As we usher in the new year, the economic situation hasn’t been particularly favorable for Keir Starmer and Rachel Reeves. The Office for National Statistics revised its latest quarterly growth figures down to a standstill. Meanwhile, members of the Confederation of British Industry are planning to reduce hiring and output at the outset of 2025. The Bank of England, opting not to cut interest rates again, has painted a picture of higher inflation and stagnant growth for the year ahead.
However, these are merely short-term snapshots. Lately, the focus on addressing pressing issues like Brexit, the pandemic, inflation, and the brief Liz Truss era has overshadowed the potential for more enduring economic policies. Yet, beneath the surface, Labour is striving to tackle some of Britain’s fundamental economic challenges.
Historically, the UK economy has lagged behind its North American and European peers, grappling with lower investment, sluggish productivity, an unfavorable trade balance, and significant regional inequality. While the City of London attracted foreign capital until 2008, it simultaneously drained talent and business investment from other parts of the economy. During this time, a highly flexible labor market ensured high employment, and the country benefited from the global tides of globalization, cheap commodities, and advancements in information technology, prompting robust growth.
The 2008 financial crisis, however, put an abrupt stop to that momentum. Productivity has struggled to rise, keeping household incomes almost flat. Austerity measures stunted public and business investments. Employment rates have stayed high, but job security suffered, with over a million workers on zero-hours contracts and nearly 4.5 million people self-employed. Furthermore, about 2.8 million working-age individuals are now long-term sick, a more than 25% increase over five years. Persistently high inflation, the lingering effects of Brexit—these conditions hardly set the stage for the economic growth the government desires.
So, how is Labour responding to this landscape? While No 10 and the Treasury might not trumpet it in their usual political discourse, there’s a substantial program of structural economic reform underfoot. This program spans four core strategies.
First up is a push to enhance and expedite infrastructure investment, particularly in housing, railways, energy, and broadband. Infrastructure underpins productivity by providing businesses with quicker communications and more affordable energy, and by helping workers live closer to jobs and commute efficiently. Labour plans to overhaul the planning system, prioritizing national objectives over local objections to speed up decision-making.
Public ownership is another approach—introducing initiatives like Great British Energy, renationalizing railways, and empowering local authorities in England to reclaim bus services control and restart council home construction. This indicates a government unwilling to be swayed by private infrastructure companies. It will be intriguing to see if GB Energy, in collaboration and competition with private entities, can drive the transition to clean energy by 2030, as envisioned by Ed Miliband.
Secondly, the government is working to draw private investment into crucial sectors and underinvested regions. Although not groundbreaking, Labour’s industrial strategy emphasizes devolved powers for mayoral authorities. With a level of interventionism reminiscent of the 1960s, the government aims to leverage taxpayer equity through a national wealth fund, essentially acting as a public investment bank to channel private capital into neglected areas. By consolidating fragmented UK pension funds, it seeks to boost investment in domestic businesses—practices common internationally but relatively new here.
The third element is boosting productivity in the service sector by increasing labor costs. This effort might seem surprising, but it’s driven by new employment rights, a higher minimum wage, and increased employers’ national insurance contributions. The ease with which companies can hire low-cost labor has long discouraged investment in training and technology, suppressing productivity. Despite the potential short-term risk of escalating unemployment, Labour’s ultimate aim is a high-wage, high-productivity market.
Lastly, the focus is on expanding and enhancing the skills of the workforce. The government hopes that boosting NHS spending, establishing a new national jobs and career service, and creating a coordination body for vocational training in England will cut down on economic inactivity and elevate skills, thereby trimming welfare costs and boosting tax revenues. Though achieving results here may prove challenging, the intention to curb legal migration adds impetus to these efforts.
A notable aspect of this economic strategy is how distinct it is from the previous Labour government’s approach. Unlike New Labour, which shunned nationalization and major industrial policies, the current strategy embraces them, reflecting the significantly altered state of the UK economy and global landscape.
Predicting the success of this strategy in overcoming the UK’s longstanding issues to spur growth remains difficult. As was evident in the October forecasts by the Office for Budget Responsibility, which pegged 2028 growth at a mere 1.5%, they faced criticism for potentially underestimating the productivity gains from Labour’s policies. Many economists argue there could be larger growth “multipliers” resulting from enhanced public spending and investment.
Time is of the essence for Starmer and Reeves. For Labour to secure electoral success, its long-term economic strategy must start to yield tangible medium-term outcomes. Amidst the looming threats of trade conflicts and geopolitical instability from the incoming US administration, the prime minister and chancellor will be hoping their policies prove effective and not undermine their efforts.
