Is growth really Labour’s priority?

Rachel Reeves is vulnerable to the charge she is putting politics before economics.

Growth was going to be the answer. Yes, the country was in a mess, the Labour opposition would say, and public services under-funded. Yes, Jeremy Hunt’s spending plans for 2025 onwards were very tight. But the answer was not to spend money that we did not have or to increase taxes further but to deliver higher levels of economic growth. That is how public services could be properly funded and living standards increased.

There were always grounds for scepticism here. There are inevitably time lags between pro-growth policies being implemented and the benefits being delivered. There are also many factors that determine economic growth, many outside the control of the government. Nor are pro-growth policies always politically easy. The cynical might argue that placing great emphasis on economic growth was a way of avoiding the tough questions on tax and spend.

Those tough questions can no longer be avoided. By the time of 30 October and Rachel Reeves’s first Budget, she will have to provide some answers. But we should not be completely cynical here because the essence of her pre-election argument – that the harshness of the choices that we face is ultimately determined by the strength of the economy – is correct. Relatively weak economic growth results in much tougher decisions on taxing and spending than relatively strong economic growth.

If acceptance of this view becomes central to our policy debate, this would be a welcome step in the right direction (we are still living with the consequences of a Brexit debate in which economic growth was subordinated to other considerations). Given that Labour’s vote is broad but shallow, there are grounds for optimism that incentives are aligned. To be re-elected, the party’s task will be very much easier if it has succeeded in delivering the economic growth it has promised.

That optimism is, however, fragile. These are still early days and we should not rush to judgement but there are five areas where the government is vulnerable to criticism.

The first relates to planning. This was the centrepiece of Labour’s pre-election growth plan and, undoubtedly, a policy area where it had the advantage over the Tories. But, while there is much to praise in Labour’s approach, the building targets are less ambitious in those areas where new housing would make the greatest contribution to the economy. London, for example, sees a reduction in its target whereas the north east of England sees an increase. In other words, this is not as pro-growth as it might be.

The second relates to our relationship with the EU. Again, this is an area where Labour should be an improvement on the Tories and there has clearly been a warming of relations. But Labour could go further. There is no need, for example, to rule out a youth mobility deal with the EU that would be good for growth.

Third, tax policy. It is now clear that Labour will put up taxes in October by more than it had indicated in the election campaign, when Reeves said that she saw no reason to go beyond the limited measures that she had outlined. Higher taxes might not necessarily stifle growth but they can do.

At least two of the measures that Reeves outlined – reforming the tax treatment of private equity managers and a more fundamental scrapping of the non-dom tax regime – could provoke a behavioural response that reduces revenue and the attractiveness of the UK as a place to do business. Some might argue that this is a price worth paying to make the tax system fairer, as they see it. That might be true, but growth will not be helped by the mobile wealthy leaving.

The fourth issue relates to workers’ rights. Again, some will argue that the central purpose of the Labour Party is to strengthen the rights of workers and that a rebalancing between employers and employees is necessary. But it would be a mistake to think that there is not growing disquiet from business as to the higher costs that this will involve and, potentially, lower productivity.

Fifth, spending priorities. Reeves has to make some tough decisions and, as a member of the Society of Current, Aspiring and Former Treasury Ministers, I am sympathetic to these challenges. For example, I would happily defend the means-testing of the Winter Fuel Allowance. But she was quick to scrap some infrastructure projects that were economically beneficial (a criticism that was levelled at the coalition government after 2010 which even those of us who were ministers at the time now accept). The government has also made some big concessions to public sector trade unions without extracting any commitment to reform.

In each of these items, there is a sense that politics is a bigger consideration than economics. Parts of Labour’s electoral coalition are being rewarded; Labour’s traditional opponents being punished. Taken in the round, there is a risk that the government appears less focused on economic growth than it might be.

It should be stressed, these are early days. The government continues to benefit from considerable goodwill and those who argued that the riots had brought the political honeymoon to an end were getting ahead of themselves. Nor is the government set irrevocably down the wrong track.

There is a perception, however, that just as growth is no longer the all-purpose answer to every question, it is also no longer quite the priority it once was. It is a perception that the government must rectify.