If opinion polls are even close to accurate, Labour will win the next election. The stated position of the party is that their primary goal in government will be to generate economic growth. They will fail. There is no big red “grow the economy” button. Rather, growing the economy relies on tearing up the powerful network of rentier interests which currently hold the economy hostage- landowners, financial capital, and privatised public services. It relies on waging class war against neoliberalism. And this Labour party, which has alienated the trade union movement, courted big business, and sought a new constituency amongst homeowners, is uniquely unsuited to waging class war. Labour’s plans for reforming the economy, all of which necessarily involve attacks on corporate interests, will collapse on contact with air.
Neoliberalism’s endgame
Labour’s focus on economic growth is understandable: the UK economy is a disaster. Figure 1 shows average productivity per hour worked, which according to Paul Kurgman is not “everything, but in the long run is almost everything”. From 1970 to the global financial crisis, productivity continued to grow at roughly the same rate despite the end of the gold standard, the winter of discontent, the discovery of North Sea Oil, Thatcherism, entry and exit into the exchange rate mechanism, and Bank of England independence. Its growth rate during this period is approximated by the red line. There is a clear break in the series at the global financial crisis, where productivity starts to flatline. The knock-on effects on standards of living are hard to overstate. If productivity continues to stagnate, and the demands of public services associated with an ageing population continue to grow, this means an ever higher tax burden- already at its highest rate since 1948- effective cuts to already overstretched public services, or most likely, both. In short, unless something radically changes, UK society will experience a slow-motion collapse.
Figure 1: Productivity per hour in the UK. Source: ONS
This flatlining is a result of the UK’s failed development model: neoliberalism. Neoliberalism in the UK has been marked by three key trends. Firstly, the government’s refusal to make any plans for the future of the economy. Where Norway used North Sea Oil to build the world’s largest sovereign wealth fund which will fund its welfare state for the foreseeable future, the UK used it to cut taxes; where the US government, for all its faults, does make significant investments in future technologies (this is a meme at this point but all the technology in the iphone was invented in the US Department for Defence), the UK’s industrial policy is distinctly unambitious. We can contrast small-fry tax credits for the British film industry with the US congress’ much more ambitious plan to reshore its entire semiconductor demand. Where China invested around 4% of its GDP in renewable energy capacity in 2022 alone, the UK’s coalition government implemented a de facto ban on onshore wind. Government investment is an imperfect measure but the UK government consistently spends a smaller share of GDP on investment: Government investment spending | Government at a Glance 2019 | OECD iLibrary (oecd-ilibrary.org) than most peer countries (countries which consistently spend even less than the UK such as Germany and Belgium are similarly economically weak).
Given the government’s reticence to invest in the basic infrastructure of a modern economy and development of new productive capacity, how does the UK’s neoliberal government keep the lights on? The answer is that the government has used privatisation as a substitute for investment in public services. In rail, water, energy, and increasingly healthcare, the government replaced its historical role of providing services with one of simply brokering relationships between consumers and producers. It’s a good deal for business. Government provides a ready pool of customers and even subsidises their spending (with those own customers’ tax money). In many cases, as with rail, healthcare, education and energy, it will even set the prices at which business sells to its consumers. In return businesses can provide an incredibly substandard service with few repercussions. When water companies’ decades of underinvestment runs down their infrastructure until human waste is pumped into rivers, the government negotiates a deal with consumers for the consumers to pay to fix the infrastructure. When rail companies cannot deliver on their contractual obligations to run trains, the government takes over running those lines until the next tender process, when the same companies are able to re-win the contract. It is not that governments could not run these services: many energy and rail companies are in fact owned and run by foreign governments. This policy is an active choice to cede to private companies and foreign governments the expertise and the profit of running public services. In return, upfront (public) investment costs are lower. Instead of investments in the capacity to run public services, taxpayers pay more, later, for private companies’ profits.
The final trend is financialisation. Financialisation is enabled by privatisation, which means that those with capital to invest have greater options for putting their money to work owning the country’s public service infrastructure and renting it back to its citizens. It is also necessitated by the slow wage growth which results from failing to generate new productive businesses: traditionally, we think of the “middle class” building wealth by earning wages in productive jobs which they can save from, or having access to good pensions which enable them to retire well. In an economy which does not generate high and rising wages, and where defined benefit pensions have largely been phased out, the pathway to financial wellbeing is instead capital appreciation, typically from a house the worker owns or defined contribution pension schemes. A key pillar of neoliberalism is to compensate the half of the population who can own their own home for low wage growth through out-of-control asset bubbles. Households’ financial security is dependent on a single, highly leveraged position in an illiquid asset paying off. Government policies such as the “Right to Buy'' and “Help to Buy” are direct endorsements of this model.
This, then, is the neoliberal economy. State capacity to effectively deliver public services is eroded. State development and support of high-productivity industries is prohibited. In its place, big business and foreign governments own an ever-increasing share of the capital and knowledge of how to perform the basic services the country’s population relies upon, and rent this capital back to the population for a return. The country’s subjects, bereft of any means of earning good wages themselves, secures economic well being primarily by participating in the financialisation of their own economy, that is, the acquisition of assets that they hope will appreciate in value. The role of the state in all of this is to broker relationships between foreign capital and its workers: subsidising consumption and holding down public sector wages so that foreign capital remains profitable, intervening to set prices so that exploitation of its population remains sustainable.
Some high wage jobs continue to exist in the UK’s neoliberal economy. Many of them are in services which facilitate the neoliberal economy: consulting, corporate law and finance help smooth the path of foreign capital by helping the government to outsource and effectively manage capital. Other high wage industries such as pharmaceuticals and higher education persist despite the government’s policy, not because of it. And they necessarily find it difficult to grow because capital is more easily attracted by the much less onerous task of acquiring ever larger parts of public infrastructure to rent back to the country’s people, and because the government does not shape public infrastructure and policy in such a way that it is easy for productive business to operate.
Neoliberalism is a global phenomenon, but it is most perfectly exemplified by the UK. For example, while the US is at least as financialised (if not more) than the UK and has egregious examples of private sector exploitation of public services, neoliberalism has less perfectly permeated the entire US economy. The US government continues to heavily plan the future of its most high productivity industries (e.g., the CHIPS Act and the IRA) and retains control over its most vital infrastructure (such as the post office and the military). The extreme centralisation of the UK economy also tilts towards neoliberalism because local government-run services can be zones of resistance to privatisation.
If the UK has pursued a neoliberal development model for so long, why did productivity flatlining only begin in 2008? The answer is that economic flatlining was obscured by North Sea Oil and a boom in deregulated financial services. For a few decades, rising wages in isolated sectors (mostly in London and the Southeast) obscured the general trend of stagnation elsewhere, and provided tax revenue which helped grease the wheels of neoliberal exploitation. This economic sugar high came to an abrupt stop in 2008, precipitating the multi-decade economic crisis which the UK still has not recovered from.
Nor will it, because the UK’s economic problem is neoliberalism. The UK’s development model is fundamentally antithetical to the promise of traditional capitalism, which is that business will innovate new ways to put labour to work and government will create the conditions for its easy and efficient exploitation. All effective solutions to the UK’s growth crisis involve a decisive break with neoliberal economics. The next section explores what those proposals are.
Solutions to the UK’s economic malaise
A number of groups, including the Labour party, have identified policies which have the potential to kickstart growth. All of them, in some form or other, constitute a break with neoliberalism.
Firstly, the government could increase investment, with the aim of creating large numbers of jobs in highly productive and possibly new industries. An FT survey of economists found that investment was economists’ favoured policy change for spurring economic growth: UK economy will enter ‘grey gloom’ until polling day, economists say (ft.com). Labour promised early on in Starmer’s leadership to spend £28 billion per year in investment in the green economy. This policy is a very clear break with neoliberalism. It fundamentally rejects the logic that the government ought not to plan new industries, and ought not to own key infrastructure or industries. Instead, it would decisively back a sector- renewable energy- and mobilise public policies to support its growth. Naturally, such policies represent a significant challenge to existing corporate interests. They risk increasing wages, bidding workers into productive industries, and outcompeting private business. These policies may also significantly affect asset prices by raising interest rates.
Secondly, reform of the housing market would represent a decisive break with neoliberalism. Any sustainable solution to the housing crisis must involve one of the following: a collapse in house prices, or heavy increases in regulation of the private rented sector. Either cuts against the basic logic of financialisation. If house prices halve (i.e., return to the prices of the mid-2000s) then the bet homeowners were encouraged to make failed. It will scupper plans to downsize in order to afford retirement, or sell one’s house to afford the desired social care. The inheritances required to spur the next generation’s housing market gamble will not materialise. It will represent the supreme failure of neoliberalism’s promise to the middle class. On the other hand, making renting affordable and bearable requires regulating rents, evictions, and safety standards. The UK could become a country of long-term renters where households enjoyed affordable secure private rented accommodation. (Doing so sustainable would also require reform to pensions, of course.)
Self-styled neoliberals think they have a market solution to the housing problem: planning reform. The problem with the UK housing market, they say, is that supply has been too tightly constrained by regulation. Loosening these supply constraints will lead to a boom in housebuilding, which will bring down both house prices and rents. So actually the problem with the UK housing market is too much government regulation, not neoliberal financialisation. Planning reform would enable the housing market to revert to well-functioning neoliberal exploitation. To the extent that Labour has stated its position on housing, this is it.
For what it’s worth, I am sceptical. Housing is not a straightforward issue of supply and demand because land is finite. Land is an asset, and rent its return. This is why house prices have risen in recent decades despite housing supply, as measured by square foot per capita and bedrooms per capita, actually increasing. The equilibrium return on housing is equal to the (risk-adjusted) return on other assets. Interest rates, not planning regulation, are the primary determinant of house prices: uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate.pdf (bankofengland.co.uk). This does not mean that planning reform does not matter: reducing the regulatory burden of building new housing increases the real return on investment for a given level of rent, thereby lowering real rents; allowing housing developers to build “up” increases in the return on a given piece of land, thereby lowering equilibrium rents. Incidentally, rent controls can also increase the supply of housing by encouraging developers to replace large houses with multiple smaller houses. Some planning reform would be very welcome at the margin- increases in housebuilding would contribute to higher economic growth and it may even push house prices down by 10-20%. However, there are clear limits to the extent to which decreasing planning regulation will reduce house and rental prices. The all-in return on land in equilibrium is the return at which capital does not want to flow out of land and into equities, bonds and cash. It will not fall far below or rise far above that.
In any case, the idea that housing market deregulation is actually a neoliberal solution to a crisis of government intervention does not hold up. Neoliberalism is not empirically a development model which sees a reduction in government regulation, and the creation of an ever more expensive housing market is a key plank of economic financialisation. In a world where housing was reliably affordable and rents stable, many current homeowners would choose to continue renting, a huge lost opportunity for the commercial banking sector. If deregulating the housing market did have the effect of halving house prices, it would do so at the cost of shattering the promises of financialisation.
Finally, improved transport links are often proposed as a means of improving economic growth. Any such proposals normally imply an increase in state capital spending, renationalisation, or a combination of both. Labour’s proposal is to renationalize railways through the non-renewal of franchises. Actually improving transport links would require significantly more: investment in new rail, downward regulation of train fares, and renationalization of bus routes. Clearly this all cuts against the logic of neoliberalism. However, improving local transport also requires devolution of powers. Local authorities and mayors are best placed to be accountable for organising local bus services. Again, local political power cuts against neoliberalism because it provides a counterweight against privatisation (see, e.g., the Preston Model).
Why is Labour (already) Caving?
Any changes in the UK’s development model will cut against corporate interests. What might look like a technocratic, moderate reform which has the potential to increase productivity will, if it works, reverse the trend of neoliberalism and hurt its beneficiaries. This fact explains why the Conservatives have been to paralyzed in the face of low growth. It also explains why Labour, desperate to win the approval of big business, has begun to throw out any meaningful economic policy proposals long before it wins power.
This has the effect of making Keir Starmer appear a notorious liar. He has already u-turned on ending outsourcing, supporting trade unions, abolishing tuition fees, universal childcare, taxing the rich, rent controls, ULEZ, abolishing the child benefit cap, abolishing the charitable status of private schools, and re-nationalizing anything except the rail network. It looks as though he lied about a whole suite of policies which would have begun a shift away from neoliberalism in order to win the Labour leadership. This seems believable. An alternative explanation is that he has rapidly caved in to mild pressure after that election. Either way, any claims that Labour will decisively break with neoliberalism in power look dubious.
For a while, the optimistics amongst us clung onto the £28bn a year green investment pledge. This spending would amount to investment of around 1% of GDP per year in green energy- still a fraction of China’s spending but potentially a significant spur to the economy. Then came the Truss crash. Unfunded tax cuts caused a spike in mortgage interest rates because the Bank of England was expected to compensate through raising interest rates to combat the resulting inflation- Macroeconomics 101. Mortgage-holders were willing to tolerate the kind of uncertainty private renters deal with fulltime for around two weeks before the government became too unpopular to survive. Labour followed this up with a renewed emphasis on its fiscal rules: it will not borrow for day-to-day spending (sensible) and it will ensure debt falls over 5 years (ridiculous). Instead of spending £28bn a year in each year of the parliament, Labour would now “ramp up” investment to £28bn a year by the end of the parliament. They are now reportedly considering scrapping the pledge altogether. The same fiscal rules are preventing the renationalization of all services which cannot be done without incurring an upfront capital investment (i.e., all except rail).
Here is the essential point: the population of the UK which matters for winning elections is too exposed to asset price fluctuations for either major political party to fully commit to a policy which will lead to a reduction in the value of assets. The Tories are obviously incapable of endangering the asset-holders who are their constituency. A Labour party which represented Trade Unions, Workers and Private renters could. It could go to war with buy-to-let landlords. It could cushion homeowners who had to sell their houses with new, plentiful social housing. It could replace retirement plans based around downsizing from expensive large homes with generous pensions. It could coax older homeowners who were worried about their falling house prices to support the party through offers of a revamped National Health Service which integrated social care. But this Labour party has rejected the support of the working class in favour of chasing after the Tories’ natural constituency. And maintaining the support of this constituency precludes any policy which devalues their assets. Such a policy includes breaking with neoliberalism. If breaking with their flagship economic policy is what is required to keep asset-holders above water, this is a price Labour must pay.
Why Labour will fail in government
Finally, then, why will Labour fail in government? It will fail because a return to real growth relies upon a break with neoliberalism and Labour has chosen a path to power which depends upon the support of a constituency which benefits from neoliberalism. I predict (and I hope I’m wrong) that the Starmer government will be marked by repeated U-turns in which every proposal which might generate growth will be abandoned as soon as it threatens financial interests.
As things stand, if Labour does abandon its £28bn a year pledge, Labour’s proposals which might lead to higher growth are relatively thin on the ground. They include deregulating housing and the launch of Great British Energy, a national investment bank which will invest in green energy projects, including in “partnership” with the private sector. Finally, there is recent speculation that Labour might try to cut taxes: assuming these taxes are “funded” through lower spending, then this policy will simply cut into the amount of public investment they can make. And given the relatively small estimated elasticity of labour supply in the UK, we should be relatively sceptical about the scope for long-run growth to result from tax cuts.
My prediction is that Labour will fold like wet cardboard as soon as the first opposition to housing market deregulation appears. Labour has already voted against removal of EU environmental laws which block some housebuilding (the correct decision in my opinion). Environmental concerns about the relaxation of planning laws, particularly about the green belt, have the potential to create serious fractures in the party. More importantly, though, I do not have much trust in Labour’s MPs’ ability to stand up to homeowners and landlords in their constituency who will oppose any policy they think will reduce house prices. Such squeals every time the government proposes relaxing planning laws already undercut the Tories’ attempts to reform the planning system, and if Labour win a landslide it will be by winning those same seats from the Tories. In particular, many so-called “red wall” seats have very high home ownership rates. Their new Labour MPs will be a strong voting block in opposition to any proposals to fix the housing market.
So… what is left? Small increases in public investment, perhaps. Moderate planning reform proceeding in fits and starts and generating massive opposition from Labour’s new base. But if the scenario outlined above materialises, Labour will maintain, essentially intact, the neoliberal status-quo. Every bright new idea from a think tank will crash on the rocks of the political reality that Labour’s new voting base does not desire faster growth at the expense of returns on assets.
Conclusion: economics is class war
Economists like to try and separate questions of “efficiency” and “equity”. (I have previously written about how they fail to do this in the case of international trade.) Centrist politicians like to do it too. Labour’s current position of emphasising economic growth instead of redistribution has a helpful side effect of promising greater income for all people in the economy.
The problem is that in the real world, almost all economic policies have differential effects on people depending on their economic situation. Maximising economic growth under capitalism is a delicate balance of setting incentives for different kinds of labour and capital to optimise the process of developing innovative ways of exploiting labour and making the process of exploiting labour easier. It involves working out how the proceeds of that exploitation are shared in order to optimise those incentives. Whenever you change those incentives, wealth and income are redistributed. Economic policy is class war.
Concretely, the failed development model in the UK- neoliberalism- is one in which capital’s incentive is to own ever greater portions of public infrastructure and rent it back to the population for profit. This generates high returns at the expense of capital investing in more productive activities. To fix the problem, incentives for capital need to change, and in doing so the value of assets will fall. The ultimate reason why Labour will fail to fix the economy is that to do so they need to go to war with asset-holders: landowners, financial capital, and privatised public services. They won’t, because they don’t have the stomach for it.