Time to hit the ground running

Morning all,

We’re now a week into a seismic political shift in UK politics, with Labour returning to office for the first time in 14 years. This is a Parliament that’s more new than old – 335 of the 650 MPs sworn in this week have never been one before. It’s also more representative than the ballot papers were, with Sarah soaring up the rankings to be the second most popular name in Parliament (h/t London Playbook). But whatever their makeup, the Government has a huge political mandate, and a similarly substantial task ahead if they’re to deliver the economic turnaround that Britain’s families need.

We started discussing how the new Government should approach that challenge with some of Britain’s leading political scientists, policy experts, and political and economics editors at an event yesterday, which is well worth a watch. We’ll have plenty more to say in the autumn when we launch a series of deep dives into Britain’s key economic challenges and opportunities. To whet your appetite, here’s a five-chart guide to what could make – or break – Labour’s economic record in office.

Have a great weekend. I’m told there’s a football game on 14 July, so here’s hoping ‘le jour de gloire est arrivé’ for Gareth Southgate and his team (that’s a Bastille Day joke, btw).

Mike

Interim Chief Executive
Resolution Foundation

Boosting inclusive growth

The new Government wants to kickstart growth. A laudable aim and, fortunately, we have a book on how to deliver it: a new economic strategy that covers investment, trade, reforms to our housing, jobs and pensions, and a ruthless prioritising of tax and spend decisions. It will also need a strong labour market, which is why the Government has set an ambitious target of an 80 per cent employment rate.

Delivering growth via higher employment has two specific merits. First, we’ve done it recently. The jobs boom of the 2010s was huge, and far bigger than anyone expected – the employment rate rose from 70.3 per cent at the start of 2010 to a record 76.2 per cent on the eve of the Covid-19 pandemic, as the chart below shows. The second upside is who gains from rising employment: low-to-middle income Britain. The vast majority of jobs growth in the 2010s accrued to poorer households (in part because rich households already tend to be fully employed).

But here’s the catch. Britain’s jobs performance has deteriorated in the 2020s. We are one of just six OECD economies – alongside Latvia, Iceland, Chile, Colombia and South Africa – that still haven’t returned to pre-pandemic employment rates. An 80 per cent employment rate might have been within reach in early 2020, but now we’re miles off – and our aging and ailing workforce won’t make it easy. Labour’s offer so far is greater support on health, careers and job search. It remains to be seen whether those are game-changing policies – but stronger economic growth is well worth striving for.

Getting Britain building

Rachel Reeves’ first intervention as Chancellor was to get the ball rolling on planning reform as part of plans to deliver 1.5 million homes over the parliament, and bring onshore wind back into play as part of our net zero transition. Given Britain’s failure over successive decades – and governments – to build enough homes, it is welcome to see this at the top of the priority list. But the scale of the challenge is immense: there has been no parliament in recent history when over 300,000 homes have been completed a year, not even in the 1970s (as our chart below shows).

Changing planning guidance is obviously easier than actually building homes. And while planning reform should help the private sector build more, the Government will struggle to hit its target without intervening to build more affordable homes. After all, the last house building boom we had was largely driven by social housing, which made up 45 per cent of new homes built in the 1970s. Public investment in housing has increased in recent years – the current Affordable Homes Programme is the most generous funding programme since 2011 in real terms – but it’s nowhere near the scale of ambition required.

Ending the rise in child poverty

Large reductions in child poverty were one of the major achievements of the last Labour government. How did they manage it? With a long-term child poverty strategy, involving policy action (like the introduction of tax credits, a huge expansion in childcare, and targeted help for lone parents who wanted to work) backed up with cash from the Treasury. The incoming Labour government has also promised a new child poverty strategy. But, as the chart below shows, when it comes to the drivers of poverty over the coming decade, it’s pretty clear who is falling into poverty (large families) and why (the two-child limit on benefit support, which now affects almost two-in-five families with at least three children).

Having kids is expensive. The tax and benefit system recognises this through Child Benefit and Universal Credit, though the latter support now stops after two children. This policy, rolled out from 2017, was intended to encourage employment among large families, and to stop them from having more children. The evidence is mixed as to whether the policy has succeeded on either of these objectives. But one thing it is definitely doing is driving up poverty: by the end of the decade the majority of children in large families are set to fall below the poverty line. Ending the two-child limit, at an estimated cost of £3.6 billion by the time it’s due to be fully rolled out, is the yardstick of how serious Labour’s new child poverty strategy really is.

Curbing the rise in health-related benefits

A poverty-raising benefit policy isn’t the only welfare challenge facing the new Government. When it comes to social security over the rest of the decade, the biggest increase is set to come from working-age disability and health-related benefits, as a growing share of the population gets sicker or has a disability. The consequences of this are stark – a real-terms increase of £21 billion (or 48 per cent) in working-age health-related benefits by 2028-29, while lower employment and stunted career prospects for those not able to work will have a massive impact on individuals’ living standards. This is a long-term challenge, and we’ve barely begun the journey of understanding the problem, let alone solving it. All of which makes for…

… A taxing inheritance

A cynic might say that the Chancellor began with planning reform rather than social security reform because the former doesn’t cost the government anything now. Although the immediate state of the public finances is nowhere near as bad as when Liam Byrne left that infamous note for his successor, the long-term position inherited by Ms Reeves isn’t great, as the chart below shows. Like the previous Chancellor, she wants to get debt falling as a share of the economy in five years’ time.

On current plans, that will happen, but only by the narrowest of margins (‘headroom’ is the jargon) and only if this Chancellor follows through on future tax rises (worth around £23 billion a year) baked in to the forecasts by her predecessor, and cuts spending on unprotected public services (by around £19 billion a year). If bad economic news materialises – for example, if the OBR’s already optimistic outlook for productivity growth weakens (see the purple line below) – then that headroom becomes a £12 billion black hole. Avoiding those spending cuts would supersize the black hole to £33 billion hole, and require further tough tax and spending decisions.

This all sounds really tough. And it is. But there are reasons to be optimistic about the task ahead. The current backdrop of rising debt, rising taxes and falling spending on public services is in large part due to Britain being hit by two once-in-a-generation shocks – Covid-19 and the cost-of-living crisis – in the span of only five years. Supporting families through that has been expensive, and knocked the economy off course.

A long overdue period of economic calm, coupled with a serious growth-focused policy agenda, could boost employment, productivity, wages and growth. This would make a lot of the near impossible trade-offs we’ve discussed far easier to tackle. And our recent history shows that we can boost employment (see the 2010s), build homes at scale (the 1970s), reduce child poverty (the 2000s), reduce economic inactivity (the 1990s/2000s), and even catch-up with our peers productivity-wise (the 1990s). So, over to you, Sir Keir…