Will Labour’s plan for growth actually work? Two economists respond

The UK chancellor Rachel Reeves says the Labour government will go “further and faster” to kick-start the British economy. Economic growth – to raise living standards and fund public services – is apparently a core mission of this government.

Yet since the general election last July, this growth has proved elusive.

In fairness, the UK economy been pretty stagnant for a long time. And as Reeves sometimes mentions, she arguably inherited the worst set of economic circumstances since 1974.

Nevertheless, the government has been guilty of some major own goals. The means-testing of winter fuel payments drew derision, while the public framing of a “painful” budget in October 2024 dented business and consumer confidence.

So after a difficult first six months in office, the chancellor’s big speech on January 29 was an opportunity for a major economic reset. And there were some signs of encouragement.

She reaffirmed, for example, a commitment to reforming the UK’s antiquated planning laws for residential and commercial building. And there was a big emphasis on public investment, which is to rise to 2.6% of GDP over this parliament, compared to the previous government’s plans of 1.9%.

Airport expansion at Heathrow (and to a lesser extent, Luton and Gatwick) aims to enhance global connectivity and increase trade and investment, especially with emerging economies.

But those plans, which run counter to the government’s net zero goals, unsurprisingly sparked the ire of environmental campaigners, as well as some senior Labour MPs and party donors.

They may also widen the UK’s regional inequalities, drawing more investment and economic activity to the south-east. The same goes for the notion of building Europe’s “Silicon Valley” between Oxford and Cambridge.

That said, some other regions may benefit from announcements which included a £28 million investment in Cornish Metals (for materials for solar panels and wind turbines), and £63 million for advanced fuels which should bring more high-skilled jobs to areas like Teesside. There were also plans for housing and commercial redevelopment around Old Trafford in Manchester.

Some of these projects will form part of the government’s new industrial strategy, which is expected in the spring.

Red tape restrictions

One word to look out for when that strategy is unveiled is “Brexit”, which continues to act as a drag on the UK’s growth. Yet in her speech, while Reeves used the “growth” word more than 50 times, she mentioned Brexit just once.

It deserves much more attention. For investment in the UK has been lacklustre since the 2016 referendum, and research shows that post-Brexit red tape has hampered exports, especially for smaller firms. Overall, the UK’s exports of goods are down by 9% since 2020, while similar economies have seen their exports rise by 1%.

The chancellor has previously suggested a Brexit “reset”, and there may be a future a deal to ease some Brexit agri-food trade barriers. Reeves has also floated the possibility of the UK joining a “Pan-Euro” customs zone.

Other moves which might help UK manufacturing include a bill that would allow the government to keep pace with new EU product safety regulations, and anything else which avoids new administrative costs for businesses.

Yet despite the government perhaps adopting a more conciliatory tone with the EU, there are frustrations with the UK’s “red lines”, such as a refusal to agree to a scheme which would make it easier for young EU citizens to travel, work and study in the UK, and for young UK nationals to do the same in EU member states.

Execution

And while the chancellor’s speech highlighted the government’s long-term ambitions for growth, there was little to address current weaknesses quickly.

For despite a change to Labour’s self-imposed fiscal rules last autumnn, the government still faces significant public borrowing constraints. This will restrict the amount of investment required to fundamentally transform public infrastructure, without major private sector support.

And planning reforms, infrastructure projects, and new trade deals all take time and face political, legal and logistical hurdles. This will also delay growth.

Labour’s ambitions for a more pro-growth, pro-business agenda mark a positive shift, at least in tone. But actual, visible, tangible growth depends on execution. This in turn depends on private sector money, overcoming bureaucratic hurdles, and cutting the Brexit red-tape that continues to hamper trade with the EU.

Without effective action across the board, including immediate fiscal stimulus, the chancellor’s words may begin to sound a little hollow if the mission for growth soon starts to look like mission impossible.

All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath.