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The Growth Delusion

By drastically scaling back on investment policies, Labour’s promise of faster economic growth is a fantasy. In an increasingly crisis-prone world, the consequences could be disastrous.

Child poverty for families with three or more children is set to reach 55 percent in 2027/28. (Photo by Jeff J Mitchell/Getty Images)

During the 1980 US presidential election Ronald Reagan asked a rhetorical question of his audience: ‘Are you better off now than you were four years ago?’ Reagan as Republican candidate went on to win a landslide victory against the Democratic incumbent Jimmy Carter.

The Labour Party has recently adopted this rhetorical tactic. ‘Ask yourself this,’ said Shadow Chancellor Rachel Reeves to an audience in East London in January: ‘Are you and your family better off [now] than you were thirteen years ago?’ And then, in October: ‘Is there anything which works better in Britain [now] than it did thirteen years ago?’

Politicians ask such questions when they know what the answer will be. In summer 2023, the Ipsos Mori pollsters reported ‘a general mood of dissatisfaction with the state of the country’. Of their respondents, 76 percent agreed that ‘Britain is becoming a worse place to live’, and 65 percent that ‘the next general election is time for a change’.

Both the Conservatives and Labour are now competing to offer that change. In a bizarre party conference speech this autumn, Rishi Sunak announced to the amassed Tories, ‘It is time for a change — and we are it,’ while Keir Starmer celebrated the Rutherglen by-election victory with the claim that Labour is ‘the party of change in Britain’.

Will there be a substantial change for the better if a Labour government is returned at the next general election? Keir Starmer promises a decade of ‘national renewal’ based on faster growth and public reform. But Labour’s reach exceeds its grasp, and the most likely outcome is mid-term political disillusion with more of the same outcomes, as a volatile electorate lurches further to the Right.

If we want better lives, we must think more radically about improving household liveability — which isn’t just about income, but also about essential services and social infrastructure — and focus on the extra-parliamentary opportunities to bring that change about.

Labour’s Delivery Problem

Parliamentary Labour’s electoral promise is straightforward. Keir Starmer’s ‘single defining mission’ is faster growth of economic output, which will in turn yield higher taxes to fund services like health, education, and social care. At the same time, ‘public service reform’ will improve delivery and quality. The problem here is delivery after winning the election.

The initial driver of output growth was to be the ‘green prosperity plan’, the economic motor funded by the government borrowing £28 billion a year for investment in shiny new high tech. But large-scale borrowing was scaled back because it was thought it might frighten the electorate. Now the emphasis has shifted to regulatory reform: Labour will ‘get Britain building again’ by ‘bulldozing’ through the planning system to build 300,000 houses a year — a goal that allows Labour to claim status as the party of home ownership and volume council housebuilding.

The problem is that it’s easier to set such targets than deliver them. Labour’s plans say social housing is to be financed through financial contributions from private developers who will claim they cannot pay, while housebuilders will release only small batches of private homes into a seller’s market to defend their near-20 percent return on capital. With inflation and its aftermath, the Bank of England will be reluctant to deliver the low interest rates necessary for a building boom.

More generally, faster growth would be a big ask for any party, with the UK’s growth rate declining over the past fifty years and productivity increases (or growth of output per capita) stalling during the 2010s. Economists dispute the causes but agree that supply-side reforms, such as improving transport infrastructure and workforce skills, are unlikely to raise the secular growth rate within just one parliamentary term, which is the impossible task Starmer seems to be setting himself.

To make things worse, sustained UK growth is unlikely through the later 2020s in a crisis-ridden world. The current war in Gaza is the latest in a succession of unexpected and unresolved crises since 2008: the great financial crisis has left a legacy of increasing debt and unreformed finance; Covid prefigures more pandemics; the war in Ukraine signals a world of multi-power rivalry; and geopolitical instability is exacerbated by climate change.

Exhibit 1: UK year-on-year growth rates and long-run trend of real GDP (Sources: ‘A millennium of macroeconomic data for the UK’ Bank of England and GDP — data tables, ONS)

Past record and current prospects suggest that the UK can expect low and stuttering growth in the second half of the 2020s. Consequently, the tax yield will be inadequate to fund health, education, and care, not to mention the other claims — like defence spending — on public funds. We can also expect more uncontrolled splurges of public expenditure and crisis borrowing like those we saw during the pandemic and the energy price spike, ratcheting up the government debt-to-GDP ratio, which already stands at 100 percent.

Between the crises, the default will be austerity policed by the financial markets, which determine the cost of borrowing and exchange rate. Market reaction vetoed Truss and Kwarteng’s proposals for unfunded tax cuts. The markets would react similarly if Starmer and Reeves proposed target-scale borrowing for rebuilding schools and hospitals.

Given these external constraints, the Labour frontbench has boxed itself in, because its current offer excludes the higher taxes and tax reform that would raise revenue. Labour has made a few symbolic proposals, like ending non-dom status and levying VAT on private school fees, but fears of electoral unpopularity inhibit anything more radical. The result is that an incoming Labour government will continue to rely on the tax system as ‘reformed’ in the 1980s, when the burden was shifted from progressive income tax to regressive consumption taxes. The stock of wealth in the UK is now seven times the annual income — but any discussion of this is off-limits, as is the fact that wealth taxes currently raise very little revenue, even though the distribution of wealth is roughly twice as unequal as the distribution of income.

Within Labour’s self-imposed limits and with little tax funding available, public service reform will become a key lever in the attempt to fix politically damaging failures such as NHS hospital waiting lists. Such reform will come in the shape of more top–down reorganisation of the kind which, before 2012, delivered more NHS management distraction than service improvement. The subsequent pursuit of ‘efficiency’ in a system with fewer beds and medics than in other North European countries has produced a fragile hospital system that cannot cope with demand surges or delayed discharges. Without extra funding, reform will in any case do little to address the staff recruitment and retention problems that limit all kinds of public service delivery.

The Crisis of Liveability

Labour cannot, with its current policies, deliver better lives. Even if by some magic a Labour government did deliver faster growth, the lion’s share of the benefits would once again be captured by upper-income households. If the aim is not just any ‘change’ but betterment for all or most, then the policy objective needs to be shifted towards household liveability and direct, meaningful improvements in ordinary lives.

In our foundational analysis, liveability rests on three pillars, all of which must be present and robust for household well-being. (Our analysis of liveability is about households, not individuals, because most of us live in multi-person households with expenditure- and income-sharing. By the 2010s many households relied on income-sharing by two wage earners: among three-quarters of couples with children, both parents work.)

First, households need cash income, because necessities like rent and utility bills all carry a price tag. Second, households need access to essential services like health, education, and care. Third, household members are sociable creatures with more than individual needs, so they need hard and soft social infrastructure, like local parks and youth clubs. The UK’s problem is that all three pillars of liveability are eroded and crumbling.

Exhibit 2: The Pillars of foundational liveability

The income that matters most for households is not gross wages or disposable income after tax and benefits, but residual income: what is left in the household budget after paying for the four essentials of rent, utilities, food, and transport. The cost-of-living crisis, with its near doubling of household energy bills, double-digit food price inflation, and now high interest rates, is about an acute squeeze on residual income for all households, particularly in the bottom half of the income distribution.

These problems are compounded by the low wages encouraged by unregulated private labour markets and austerity budgets in the public sector. Successive New Labour and Tory governments have covered this up by expanding the earnings-related state subsidy of low wages formalised as Universal Credit. The state’s ability to fund anything else is now limited by the increasing percentage of working households who receive more in benefits than they pay in taxes. From 30 percent in 1979, this rose to a cyclical peak of 45 percent after the 2008 Financial Crisis and reached a peak of 48 percent during the pandemic.

Against this backdrop, the Office for National Statistics (ONS) calculates that ‘benefits in kind’ in the form of free or subsidised taxpayer-funded health, education, and care services are worth £13,000 per annum for every non-retired household in the bottom half of the income distribution. But many local authorities are in financial crisis after a decade of austerity cuts: after cutting back on everything else, they cannot cover the growing cost of adult and childcare services they are legally obliged to provide. If NHS waiting lists are long and care for the elderly is rationed, poorer households simply cannot afford out-of-pocket alternatives.

English local authorities have also traditionally played a key role in providing local social infrastructure of all kinds, but their real spending on ‘cultural and related services’ was cut back by more than 50 percent between 2010 and 2023. The outcome is closed leisure centres, neglected playgrounds, and fewer facilities outside the home for people of all ages. At the same time, social infrastructure is crumbling, essential public services are failing, and the squeeze on residual incomes is intensifying.

Hitting Reset

Exhibit 3: In-work households receiving more benefits (cash and in kind) than paying in taxes (Source: The Effects of Taxes and Benefits on Household Income, UK, 2020/21 — Reference Tables, ONS)

In the middle of an acute crisis of liveability, the distracted parliamentary Labour Party is not addressing the real problems affecting households. But extra-parliamentary actors can take the initiative in a politics of improvement to slowly rebuild some of the pillars of foundational liveability. Meaningful improvements in the workplace can be obtained by trade unions pressing on wages and conditions, and locally by driver organisations doing social innovation in public service delivery.

While we cannot expect very much from an incoming Labour government, lobbying Labour remains worthwhile given that the central state sets frameworks and has financial resources. The clever priority would be ‘starter policies’ which are actionable and open the way to further improvement because they are in line with electoral sentiment or fit the Labour Party’s self-image.

On food policy, for example, we can press for starter policies like free school meals or the lifting of the two-child benefit cap. On some issues we can shame Westminster politics and politicians into catching up. Regional and local government actors are important because they can prefigure progressive central policies: the Scottish and Welsh governments and five London boroughs are already rolling out free school meals for all primary school children.

At the same time, a variety of non-governmental actors — from trade unions to housing associations — also have political agency and can kickstart a politics of liveability improvement. Trade unions, for one, can act to redress unfair distribution in the private sector and eroded relativities in the public sector. With the collapse of private sector unionism after 1979, capital share of output increased at the expense of wages, with the result that each non-retired household now has £9,750 less gross income than it would have if the mid-1970s wages distribution had been maintained. With a 1970s share of output, many more households in the 2020s could manage without food banks and not have unheated homes. The broader agenda for trade unions should also include reductions and flexibility in working hours to allow workers to balance caring responsibilities and work.

In the face of apathetic Westminster politicians, we must also think of new and different ways in which political actors and actions can improve sclerotic public services. The issue here is whether and how anchor organisations like councils, health trusts, and housing associations can become drivers of social innovation in public service delivery.

Driver organisations matter because they can combine imaginative ideas with financial resources and management capability. They can provide core public services differently, as with adult domestic care in Gwynedd, which is operated without rigid time and task requirements. Or they can provide extra add-on services, as with the Well-Fed service in Flintshire, which offers social housing tenants not just a van as ‘mobile corner shop’ but meal kits with recipe cards and meal bags with slow cookers.

Expanding these kinds of efforts will often involve task-oriented alliances for change and joint action. Complex problems — avoidable health inequalities, for example — are beyond the reach of one siloed organisation. Movement 2025 in North Wales takes an innovative approach, bringing together cross-organisation teams from the regional health board, progressive housing associations, and social services to tackle issues like unheated homes, food poverty, loneliness, and the shift from medication to social prescribing.

These are just a few examples of the ways we can work to make lives better without looking to Westminster. The Left in Britain has little alternative: people are desperate for change, but if Labour does not put questions of liveability at the core of its economic plans, it will only continue the consensus that has brought the country to its present state of crisis.

Labour has decided this is a risk worth taking in the pursuit of power in 2024. Beyond the question of whether Labour can win in 2024, however, is another about whether Labour then risks losing to the radical right in 2028, rejected by voters angered by the continuing degradation of their financial security, their public services, and their social fabric in the latter years of the decade.

For those of us who want not only to avoid that outcome but to fight the collapse visible all around us, there is no choice but to steer the politics of improvement towards an extra-parliamentary direction.


About the Author

Sukhdev Johal is a professor at Queen Mary University of London and director of Foundational Economy Research Limited. He is the co-author of When Nothing Works: From Cost of Living to Foundational Liveability with Luca Calafati, Julie Froud, Colin Haslam, and Karel Williams.

Karel Williams is professor of accounting and political economy at Alliance Manchester Business School. He is a member of the Foundational Economy Collective.