Does Labour understand growth?

21 November, 2023
CapX, by Sam Watling

 

It’s widely agreed that responding to a Budget or Autumn Statement is one of the hardest jobs in politics. Not only does the Shadow Chancellor have to react to a whole new set of forecasts and fiscal policies, but also set out an alternative economic vision. So what can we expect from Rachel Reeves tomorrow?

A report published by the Labour Party last year, ‘Building a New Britain’, can offer a few clues. It identifies Britain’s lacklustre productivity as the main barrier to growth. In 2010 British labour productivity was around 15% lower than in Europe and 20% lower than in America and that gap has increased by 5% in the intervening 13 years. Under reasonable economic assumptions this ‘productivity failure’ has left British workers £4750 worse off and reduced the amount of money going to essential public services such as schools and hospitals.

To fix this problem the ‘Building a new Britain’ report suggests raising investment using targeted public expenditure in critical sectors to ‘crowd in’ a greater amount of private sector investment. Specifically, this involves increasing long-term public investment in clean energy, reforming the planning and land value capture system to re-start the new towns programme and finally increasing infrastructure spending in less well-off regions.

No one should seriously dispute the overall problems highlighted by the report. Any attempt to add policy solutions to the debate on Britain’s stagnant economy beyond spraying around non-existent money on favoured electoral demographics should be welcomed. Equally, the three areas identified are, by anyone’s admission, the most serious bottlenecks affecting the British economy. However, the policy suggestions amount to little more than wishful thinking undercut by admissions that nothing which requires increased spending will actually happen.

For example, the section proposing an ‘The Energy Independence Act’ sets the pattern for the rest of the report. It begins by waxing lyrical about the economic benefits of clean energy and how the government could ‘drive investment in gigafactories’ and other futuristic technologies. However it then concedes that there probably isn’t any available money for this and we should instead ‘consider’ more ‘targeted innovation’ and ‘R&D’.

Likewise, the transport section notes that Britain’s historic neglect of infrastructure means that we are starting from a lower base than our competitors, which it says justifies higher spending since it will have a higher ‘growth impact’ than expected. It then contradicts itself by suggesting there should be a review to look at what they can do with ‘the same amount of money’. Equally, it then demands that the government ‘green book’ guidelines on maximising growth from infrastructure spending be scrapped to fund less economically beneficial programmes in deprived regions, which of course undermines the entire principle of the paper’s justification for transport infrastructure in the first place.

The report is most specific in its recommendation on housing. Unfortunately, this is also where it is most misguided. It notes that the high productivity of London means that building there can generate large-scale economic growth coupled with tax revenues. However, it then demands an incoming Labour administration resurrect the New Towns programme, intended to build housing far away from these successful agglomerations. It also suggests that these towns be funded through a land value tax and administered by a bureaucratic planning organisation akin to Harold Wilson’s failed Land Commission. This is politically controversial, and it’s highly questionable whether it will do anything to eliminate the main constraint on housebuilding, which isn’t that land is difficult to acquire, but that difficult to get permission to build anything on it

The most enlightening part of the report is what is the bits it leaves out. Namely the fairly obvious fact that if you want to increase investment without necessarily spending more you will have to cut costs and increase efficiency. Indeed, it is arguable that total British investment is low precisely because this country makes the cost of investing so high. Investment in physical infrastructure, such as energy systems, infrastructure and housing, is beset by a restrictive planning system which limits construction and causes long planning delays.

In addition, much public investment is plagued by a lack of institutional knowledge, which leads to over-engineering, constant and expensive changes in specification and overreliance on outsourcing. This curtails the feasibility of infrastructure projects in less productive areas with less immediate economic benefits. Crossrail was so popular that it was still worth its spiralling costs, but HS2’s northern leg was cut after ballooning costs meant that the benefit-cost ratio had dwindled to under 0:4.

To do this, the easiest thing a government can do is to cut the costs it has direct control of. Granted, there are fleeting endorsements of Britain Remade reports that suggest doing just this, and a passing reference to reforming infrastructure planning, but they are far too perfunctory. Solving these issues requires extensive, detailed and politically difficult reforms. This includes long-term infrastructure planning, improvements in civil service procurement and engineering capacity and perhaps most crucially of all. reforming the British planning system. Without this, the ‘New Britain’ Labour envisions will be delivered after significant delays and cost overruns and will look a lot like the current one.