After years of underinvestment and low productivity in the UK, Labor recognizes that achieving high-quality growth will require a comprehensive policy approach based on many intermediate goals, but designing a strategy is only the first step. The real challenge lies in implementation.
Cambridge. As has happened in many other developed countries recently, both of the UK’s main political parties have made economic growth their top policy priority. However, following the rollercoaster 49-day experience of the Liz Truss government and its “growth plan” in 2022, both parties insist there are no fiscal shortcuts. Instead, the focus is on designing measures to enhance productivity, resource allocation and long-term growth. In this sense, the opposition Labor Party has an advantage over the Conservatives in power, although both continue to finalize implementation details on the ground.
Strong, lasting, sustainable and inclusive growth is essential for a country where older generations risk seeing their children end up in worse circumstances than their own. This has not happened for many decades. Only growth can provide the resources needed to boost living standards, improve public services, finance sustainable energy initiatives, limit the size of large-scale tax increases, and combat inequality in wealth, income and opportunity.
In short, it is about increasing the maximum safe speed of economic growth. The Bank of England estimates that the potential growth of the UK economy could fall to 1 percent. At this rate, much of what ails the country is likely to get worse, not better, over time. Moreover, the already weak growth potential may deteriorate further if the problem is allowed to worsen.
There is no unique magic solution that can change this perspective. The Truss saga still haunts many British politicians, when the newly sworn-in Prime Minister tried to use unfunded tax cuts as an incentive, creating a disastrous cycle of financial instability that forced a change of government. It is known today that after many years of insufficient investment and lagging productivity, achieving high-quality growth requires a comprehensive political strategy based on several intermediate objectives.
The Labor Party has gone further in identifying these types of structural reforms. His program includes proposals to modernize the planning system, strengthen infrastructure, improve trade links, attract domestic and foreign private investment (including through an active National Wealth Fund), remove tax distortions, and focus on sector-specific initiatives. The party has already identified promising public-private partnerships aimed at improving investable funds, while encouraging creativity and efficiency.
Labor has indicated that it will attempt to “mainstream” many of these reforms by strengthening existing institutions. To ensure that all these policies remained consistent with financial stability, he committed to adhering to the same public debt “rule” as the current Conservative Party.
The challenge today is to design a detailed implementation plan, including a high-frequency monitoring system that provides real-time feedback and allows for timely course correction, if necessary. Any economic policy road map must favor comprehensive reforms over piecemeal reforms. These reforms must be implemented simultaneously, not sequentially, and must occur as soon as possible.
As Labor showed in its successful launch into power in 1997, a new focus on growth would benefit from serious measures to improve credibility. This is what the then Chancellor of the Exchequer, Gordon Brown, did with his sudden and pure decision to hand over the reins of interest rate policy to the Bank of England, thus enshrining the principle of central bank independence.
We hope that the current leadership of the Labor Party will not rule out too much political flexibility in its pursuit of a decisive electoral victory. Some of the stronger measures he proposes will require upfront resources, but their growth and financial benefits will only be realized over time. The next government will also face an increasingly more complex and fragmented international system, and will need to ensure the continued participation of the private sector, which will ultimately have to bear the heavy burdens.
Another related risk is improving the functioning of current growth engines while supporting the development of sectors and industries that will drive growth in the future. Striking the right balance may be the most difficult part of the challenge, given the country’s limited resources and the fact that some key initiatives are best pursued at the regional level. (With its lack of strong enough regional initiatives that drive innovation in artificial intelligence, the humanities, and sustainable energy, the European Union currently faces a similar problem.)
Promoting high, sustainable, sustainable and inclusive growth will never be easy after so many years of neglect. The need to revitalize the UK’s existing growth engines and simultaneously launch new ones further complicates the task. But in a paraphrase of the famous landing speech given by US President John F. Kennedy, the winning party must do these “and other things not because they are easy, but because they are hard.”
Author
Mohamed El-Erian, President of Queens College, University of Cambridge, Professor at the Wharton School, University of Pennsylvania, author of The Only Game in Town: Central Banking, Instability, and Avoiding the Next Collapse (Random House, 2016) and co-author (with Gordon Brown, Michael Spence, and Reed LeDoux) Permacrisis: A Plan to Mend a Broken World (Simon & Schuster, 2023).
Copyright: Project Syndicate, 2024
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