With the new Labour government having endured the kind of honeymoon that puts divorce lawyers on notice, No 10 and the Treasury are now under intense pressure to show how they intend to revive the UK’s flat-lining economy.
The problem is critics on both left and right are unconvinced the new administration has the vision and political nerve required to deliver what prime minister Keir Starmer has described as an “age of national renewal”.
This scepticism is rooted in two harsh realities. The first is that for all the talk of a Tory budget black hole and crumbling public services, Labour has actually pulled its punches when assessing the economic inheritance handed over by the Conservatives.
A recent report from the Office for Budgetary Responsibility painted a near apocalyptic picture of the UK’s fiscal prospects: deficits have averaged just under 5% of GDP since the start of the century; debt has more than tripled as a share of GDP to 98.1%, the highest level since the early 1960s; public spending is at nearly 45% of GDP, its highest level since the mid-1970s; the tax take as a percentage of GDP is approaching its highest level since the late 1940s; and there is still a £22bn hole in this year’s budget and countless public services that are breaking point.
Worse still, without sweeping reform and a fundamental shift in the UK’s economic performance three macro-trends mean the public finances are on track to get even worse. An ageing population means the higher health costs and a smaller working population, climate change means more costly climate impacts and the urgent need to invest in decarbonisation and resilient infrastructure, and the geopolitical threats on Europe’s borders make increased defence spending a sensible precaution.
The OBR concludes current policies and trends “would eventually put the public finances on an unsustainable path”. The report generated surprisingly little media coverage. It turns out people don’t like horror stories.
The second reality – as evidenced by their speeches to the Labour Party conference – is the economic vision offered by Starmer and his chancellor Rachel Reeves appears badly out of step with the scale of the challenge.
Neither are the greatest political storytellers and as a result the government’s economic strategy looks technocratic and underpowered – a vision defined by rows over winter fuel payments to pensioners or tweaks to inheritance tax at a time when the UK is facing the risk of decades of structural decline.
The fear is that for all the assurances to the contrary, the UK is about to embark on yet another disastrous experiment in austerity – a sense compounded by a donations scandal that fuels the impression all politicians are the same.
Is there any good news to be had? The one potential source of optimism is that Starmer and Reeves’ somewhat faulty political antennae means they are guilty of burying the lede.
It has generated relatively little attention, but alongside this summer’s doom-laden warnings about the scale of economic challenge, the government has quietly started to sketch out genuinely radical infrastructure and investment plans centred on the need to accelerate the transition to a net zero emission economy.
The target to deliver a clean power system by 2030, the promise of sweeping planning reforms, the imminent industrial strategy, the launch of GB Energy and a National Wealth Fund – these all point to a step change in the UK’s decarbonisation efforts, which should in turn trigger billions of pounds worth of investment and unlock sustained reductions in energy costs.
As part of the new government’s net zero strategy, the next few months should see the finalisation of once in a generation planning reforms, wide-ranging electricity market reforms, grid connection reforms, new green building standards, carbon capture and storage and hydrogen subsidy frameworks, and fresh funding for green steel projects, gigafactories, and a lot more besides.
All these decisions come with cost implications and political challenges, but they also promise to unleash the investment that may finally jolt the UK out of its economic malaise.
Crucially, these decisions come amid reports Reeves is preparing to tweak the Treasury’s fiscal rules to provide more freedom to borrow to invest in strategic infrastructure. Much of this investment would inevitably be earmarked for energy, rail, clean tech factories, and building upgrade projects. The goal of £28bn a year of green public investment that the Labour leadership shelved ahead of the election may end up being reached by default.
No 10 is yet to find an effective way to tell this story and generate the optimism and confidence businesses and investors desperately want to see. But the story is there to be told, not least because it offers the only credible way of breaking away from the “unsustainable path” the OBR has warned the UK is on.
The honeymoon may have been a bit of a disaster, but things really can get better.
The economics of net zero is one of the topics at this year’s Net Zero Festival, which takes place in London on 22 and 23 October.