Abandon caution, embrace risk: a growth recipe for Labour

The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England

Exactly a century on from the party’s first term of office, a Labour government has swept to power with one of the largest ever parliamentary majorities. Labour ran on a campaign slogan of “change”. The first part of that sweeping change — in people — is complete. The second, harder and more important part now lies ahead: similarly sweeping change to the UK’s policies and, in time, prospects.

The task is vast. The economic and social challenges are formidable, structural and multiple: from low growth to poor health, from decaying public services to depleted public trust. These problems were decades in the making and will take at least a decade to fix. Progress in doing so will be hindered by the tightness of the public purse. Were you placing a bet — I’d advise against — the odds would not be in your favour.

The scale of the Labour party’s majority helps. But this mandate, while wide, is not especially deep. The seismic electoral swing to Labour since 2019 was largely the result of Conservative party self-harm. Trust has grown but understanding, much less love, of Labour remains in short supply. In a world of ever weaker political ties, the new government’s honeymoon with the public could be short.

For all the talk of change, Labour’s manifesto was one of the thinnest and centrist in its history. It had little new to say about such core issues as education and skills, public service reform and local government financing. It was largely silent about how both tax rises and austerity could be avoided without breaching its fiscal rules. The country demanded a radical policy break from the past. Labour, in opposition, offered a mini-break. 

This is not a new challenge. Writing almost 10 years after the first Labour government, the leftwing social reformer RH Tawney lamented the party’s “intellectual timidity, conservatism, conventionality, which keeps policy trailing tardily in the rear of realities”. While the realities of 1932 are not those of 2024, they are no less harsh. A conventional or tardy response to them would as good as guarantee failure.

All that said, there are good grounds for tempered optimism. A decisive break from the past is possible if the new government plays its policy cards wisely. The hand it has been dealt is not all bad. The UK economy is at last recovering, if slowly, with inflation at target, real wages rising at 2-3 per cent and borrowing costs set to fall in the second half of the year. The country’s economic underperformance in the past means there is a healthy degree of pent-up potential for the future. UK assets, cheap at the start of this year, have gained ground in anticipation.

That reflow is being given momentum by international investors. After years of turbulence, the UK now looks like a sea of political calm relative to the situation across the Channel and Atlantic. The political risk premium on UK assets, too high for too long, is shrinking and the country’s attractiveness as an investment destination is rising. Sir Keir Starmer may yet prove a lucky general.

But luck will run out, the honeymoon fade. Injecting dynamism into the UK’s economy on a sustained basis will require a sharp shift in culture within government and the private sector. At present, both are riddled with risk aversion and its ugly sister, under-investment. The caution that propelled Labour to power is the opposite of what will be needed in government to promote growth and improve public services. 

That culture shift, from safety-ism to dynamism, starts with the Labour party itself. With the Tories decimated, Starmer’s unofficial opposition will now sit behind rather than in front of him in Westminster. It is time to loosen the centralising grip, adding some backbench Cavaliers to a cabinet largely comprising Roundheads. That would make for more innovative and dynamic leadership and, post-honeymoon, a more resilient party.

That willingness to loosen its centralising grip applies with equal force to the UK’s regions and nations. Their potential will only be unleashed if local powers are unlocked. Labour has committed to giving this to local leaders. But there is some risk they are treated as the delivery arm of centrally set missions rather than masters of their own destiny. That should be resisted — it would dim the local dynamism essential to UK growth. 

Dynamism has been absent, too, from the public sector whose productivity has flatlined and whose morale is shot. Every government comes to office promising public service reform and productivity improvements. This one has the twin advantages of its being both a practical necessity (given decades of decay and a tight public purse) and a generational opportunity (given the transformational possibilities of AI).

An AI-enabled reimagining of public service provision is possible early in a new government. Some positive early steps have already been taken with the NHS in the last Budget. In everything from schools to courts to planning, there is scope for new technology to deliver large cost savings and significant quality improvements. The UK should aspire to lead the world not in AI regulation but in its business application, starting with the public sector.

Complementing this on the private sector side, the new government needs to give industrial strategy the full-throated, deep-pocketed support Joe Biden has provided in the US. This means acting as a strategic venture capital investor in the UK’s genuinely frontier sectors and technologies, of which there are several. This requires a radical change to Treasury practice, shifting its fiscal-first culture and shredding its flawed Green Book.

Regulatory rulebooks should follow it into the shredder. The UK’s growing army of regulators, while individually well intentioned, have become a collective blight on private sector innovation, prioritising risk avoidance over dynamism. An independent royal commission is needed to reassess regulators’ statutory objectives and cultures to make them growth, risk and innovation friendly. 

On housebuilding, the UK needs to go back to the 1960s — an era of active spatial planning with council or social housing as its centrepiece. After a half century of under-investment, the fastest way of achieving that is by releasing publicly owned land to private sector development corporations, with a clear public realm mandate and a distinct, permissive public planning regime. This could herald a new “sociable” housing revolution.

As for the financing of all of this, the good news is that the world is awash with money, much of it patient. Too little, at present, finds its way beyond the Golden Triangle, which spans London, Oxford and Cambridge, and to the UK’s frontier sectors. Provided it is targeted to the right sectors and places, underpinned by an active industrial strategy, Labour’s proposed new National Wealth Fund could fill the financing gap which has faced British businesses for a century. 

Change is not always for the better, but nothing has ever improved without it. Tawney’s critique of Labour in the past should spur the party in the future. Actively embracing risk and reform is the only route to boosting UK growth sustainably. That makes it, contrarily, the least risky path. Thus equipped, I am rather optimistic that Starmer can deliver the large, lasting improvements that have eluded most UK prime ministers this past century.