Stronger govt role to revitalise UK economy
The challenges to UK’s economy are formidable, lackluster growth, public services starved of funds, and anemic productivity and investment. Taxes are the highest they have been in decades, while government debt adds up to more than 90 per cent of its total output
The last time a freshly minted Labour government unabashedly campaigned on an ambitious national industrial policy to revive the British economy was 50 years ago, and the results were generally viewed as disastrous. The 1974 program of subsidies, state ownership and power sharing among business, unions and government resulted in strikes that paralysed the nation. And the government’s goal of picking industrial winners turned into a policy of backing losers like the automaker British Leyland and British Steel Corporation.
The current Labour Party has clearly jettisoned that ’70s era legacy. Keir Starmer’s new government, which is scheduled to formally lay out its economic agenda when Parliament opens on Wednesday, is nonetheless embracing the idea that the government must play a key role in driving Britain’s stagnant economy.
Policies that put political leaders more firmly in charge of the economy have taken hold all over the world. India, Brazil, Malaysia and many European capitals have all signed on. Leading the way is the United States, which for decades had spearheaded the campaign for open markets and hands-off government. The movement is largely aimed at challenging China, which has used topdown planning to move firmly into the No. 2 spot among global economies, as well as financing programs to stem the ravages of climate change. The growing lineup of government interventions inevitably means they will end up competing to some extent with one another. With one of the world’s largest advanced economies, though, Britain’s latest experiment is being watched particularly closely. Labour’s industrial policy is getting a belated start and has severely limited funding, but it is likely to have easier politics to navigate than some other governments do. Starmer’s landslide victory gives him a comfortable parliamentary majority.
Simone Tagliapietra, a senior fellow at Bruegel, a research organisation in Brussels, ticked off some of the actions taken just since the election less than two weeks ago: the launch of a public company investing in renewable energy projects, the announcement of a National Wealth Fund and the creation of cross-governmental panels led by the prime minister. It “all represents a textbook example of how modern industrial policy should be structured,” Tagliapietra said. “And not many countries have done it all in once.”
The challenges are still formidable. The economy is suffering from lacklustre growth, public services starved of funds, and anaemic productivity and investment. Taxes are already the highest they have been in decades, while the government’s debt adds up to more than 90 percent of its total output.
Labour is responding with a small-budgeted spin-off of a multibillion-dollar industrial policy put in place by President Biden, whose administration seeks to build up critical advanced technologies like semiconductors and electric batteries. Washington’s policy is much better funded, but Starmer’s 174-seat majority means he will not have to battle nearly as much over green initiatives. With a lack of bipartisan consensus on climate and just a single-seat majority in the U.S. Senate, the Biden administration has had to negotiate with the critical swing vote — Senator Joe Manchin III, a conservative from West Virginia who railed about the administration’s “radical climate agenda.”
Starmer, by contrast, is likely to avoid such combat. Ed Miliband, Britain’s new energy secretary, already announced approval of three solar farms that could power 400,000 homes despite opposition from members of Parliament and the communities they represent. He added that the government would end rules that in effect allowed communities to ban onshore wind projects in England.
In a speech last week, Rachel Reeves, Britain’s new chancellor of the Exchequer, said the overall approval process on critical infrastructure would be reviewed. That could mean decisions about where to install projects like large wind farms would be made on a national level, sidestepping local opposition.
Such resistance has frustrated wind development throughout the European Union despite emergency measures that were created to speed approval of renewable energy projects. In the Netherlands, dozens of projects were canceled or delayed in recent years because of local opposition that cited concerns about health, noise and the ruin of natural landscape, according to the Energy Monitor.
Ms. Reeves said the government would also reinstate requirements that local authorities build a minimum number of new homes, a mandate that the previous government scrapped. Labour has set a goal of building 1.5 million homes over the next five years. To help, 300 new planning officers will be dispatched to assist. George Dibb, associate director for economic policy at the Institute for Public Policy Research in London, listed other actions that the Labour government could quickly take, such as tightening regulations on internal combustion engines and phasing in a requirement that households and businesses replace gas boilers with heat pumps.
Britain has a wider set of policy tools than the United States, Dibb said. A lot of incentives like tax breaks were included in the American plan, he said, but not many punitive measures like a carbon tax or a cap on emissions. Other economists expect that Labour will try to encourage reluctant private investors to develop green technology by limiting risk through loans and other government guarantees.
The European Union, too, has assiduously worked to put together a better coordinated and financed industrial strategy. Last year, it passed a Green Deal Industrial Plan focused on the energy transition. And this year, it approved its first industrial policy for defense, and approved regulations to step up production of essential raw materials within the bloc. But the 27 nations that make up European Union must agree on any joint industrial strategy brick by brick despite often different priorities and outlooks.
Of course, Britain faces its own set of hurdles. Diane Coyle, a professor of public policy at the University of Cambridge who has analysed the country’s history of industrial policies, pointed to examples like a fragmented set of institutions and the lowest investment rate among the Group of 7 countries.
But “when there are huge transformations in digital and energy, not having an industrial policy,” she said, is “just a bad choice.”