Written by 12:52 pm Europe Economy

‘It’s the economy, stupid’ says the US campaign slogan. Starmer would do well to learn it | Anne McElvoy

The future direction of UK plc now looks more likely to come from the Starmer and Reeves emporium than the woeful management of the present Are You Being (Under) Served? government. In the mayhem of 2022, the Tories forfeited their claim to be the natural managers of the UK economy. Opportunity knocks for the opposition to fill that gap.

Attacking the government’s record here is straightforward: the economy has had skimpy growth for most of its 12 years in power (on a per-person basis, the economy has grown just 7% in real terms since the financial crash of 2007-08). Perhaps more concerning for any potential replacement, productivity has lagged behind competitors. Voters feel the result in their real-terms household incomes, and lower earners now find basics, let alone treats, less affordable. So “the Tories tanked the economy” is a line with a lot of truth to it. Planning to get the economy upright again is a more daunting task. That will need to change in 2023 as voters will want to know more about Labour’s intended direction of travel.

The big reality check is that the political economy no longer has “natural elasticity”, which prompts things to return to a benign status quo. The Conservatives have discovered this the hard way, after opting for austerity in the hope of rapid stabilisation afterwards. This never really paid off, and something similar seems to be happening in the wake of the pandemic, where bouts of apparent recovery are followed by sluggishness.

Systemic tweaks may help to some extent. As a former Bank of England economist, it must have struck Rachel Reeves that her old employer’s inflation-targeting remit is too restrictive. These days, more flexible central banks have a wider brief to consider inflation and employment, which connects them more closely to the big picture. The 1997 Gordon Brown version of the central bank’s autonomy doesn’t have to be the final word on the bank’s role, so this discussion should not be cut off by the shadow chancellor before it gets going.

Reconnecting Labour more forcefully to business is the most significant overall priority, alongside a clearer understanding of what it takes to help medium-size companies to scale and become export champions. This will mean a delicate corporate tax calculation for Labour. “Sharing the pain” is a decent message in times like these. But ensuring there are incentives for companies to grow needs to be firmly in the mix, along with commitments to offsets for research and development, and promoting better quality machinery and digital capacity. These are not “sexy” topics, in the way that tax and borrowing motivate MPs and voters. But tax incentives that favour the behemoths with offshore accounting facilities over new entrants is one reason for productivity woes.

Keir Starmer, I gather, is quietly spending a lot of time speaking to industry giants such as JCB (despite the diehard support for Boris Johnson from its chairman, Lord Bamford). Understanding where and how the commitment to “green jobs” plugs into broader economic thinking will be crucial. Certainly there will be tension between commitment to “blue” hydrogen generated from methane, and “green” hydrogen made with renewable energy, which is more environmentally solid but harder to secure at scale. That poses tricky questions about what is meant by a green job. Much else, in terms of energy supply, cost and the impact on the economy, will depend on how Labour navigates this choice – and those who advocate for one or the other will be disappointed.

There will also be calls to “rebalance” the economy to the north, where investment has been shockingly poor. It should not, however, come across as a zero-sum game in which the party turns its back on the powerhouse of established tech and new industry clusters in the south. Labour needs to embrace a better and more innovative future for the economy, not simply shuffle around resources.

Remaking relations with major economic powers in Europe needs to be a higher priority. Starmerism has shied away from this, partly in order to avoid rows about whether he wants to rejoin the single market, and partly because, to put it bluntly, the upper echelons of today’s Labour party are not well connected in Berlin, Paris or Brussels. But when it comes to resolving trade tensions and healing post-Brexit damage, a Labour government will be seen as a new start, and has commonalities with the SPD-led coalition in Berlin and the socialism-lite French government. It can start to show more dedication to the task of talking to Europe for mutual trade and benefit.

Oppositions need plans, projects and passions, but they also need to look at why some apparently good ideas have not worked – and the answer is not always that Conservatives are fools or greedy cynics. A Labour pledge to “give small enterprises a level playing field for winning contracts, cutting red tape, streamlining the bidding process” is one I read with some nostalgia, having written about the attempt to make this happen in 2011 under David Cameron. It did not work because the legal and efficiency complexity proved too great, and procurement challenges often favour big players. It is a dead certainty Labour will also struggle with this; it must be open to learning from the best-intentioned failures, even Tory ones.

A Labour economy needs to support the interests of those who have fallen behind in the national prosperity story. But the party also needs to think beyond simply redistributive ideas, to those that move the needle on growth. The present focus around on-shoring and re-shoring jobs, without a plan to boost immigration for skilled workers or a better sense of connection to the outside world, risks parochialism.

Tempting as it is to bring out the Blair-Brown greatest hits album, Starmer cannot rely on returning to the defaults of the 2000s, or the assumption that ousting an unpopular government will be a remedy. Next year, many voters who opted for the Conservatives in 2019 will survey the damage and ask what may await them if they shift their vote leftwards. We have the beginning of an answer – 2023 should give us a greater sense of where the Labour compass will point.

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