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In his book Great Britain? Torsten Bell – the recently appointed Treasury minister – tells a revealing tale. The slowdown in income growth, he writes, began around 2004, “but no one in government noticed until 2009, five years later. I remember the meeting at which it became clear what had happened, but by that point there were more immediate problems such as collapsing banks to worry about.”
Why did ministers miss the slowdown? “Because headline GDP growth remained strong right up to the financial crisis – averaging 2.8 per cent between 2000 and 2006.”
That’s one instance of how living standards can become decoupled from GDP. It’s a subject that has defined politics in recent years. Recall the heckle that a woman in Newcastle delivered to the think-tank director Anand Menon in 2016 after he warned that Brexit would hit GDP: “That’s your bloody GDP, not ours.”
Morgan McSweeney, No 10’s chief of staff, is aware of the danger of such sentiments. That’s one reason why the Plan for Change announced by Keir Starmer at the end of last year opens with the aim of “raising living standards in every part of the United Kingdom”. This marked a shift away from an initial headline pledge to achieve the “highest sustained growth in the G7”. That aim endures, but it has obvious complications: it encourages a focus on GDP rather than living standards and it depends on factors outside of ministers’ control (such as the performance of the US economy).
This shift reassured Labour MPs, not least those in the “Red Wall” facing a challenge from Reform (“Our quality of life matters much more than GDP going up by a percentage point or two,” Nigel Farage recently declared). But after the last fortnight – in which Rachel Reeves has centred growth – some worry that the government is losing perspective.
“The Plan for Change was meant to mark a big pivot away from growth to living standards,” one MP close to No 10 told me. “But nowhere is that visible in the last ten days”.
In her speech in Oxfordshire yesterday, Reeves emphasised that “growth isn’t simply about lines on a graph. It’s about the pounds in people’s pockets”. And in the UK, evidence shows that pay and productivity haven’t become detached to the extent that they have elsewhere. In short, a return to healthy GDP growth should boost living standards too.
But how will Labour ensure that’s the case? The government has already raised the minimum wage by 6.7 per cent to £12.21 and increased public sector pay in real terms (by £9.4bn). Yet the political impact of such measures has been far exceeded by the winter fuel payment cuts – the most unpopular action Labour has taken in office.
That’s a reminder of how sensitive voters are to the state taking money away from them or giving it to them (Gordon Brown’s tax credits earned Labour enduring support). What positive action could ministers take?
Inside Ed Miliband’s department, energy minister Miatta Fahnbulleh, the former head of the New Economics Foundation, has been charged with ensuring bills are lower by the time of the next election (Labour’s initial pledge was to cut them by £300). Treasury aides say they would like “taxes to be lower” once fiscal conditions allow – creating the potential for pre-election sweeteners.
Whatever the answer, pointing to lines on a graph – whether higher growth or even higher wages – certainly won’t be enough. Labour will need concrete actions that prove it’s everyone’s GDP, not just theirs.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Could John Rawls save the Labour Party?]