The message from the king’s speech was clear. After 14 years in opposition, Labour is back with a plan to get the economy moving. The brakes on growth are coming off, says the prime minister.
In a way, the measures outlined to achieve the government’s “mission” hark back to Labour governments of the past. There is to be more nationalisation, more centralised control of planning, more power for workers, an industrial strategy council and a national wealth fund to boost investment in infrastructure projects. Economic policy under Keir Starmer will become more interventionist and have a discernible social-democratic tinge to it.
But only modestly so. This will not be a tax-and-spend government prepared to boost growth by borrowing for long-term investment. Active demand management is not part of the plan. Instead, the chancellor, Rachel Reeves, will be forced to get the approval of the independent Office for Budget Responsibility (OBR) for any major tax and spending decisions she intends to take.
This proposal is really just for show, since Reeves has shown no desire to emulate Liz Truss, who came a cropper after sidelining the OBR and announcing £45bn of unfunded tax cuts in September 2022. But with interest rates set by the technocrats at the Bank of England and fiscal policy policed by the technocrats at the OBR, it leaves little scope for the government to act on the demand side of the economy.
Labour won’t mind this, because it thinks the real problems of the economy lie on the supply side, and that a period of stability is needed to allow reforms to work. These weaknesses include the poor state of public infrastructure, low levels of business investment, weak productivity growth and inadequate skills.
With that in mind, the two most important bills announced in the speech involve planning and the workplace. Both have the advantage of potentially being transformative without costing the government serious amount of money.
Planning reform is seen as key to unlocking the door to faster growth. There will be national targets for housebuilding and a national strategy for infrastructure. The planning system will be reformed and streamlined. Democratic engagement will be about where, not if, new homes and infrastructure are built. This top-down approach is almost certain to be tested in the courts and is at odds with Labour’s separate plans to devolve more power to local authorities and metro mayors. It might not be universally popular in some of Labour’s newly won seats in the leafy shires either.
Business likes the sound of planning reform but is less keen on the employment rights bill, which will ban exploitative zero-hours contracts, end fire and rehire, provide a range of employment rights from a worker’s first day in a new job, and make it easier for trade unions to organise and operate.
Employers have expressed concern that the reforms will make the labour market less flexible. The government’s argument is that flexibility has not resulted in higher productivity or strong real wage growth, and that the changes will lead to companies being encouraged to invest more in new labour-saving equipment and in training.
Labour has been fortunate in coming to power with inflation back at 2% and growth on a gentle upswing. It will need to stay lucky because changes to the supply side of the economy are unlikely to bear fruit overnight and even then the impact will not appear dramatic. Estimates of the economy’s long-term sustainable growth rate range from 1% to 1.5%. If Labour manages to push that up by 0.25 percentage points by the end of this parliament it will be doing extremely well.
