In this post, Professor Phil Tomlinson, Co-Director of the Centre for Governance, Regulation & Industrial Strategy, and Professor David Bailey from the University of Birmingham explore the challenges facing the Labour Party as it takes charge after 14 years in opposition.
The UK’s recent General Election delivered the Labour Party a landslide Parliamentary majority. This was achieved on a mere 33.7% of the popular vote (up by only 1.5% on its loss in 2019) – the lowest ever share of a winning party.
Labour was a beneficiary of the peculiarities of the UK’s first-past-the-post electoral system, the widespread rejection of the Conservatives (who were reduced to 121 seats) and the surge in support for the Reform Party, which split the right-wing vote.
Labour’s victory might not be as convincing as the Parliamentary arithmetic suggests, given that its vote share was around 5% less than the combined share of the Conservatives and Reform. Yet not all voters of these two parties would necessarily support the other.
Indeed, if the Conservatives veer further right (onto the political ground held by Reform), then they are likely to lose voters to the centre. Until the Conservatives return to the centre-ground politics of Michael Heseltine, then they are unlikely to be electorally competitive.
Labour’s position in power may therefore be safe for some time – but there is a caveat. In a mirror image of Boris Johnson’s election triumph nearly five years ago, Labour’s new voter coalition consists of winning back its traditional Red Wall seats and gaining seats across the south – the so-called ‘Blue Wall’.
As the Tories discovered, satisfying these very different constituencies is difficult at the best of times – if Labour fails to deliver, then it could all end in tears.
Economics: growth is the government mantra
Moreover, Labour inherits the most challenging set of circumstances of any incoming government since 1974 – a stagnant economy, a cost of living crisis and a high tax burden alongside record high NHS waiting lists, crumbling infrastructure and a much-diminished public realm.
Labour is pinning its hopes on generating higher economic growth to solve these problems. Put simply, higher levels of national income mean more resources for public services, without having to resort to tax rises.
Yet, delivering growth in GDP per capita is easier said than done. Since 1974, no UK government has been able to better the much-maligned Jim Callaghan government’s growth record.
Since the election, government ministers have been eager to demonstrate they are in a hurry to get Britain growing again. Rachel Reeves used her first speech as Chancellor to announce a reform of planning laws to facilitate house building and unblock infrastructure projects.
Raising investment in the UK is a priority, and Reeves has promised to host a global investment summit within Labour’s first 100 days.
Reeves has also announced plans for a new £7.3 billion National Wealth Fund to direct public investment in areas such as ports and green technologies. The aim is to ‘crowd in’ three times as much private investment in these potential high-growth sectors.
The government is also investing £1.7 billion a year in a state energy company, Great British Energy, to roll out renewables and secure supplies of clean energy.
Reinvigorating strategy
The new business secretary, Jonathan Reynolds, will oversee a new industrial strategy, backed by a statutory body – a re-established Industrial Strategy Council – to offer expert advice and critical appraisal of projects.
This will look to build on the UK’s strengths – such as professional services, advanced manufacturing and the creative sectors – but also financial services. Policies favouring the City could, however, hamper attempts to reduce the UK’s wide regional inequalities, which have been associated with the rise in ‘populist’ politics.
Since 2010, local governments have faced significant cuts in central government revenue support. This has placed several local authorities on the verge of bankruptcy and left many public services withering on the vine.
The new government has also dropped the rhetoric of ‘levelling up’, while emphasising its commitment to reducing regional disparities – including a commitment to further devolution.
Finally, Labour is resolute on the importance of providing stability for business. Given the often chaotic and uncertain political environment of the past few years, this should not be underplayed, especially in bolstering business confidence. However, on its own this is unlikely to shift the dial sufficiently.
Constraints on growth?
Business has generally welcomed Labour’s plans. However, many economists are sceptical about whether these growth ambitions will actually be met, given the modest scale of proposed public investment. The recent Institute for Public Policy Research report noted that Labour is committed to plans to cut total public investment over this Parliament – by more than the entire Conservative government of 2010-24!
This is because Rachel Reeves has signed up to meeting previous Chancellor Jeremy Hunt’s fiscal rules. This self-imposed constraint will severely limit Labour’s ability to grow the economy.
Brexit has also significantly hit UK goods trade and investment – estimates put the long-term hit to UK GDP at 5-6%. Yet, the new Prime Minister has categorically ruled out rejoining the European single market, although he hopes to secure some concessions to the existing EU-UK Trade and Cooperation Agreement.
These would be welcome in areas such as chemicals regulation but will do little to lift overall growth, especially as the EU has ruled out allowing the UK to ‘cherry pick’ deals.
In 1964, an incoming Labour government – also on a mission to restore growth – refused to countenance a sterling devaluation. This decision led to a period of austerity and the stop-go growth policies of the 1960s, before devaluation was forced upon the country by the markets – and the so-called ‘gnomes of Zurich’ – in 1967. Labour lost both its economic credibility and the subsequent 1970 General Election.
If the new Labour government wants to avoid the mistakes of the past, it needs to revisit fiscal rules and be brave enough to deal with Brexit’s drag on growth.
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