Labour's Economic Policy: Are We There Yet?

After a severe drought, new policies were showered on the Labour Party conference in September. Both the leader and his shadow chancellor made significant announcements. But does it yet add up to a coherent economic policy? Or can we at least see the outlines of an approach or an economic philosophy?

In trying to answer the questions, I find two immediate difficulties. Firstly, few of the policies are actually new. Secondly, where there are changes, they reflect political positioning rather than economic analysis.

The conference welcomed the reforms to employment rights which will see worker protection strengthened and crucially sectoral pay bargaining expanded. Support for the green new deal comes with an interventionist industrial policy to substitute imported technology with home grown windmills, batteries, electric vehicles and so on. All of which is consistent with recent manifestos.

Other policies announced include rules to ensure fiscal discipline and a target for R&D spending. Outsourcing will be curtailed with a promise of “insourcing” at an unprecedented scale. Rachel Reeves’s fiscal rules are identical to those advanced by John Mc Donnell as shadow chancellor. (Anneliese Dodd had proposed to update them, post Covid, but we seem to be back to the 2017 rules). Insourcing of public services is another idea that sounded radical when John Mc Donnell launched it some years back.

The target of 3% of national income spent on R&D has been government policy for 20 years. Indeed, the Blair government wrote it into a European agreement, the Lisbon Agenda, in 2000 and it was maintained in its successor programme, Europe 2020

Genuinely new are the reform of business rates and the duty of long-termism imposed on company directors, A new body will be created to oversee value for money in public spending, which sounds new but I thought that was already the job of the National Audit Office.

The shock rejection of nationalisation seems to have less to do with effective policy than political signalling. New Labour saw nationalisation as toxic to their brand and were reluctant to use it, even when it became inevitable during the global financial crisis. Sir Kier is signalling a break from the recent past. However, he does not offer an alternative to fix the broken system introduced by privatisation. Poll after poll shows that nationalisation is popular. It is not just economists who have noticed that privatisation has failed but customers as well.

Alongside the holdovers from past manifestos, there are other signs that Starmeromics is not a return to the neoliberalism of the 1990s or the austerity of the naughties. Rachel Reeves’s focus on “the everyday economy” and the shift to sectoral bargaining reflects a rejection of the idea that wages can be set in the “labour market”. Green industrial policy also reclaims power from the market. Indeed, it overturns the liberal idea of free trade. If government will sponsor the development of domestic industries to supplant imports, then trade is no longer free.

However, its radicalism is combined with a “business friendly” framing. Business lobbies have left a mark on the policies on business rates and corporate governance. The business friendly idea is ambiguous and fraught with political risks. For example, most business think a friendly policy would be tax cuts.

Another problem with business friendly policy is that businesses are meant to be in competition. So which businesses are we going to be friendly with? The abolition of business rates is popular with SMEs, not so much tech giants. The change to directors’ duties will please productive companies more than financial companies and industrial policies will favour manufacturing over trading businesses.

Labour does not yet have a coherent economic strategy. In particular, Sir Kier will need to be careful not to let signalling trump effective policy. He will need to exercise caution in dealing with business where the same policy will make a friend of one but an enemy of another.

 

Every Number Counts

 Before reading any further, try to answer this quiz question:

How much does the financial services sector contribute to GDP?

We frequently hear it said that the British economy is dominated by services. Indeed, in the debate in parliament on 30 December both Kier Starmer and Rachel Reeves claimed that services account for 80% of our economic output. Leaders of other parties also referenced this same number. This figure is accurate enough but still misleading in the context of a discussion about trade. Where trade is concerned services are the junior partner. World Trade Organisation data suggest that trade in goods makes up about 63% of UK trade.[1]

Motor vehicle repair needed
(Still, this is better than Labour’s shadow chancellor who told the BBC on 27 December that one in every 14 people in Britain works in financial services. Her claim is false. If she was correct then the population of the UK would be 14 million. Of course, she meant that one in 14 workers was employed in financial services. Which would put the total workforce at 14 million instead of the 33 million it actually is.)

Financial services is a very profitable industry. It can afford to splash a bit of money on lobbyists and one reason that the 80% figure is well known is that apologists for finance tend to promote it. An impressive statistic serves their agenda even if it creates a false impression that finance is typical of services. This is misdirection which takes our attention away from the true scale of the sector’s contribution.

To answer the quiz question I have prepared this table. It shows a breakdown of gross value added by industrial sector using data from Eurostat[2]. Naturally, services are more than one sector. In the table they are the categories from G to T.

A Agriculture, forestry and fishing

0.5%

B Mining and quarrying

0.9%

C Manufacturing

10.0%

D Electricity, gas, steam and air conditioning supply

1.0%

E Water supply; sewerage, waste management and remediation activities

1.3%

F Construction

6.1%

G Wholesale and retail trade; repair of motor vehicles and motorcycles

11.9%

H Transportation and storage

3.3%

I Accommodation and food service activities

2.8%

J Information and communication

7.9%

K Financial and insurance activities

6.4%

L Real estate activities

14.0%

M Professional, scientific and technical activities

9.0%

N Administrative and support service activities

6.4%

O Public administration and defence; compulsory social security

4.0%

P Education

4.9%

Q Human health and social work activities

7.9%

R Arts, entertainment and recreation

1.3%

S Other service activities

1.5%

T Activities of households as employers etc.

0.3%


To find the answer to the quiz question, look at category K.

Updated: 10/1/21 to simplify the table.