Increase borrowing or raise taxes. These were the choices facing Rachel Reeves as shadow chancellor when asked how Labour would fund better public services. Neither of these options, nor cuts to already stretched public services, were likely to go down well with the party’s “hero voters”, who want improved public services but without higher taxes – and are historically sceptical of Labour’s ability to manage the economy.
Reeves needed a solution to untie Labour’s perennial “Gordian knot”. This is how economic growth became, in the words of Keir Starmer, “Labour’s defining mission”. The “growth fairy” would, like Alexander the Great’s sword, solve all of Reeves’ problems at once. Money for public services – without higher borrowing or taxation.
Labour’s embrace of economic growth drew raised eyebrows from many. Some questioned it for principled reasons. Hasn’t growth become detached from the things we really care about such as community, purpose and wellbeing? Others pointed to the politics. Economic growth is an abstract concept, removed from the day-to-day realities faced by voters across the country.
Yet, the recent riots here in the UK – as well as the rise of right-wing populism across the West – remind us that Labour’s elevation of growth to the heart of British politics may be more than just a political fix. This is because there is a strong moral case for growth as highlighted by the Harvard economist Benjamin M. Friedman in his book, The Moral Consequences of Economic Growth.
He argues that “economic growth… fosters greater opportunity, tolerance of diversity… and dedication to democracy… But when living standards stagnate or decline most societies make little if any progress towards any of these goals, and in too many instances they plainly regress”. Put simply: sustained and shared growth is one of the keys to a more open, tolerant and democratic society.
A host of psychological studies demonstrate why this is the case. When asked how well-off people feel, they tend to judge their success or failure not in absolute terms, but against a reference point. This reference point can be either relative to their own (or their family’s) recent history or it can be relative to others in society, meaning how well their friends and neighbours are getting on.
Which of these reference points is stronger at any one time is crucial for the societal dynamics that play out in our politics. If people are getting richer over time, they are less likely to focus on how they are doing relative to others in society. By contrast in periods of economic stagnation, when people are not getting better off, they turn their attention to “keeping up with the Joneses”.
Combined with “loss aversion” – people’s instinct to fight harder to prevent falling down the income ladder, than to move up it – this means that prolonged economic stagnation is a recipe for unleashing often dangerous competitive dynamics which can be turned on “outsiders” such as migrants, foreigners and minorities.
This same dynamic has been highlighted by the economic historian Barry Eichengreen in The Populist Temptation. He finds that during “the golden age” of economic growth (1950-1973) the average share of far-right parties across advanced economies fell to record lows. The periods before and after it – with lower growth – saw vote shares over three times higher.
Some will argue that this misses the point: surely it’s culture not economics that drives populism? Eichengreen’s response is persuasive: “Identity politics is most powerful against an unfavourable economic backdrop… Dominant groups blame their economic plight on immigrants, foreigners and minorities… In this way economic grievances and identity politics feed on each other”.
This helps to explain the recent rise of populist parties and the far right across advanced democracies. Because although British growth has been anaemic since the 2008 crash, this is part of a wider trend. As Daniel Susskind points out in Growth: A Reckoning: “almost every country has slumped its way into the twenty-first century”.
This makes the renewed focus on higher growth in the UK and abroad understandable – though no less difficult to deliver on. But Labour should be careful in how they think about their growth mission: “to achieve the highest growth in the G7”. The lesson from history, set out by Friedman and Eichengreen, is that whilst higher growth is important, better growth is the key to a more open society.
The defining feature of the post-war period in the UK, Europe and the US was that the gains from growth were more fairly shared out. By contrast, even when there was growth in the pre-war period and the latter half of the 20th century, this was often combined with higher inequality. As noted by Eichengreen, unequal growth has a less “civilising” effect – whilst unequal stagnation, as we have experienced since the financial crash, is downright toxic.
This makes the second, often overlooked, part of Labour’s mission – to achieve growth “in every part of the country making everyone, not just a few, better off” – as important as the headline goal to increase its rate. If we need a reminder of this, recall the woman in Newcastle who when confronted with the risk that Brexit might hit the UK’s GDP shouted: “That’s your bloody GDP. Not ours.”
This means that Labour must be as tough on the causes of unequal growth, as of low growth. In the words of the economist Mariana Mazzucato, they must remember that growth has “not just a rate, but also a direction” which is susceptible to human agency. Shaping this direction, she argues, is the main purpose of “missions”, which Starmer has adopted as the driving force behind his new government.
So, of course, the government must pursue higher investment, better infrastructure, and improved education, ensuring that these are genuinely shared across the country. But it should care as much about its workers’ rights agenda, devolution to our great cities and rebuilding British industry. At the same time, Labour must advance decarbonisation to further decouple growth and emissions. These are not nice-to-haves but crucial pro-(good)-growth policies.
There are promising signs that Labour understands this. In her Mais lecture earlier this year, Rachel Reeves argued that “when vast swathes of Britain are written out of our national story; when hope for the future is allowed to wither, and decline becomes a self-fulfilling prophecy; then we know the result. We see it all across the world: the rise of populists who offer not answers but recriminations”.
The challenge now is to avoid being knocked off track. The more that policy challenges the status quo, the greater the push back will be from entrenched interests. The siren calls of easy answers and quick fixes that reinforce our London-centric, laissez-faire growth model will grow. When this happens, Labour must show that it has the steel to hold fast. If it does, it can become a genuinely transformative government. The result will be a more open and inclusive society, as well as a more prosperous one.
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