Labour’s Straitjacket

Through the post​ arrives an artefact of a vanished civilisation, trailing that nimbus of mystery and sadness and forsaken possibility that belongs to reminders of a world we have lost. It comes in the form of a cheque from the state, made out to my son, for £1024. The cheque isn’t actually signed by Gordon Brown, but it might as well be. The Child Trust Fund was a New Labour manifesto promise from 2001, passed into law in January 2005, giving every child born after 1 September 2002 a lump sum of £250, to compound until their eighteenth birthday. (My son qualified by a matter of days. Are kids born just before the cut-off annoyed about it? Yes.) The idea was to address structural inequalities in wealth by giving an entire generation access to some capital of their own. George Osborne killed the scheme in January 2011.

When the Child Trust Fund was introduced in 2005, the national debt was 33 per cent of GDP, a pound was worth $1.90/ €1.42, inflation was 1.6 per cent and GDP per capita was growing at 1.9 per cent. That year, the government spent £49 billion more than it raised in tax. By January 2025, twenty years on, debt was 95 per cent of GDP, the pound was $1.30/€1.19, inflation was 3 per cent and growth was -0.1 per cent. This year the government will spend £137 billion more than it raises. In other words, everything is worse. There are many contributing factors to this overall narrative of national economic decline, the main ones being the banking bailout and ongoing malaise of the financial sector, exacerbated by a global financial crisis; the external shocks of Covid and Ukraine; and the self-inflicted harms of austerity, Brexit and Liz Truss. The UK economy was growing, and then it wasn’t. The books were more or less balanced, and then they weren’t. We were OK, and now we aren’t.

From an economic perspective, the solution to this predicament is clear: growth. As Keir Starmer explained to Bloomberg News, ‘the number one priority of this Labour government is growth. Growth, growth, growth.’ He told the Resolution Foundation that ‘growth must become Labour’s obsession if we are to turn around the economy.’ In the course of a speech explaining ‘Labour’s economic mission – to secure the highest sustained growth in the G7’, Starmer said that ‘every one of our national missions depends on it.’ After six months in Downing Street, he was reassuring us that ‘what Rachel Reeves and I have done is to make it clear to each of our cabinet colleagues that in each of their briefs, growth is the number one mission.’

Starmer is not unusual in this emphasis. Groucho Marx once said that the ideology of Hollywood was to praise American motherhood and condemn the man-eating shark. Contemporary politicians are similarly united around their belief in the obvious, pre-eminent virtue of economic growth, defined as an increase in GDP. Growth is such an omnipresent, inarguable universal good that it is surprising to find, in Daniel Susskind’s book Growth (Penguin, £10.99), just how recently it has gone from an idea to a reality, and then to an end in itself.

The first component of Susskind’s story is a stark truth about human history: for most of it, most people have lived in a condition of economic desperation. The central reality of life has been the need to find enough shelter and sustenance to survive. The life of most people in 1800 was no better, and in some demonstrable measures worse, than that of a hunter-gatherer in 100,000 bc. Malthus has had a terrible press for predicting that material progress would always cause a surge in population that wiped out any advantages brought by the improvements. Susskind, however, argues that Malthus was broadly correct. As Paul Krugman has written, ‘he was right about roughly 58 out of 60 centuries of civilisation … the two centuries he was wrong about were the two centuries that followed the publication of his work.’ The difference – the ‘escape’ – was made by the ‘Industrial Enlightenment’, as the economist Joel Mokyr calls it. That means not just the industrial revolution, but the shift in attitudes and ideologies that allowed and accompanied it: a belief ‘in the possibility and desirability of economic progress and growth through knowledge’.

Growth is comparatively recent, and the study of it and quantification of it even more so. Like many innovations, they came out of war. In his 1940 pamphlet How to Pay for the War, Keynes wrote that the big, basic problem complicating the answer to his question was the fact that ‘the statistics from which to build up these estimates are very inadequate.’ His attempts to frame the question – to put together an account of what an adequate measure of an entire economy would look like – are the beginnings of what we now understand as GDP.

Keynes’s creation has in effect eaten modern politics. As Susskind says, ‘the central goal of economic policy in most countries is “more GDP”.’ Nearly all governments set this as their lodestar. It is easy to mock GDP as a shibboleth, and there’s no denying that it’s a metric riddled with loopholes, paradoxes and inconsistencies. There are hundreds of examples of its shortcomings, and here is just one: most countries include illegal activities in their GDP, but the French have been reluctant to do that. They only added drug-dealing in 2018 and still don’t include prostitution. As Susskind explains, ‘“market activities” require mutual consent, and they argue no Parisian official could be sure it was present.’

Despite all the problems with GDP as a metric, there’s no denying that it correlates strongly with pretty much every good thing that developed societies want: health and longevity and educational attainment and multiple other metrics for well-being. In the UK, voters are clear about wanting high levels of public services combined with low levels of tax. GDP growth is the only way of getting even a vague version of that. At the same time, GDP growth in its modern neoliberal form has obviously come with severe disruption to community cohesion. It creates winners and losers – and the losers really, really mind. And then there’s the other big one: the last two and a bit centuries of GDP growth have been made possible by ever more abundant, ever cheaper energy from fossil fuels. That is frying the planet. Grown-up politics demands that we consciously face what Susskind calls ‘trade-offs’: moments when we acknowledge we are prioritising social needs ahead of growth, or vice versa; moments when we make expensive choices about moving away from fossil fuels, or decide not to.

It would be soothing if we could turn from the pages of Growth to the current state of UK politics and conclude that what we are seeing is a calm, mature consideration of Susskind’s trade-offs, worked through in real time in the world’s sixth-biggest economy. Unfortunately, as Rachel Reeves’s Spring Statement made horribly clear, things aren’t as neat as that. The Tories, in office, prepared a trap for Labour. It had a large sign on it saying ‘It’s a Trap’ and then next to that another sign saying ‘When We Say, It’s a Trap, What We Specifically Mean Is, It’s a Trap for the Incoming Labour Government and Especially for Rachel Reeves.’ The trap was that the Conservatives had committed themselves to fiscal plans which implied spending cuts far exceeding those the coalition government had imposed in the name of ‘austerity’. The trap Labour fell into was to commit to the same fiscal targets and to promise that they wouldn’t raise general taxation – unhelpfully defined as tax on ‘working people’ – to get out of the straitjacket into which they had voluntarily strapped themselves.

When Labour got into power, they seemed to make it their primary concern to talk down the economy as energetically as possible. It makes no sense for a government to trash-talk its own economy – unless the plan is to blame somebody else for how bad things are. Reeves was shocked, shocked, to find that the fiscal picture was even worse than she had expected. There was a £20 billion ‘black hole’ in Tory spending plans. It seemed obvious what was going to happen: Starmer and Reeves were going to say that UK Plc was so much more wrecked than they had thought that they were sadly, reluctantly, with the heaviest of hearts, going to do what everyone knew they had been planning all along and increase taxes across the board. That, by general economic consent, is the best way for a government to raise a significant amount of revenue. One of the easiest tricks would be to reverse the cuts in National Insurance brought in by the Sunak government. That was a strange policy, very expensive in fiscal terms (£18.8 billion) but barely noticed by voters, mainly because people don’t understand National Insurance and don’t really think of it as a tax.

Reeves didn’t do that. Instead she left the NI cut where it was and her first budget instead increased employers’ contribution to NI, thus raising £25 billion. But employers’ NI is a direct tax on employment, and the people who feel the burden most keenly are the small and medium-sized businesses which provide the majority of the UK’s private sector employment. (The UK’s biggest companies – Shell, Glaxo, HSBC and so on – make the bulk of their money abroad.) Most of these businesses have little economic leeway, so the cost of the tax rise will be passed on in the form of pay freezes, cuts to staff and increased prices for customers. If Reeves had deliberately devised a policy to do the maximum possible damage to growth, she couldn’t have done better. In addition, the government announced new rights for employees and a higher minimum wage. Those are worthwhile policies, but they impact smaller businesses disproportionately, and they should have been implemented after the economy had begun to grow, rather than at a moment of stagnation and fragility.

Reeves, in addition, has adopted a binding fiscal rule that the current budget should be on course to be in balance or surplus by 2029/30. The body which determines whether that objective is being met is the Office for Budget Responsibility. If the OBR says the books won’t balance, the government is obliged to change tack accordingly. You can see why she has done this. Liz Truss’s refusal to consult the OBR before announcing her £45 billion package of unfunded tax cuts was a big factor in destroying the credibility of her plans, her government and herself. By making a commitment not just to consult the OBR but abide by its assessments, Reeves is, in effect, committing to do the opposite of that.

We, the electorate, get why she is doing this. We remember Truss. But the fact is that the policy is a mistake. For one thing, OBR forecasts tend to be wrong. No particular opprobrium attaches to that: everyone’s forecasts tend to be wrong. As the old joke has it, forecasting is difficult, especially of the future. It is complicated to answer the question, ‘just how wrong’, but a typical item from the OBR’s own work states that ‘if our July 2015 income tax and NICs forecast had been correct, income tax and NICs receipts in 2019-20 would have been 8.3 per cent (£27.9 billion) higher. This is equivalent to 1.2 per cent of GDP.’ Now imagine Reeves imposing cuts based on a forecasting error of that magnitude. It would wipe out entire government departments. A subtler, but more significant problem with the OBR forecasts is that they tend to be wrong on the upside – that’s to say, they’re too optimistic. This is because the UK economy has a persistent problem with productivity which nobody understands and nobody knows how to fix. The OBR keeps coming up with numbers that assume the problem will go away, which it refuses to do.

It makes no sense for the government to subcontract its entire economic agenda to almost-certainly-wrong predictions by an external body. It is the opposite of what Labour has done by abolishing NHS England, on the grounds that the health quango was an attempt to depoliticise something inherently and always political. Nothing is more inherently political than raising and spending revenue. But if the OBR projects that the economy is on track to miss fiscal targets, the government has no choice except to change its policies. So the government is not in charge of its own central mission. Given the current level of unpredictability in global politics, this degree of would-be caution is reckless. Who can possibly tell what the impact of Trump’s truly astonishing tariff policies will be?

A five-years-off target and a fluctuating but binding forecast have led to benefit cuts. These have upset everybody: £4.8 billion of cuts will inflict suffering on some of the most vulnerable citizens, while barely making a dent in a health benefits bill which was £52 billion in 2020 and is – even with the cuts – on course to hit £97.7 billion by 2030. The cuts are both too much and nowhere near enough and besides, you can’t cut your way to growth.

What else could happen? The oldest rule of British statecraft – indeed, a rule older than British nationhood – is that however little money there is for everything else, there’s always enough money for a war. Trump’s abandonment of the Pax Americana seems likely to lead to a significant increase in UK and European defence spending, which, in turn, will give a bump to GDP. But probably only a small one. The UK has been specifically excluded by the EU from receiving any of the extra €800 billion it is spending on defence. This will surely be a central topic for the spending review, which is due to report in June. Labour’s new policies on tax and employment and government investment won’t even start to kick in until later this month, that is, not until after the Spring Statement. Trump’s insane trade war will start to kick in too. How can it make sense to change course now, ahead of these all-important realities, on the basis of a forecast?

The upshot: rather than having ‘the fastest growing economy in the G7’, GDP per capita (Labour’s preferred measure in opposition) fell 0.1 per cent in the last quarter of 2024. The government’s rhetoric – especially around planning – is stepping on the accelerator while its fiscal policy is stamping on the brake. They are making the right noises about energy, but have not yet shown that they are capable of enacting the necessary cultural shift around, for instance, nuclear energy. Judicial maximalism takes a heavy toll here. Plans for a nuclear reactor in Wales were cancelled partly because of concerns that it might ‘adversely affect Welsh language and culture’. Susskind’s idea about trade-offs is an important one: it’s not clear that the legal system and the quangocracy are listening. And then there’s another big one: can the UK seriously claim that its primary purpose is the pursuit of growth, while continuing to have the most expensive electricity in the developed world?

Labour has stayed on-message. On 27 February, Starmer told the British Kebab Awards: ‘The government is committed to delivering for small business and boosting productivity, so we will continue to build on our partnerships with businesses to achieve our mission. That is why we must work with businesses across the sector to help shape our approach to our mission for growth.’ An invitation to help shape an approach to a mission – who could resist that stirring call? Many factors affecting growth aren’t in government hands. The government decisions that would help grow the economy are changes to tax, trade arrangements with Europe, the cost of energy, and planning. Labour has talked itself into believing that manifesto commitments prevent any action on the first three. Angela Rayner’s planning reforms need to work, and fast.