time.”
The UK is pretty well placed to realise the benefits of AI, lying third in the global race to develop the technology after the US and China. Conservative governments in the 1980s were the lucky beneficiaries of peak North Sea oil and gas revenues (and managed to blow most of the windfall) and the new Labour government could reap the benefits of the AI revolution.
If all that’s a reason for optimism, a word of warning is needed. Wilson thought harnessing technology would be the catalyst for faster growth, and it didn’t happen. The benefits of AI may not be all they are cracked up to be. It is worth repeating: we have been here before.
• Larry Elliott is the Guardian’s economics editor
