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Labour’s long term aims and manifesto

After Labour's victory at the general election, what are its plans for the UK economy and markets as stated in their manifesto?

| 12 min read

During the election campaign, Labour set out five missions for the UK. It wants to grow the economy at the highest sustained growth rate of the G7 countries. It wants to make the UK a clean energy superpower. It wishes to halve serious crime and improve the safety of the public. It wishes to reform childcare and education to break down barriers to opportunity. It wishes to build an NHS fit for the future. Many of these aims will be supported by voters who did not vote Labour as well as by those who did.

Going for growth

The growth aim is a stretching one. The emphasis is placed on a major expansion of green energy and general infrastructure investment. In a £2.7 trillion economy there would need to be growth of £54bn a year to reach 2% annual growth. To be the highest in the G7, the UK would have to outperform the US, which regularly achieves 2% growth compared to growth of recent quarters in the UK and EU which are often below this.

Labour’s main proposals to boost growth is to establish a National Wealth Fund and Great British Energy. These two bodies will receive public capital, with £7.3bn over five years for the Wealth Fund and £8.3bn for British Energy. It budgets that these two bodies will spend an annual £1.5bn and £1.7bn of public money in 2028-9, its control year for the overall deficit. It wishes these bodies to attract or lever in three times the amount they are investing from state money, as simply allocating £15bn over five years will not make a sufficient impact.

Were it to hit their leverage targets for both bodies that would be £60bn over five years, or £12bn a year. It also plans a £1.1m programme called Warm Homes to help people raise their standards of home insulation to cut their household bills and assist is adapting homes for different home heating systems. The investment plans coupled with labour market spend amount to £4.7bn a year. Of this, £1.2bn would be paid for from an increased tax on fossil fuel energy producers, and £3.5bn from additional state borrowing.

The higher windfall tax and the ending of new UK oil and gas licences will subtract from GDP with a faster run down of the UK’s conventional energy sector.

How realistic is the green growth strategy?

The clean energy ambitions assume 650,000 new jobs and aim to eliminate net carbon dioxide from electricity generation by 2030, though allowing stand-by gas generation against the possibility of low solar and wind days. The plans recognise the need to step up grid capacity substantially, and to develop various ways of storage of power when renewable power is in good supply. It also promises some carbon capture and storage to allow for continuing fossil-fuel use. There would need to be an investment of about £200bn over the six years by the private sector in the extra generating capacity and related spending. This would lift the growth rate.

Trying to do all this by 2030 is going to be difficult. Labour talks of doubling onshore wind capacity, trebling solar and quadrupling offshore wind output. There have been delays in introducing the extra grid the transition requires. Labour proposes new planning guidance or rules, but it will still have the issue of how many pylons and high voltage cables to march across the landscape given the objections of many local communities. It will probably require a change of the law to speed up the planning enquiries and to limit the right to object.

There remain issues over how far it will go in promoting hydrogen as a way of storing and using renewable power. The commitment of £500m for hydrogen and £1bn for carbon capture and storage by the National Wealth Fund will not pay for national roll out of hydrogen charging stations nor buy much carbon capture and storage. It will need substantial private sector investment back up. The National Wealth Fund has a provisional planned budget spend of £2.5bn for steel investment, £1.5bn for gigafactories for car batteries and £1.8bn for ports and supply chains. This reaffirms the primacy of the green transition as the growth plan.

One of the dangers to this growth plan is the reluctance to date of UK consumers to back the products of the green revolution. Battery electric car sales especially to individuals are well below modest government sales targets so far this year, and heat pumps remain unpopular. More electric cars could probably be sold at lower prices, but that might mean allowing in many Chinese cheaper vehicles which would not boost jobs in the UK. The US and the EU will seek to keep Chinese cars out with high tariffs which the UK has not yet said it will impose.

The green measures and investment proposals on their own are unlikely to propel the UK to a reliable 2% a year growth rate when taking into account imports and the faster closures of fossil-fuel-based activities. Labour has other proposals to assist.

Creating economic stability

Labour makes much of the need to create stability, with lower inflation and lower interest rates than the UK has experienced in the last two years. It attributes the high interest rates to the short-lived Truss 2022 budget. It understandably wishes to avoid a budget that could cause instability. It inherits rates that are higher than they were in 2022 here and in the US.

Rachel Reeves set out her proposals for stability in her Mais lecture. She plans to balance current spending against tax revenue, with borrowing to invest. By the fifth year of the forecast state debt must be falling as a percentage of GDP as under the current control. This leaves the government free to boost capital investment and borrowing in the shorter term. She identifies a productivity problem which requires more investment and improvement in skills and training. She plans both a British Infrastructure Council and an Industrial Strategy Council with the green prosperity plan as a central driver of growth.

In due course the industrial strategy and the demands of the green transition may well need additional government spending. This will need to be financed from additional tax revenue stemming from faster growth or from tax rises.

Further growth measures

The manifesto reinforces these views. We are promised no return to austerity. The government aims at lower food and energy prices for households. It aims to buy half the public sector’s food requirements from local production or certified to higher environmental standards. It assumes as more renewable power becomes available prices can fall, but that will depend on what contract prices they need to promise to secure the very large additional investment in capacity. It will also hinge on what happens to comparable gas and petrol prices as most people are currently burning fossil fuel and will have a direct comparator when they make a decision about whether to switch.

The government wishes to build 1.5 million new homes over a five-year period.

The government wishes to build 1.5 million new homes over a five-year period, with planning reforms making it easier for developers to get planning permissions to do so. Councils will be required to grant sufficient permits. The main policy heralded is to reintroduce top-down targets for each council to grant more permits to build.

Some say that shortage of permissions in the right places is a problem. Others say the current failure to build 300,000 a year may not be owing to an inadequate supply of permissions, as there were 1.1m outstanding permits last year in England. It requires builders to have the working capital to build the homes and private buyers and councils to have the money to buy the homes when built. The Bank of England has been cooling the economy with higher interest rates which was designed in part to cut the supply of mortgage finance. As Labour wants to increase affordable housing there will need to be an expansion of public budgets.

Business partnership

Much rests on a proposed partnership between government and business. Business is offered stability of corporation tax at 25% for the parliament with full expensing of investment. It has promised the end of business rates to be replaced by a business tax which will tax online as well as physical property-based activity. Labour promises it will be easier to put in new datacentres.

There will be a change to the apprenticeship levy to make it more effective at training more UK people to meet workforce demands. There will be early legislation to ensure better terms and conditions for employees, and a higher living or minimum wage that will be the same for all ages.

The idea also includes seeking more investment money for green transition and infrastructure from pension funds, based on the argument that they should have more invested in real assets which have some inbuilt protection against inflation and can grow with the economy.

Taxation

Labour has promised not to increase the main rates of income tax, VAT and National Insurance as well as the pledge on corporation tax. The manifesto has identified additional tax on non-doms, extra windfall tax on fossil fuel and VAT on school fees as agreed rises to pay for specified pledges. Other taxes are not the subject of either a promise to leave alone or a commitment to increase for a purpose. It may be that the new government wishes in due course to make further use of sin taxes to influence behaviours and may extend its proposals aimed at the very rich.

Interest rates

Most people think interest rates will start to come down later this year. The more that happens, the more fiscal freedom is created as the large debt interest costs for the government decline. It would also provide a further stimulus to private sector investment and help mortgage holders and new homes buyers as rates fell. The next OBR forecast might reveal some increase in capacity to spend if interest costs are marked down.

Summary

Labour’s economic plans are loosely based on President Biden’s Inflation Reduction Act. They wish to grow the UK economy faster by accelerating infrastructure and other investment, by improving training, education and working conditions and by using planning, industrial strategy and public purchasing to assist the aims. Called ‘Securonomics’, it has overlaid the Biden growth package with tougher UK rules to limit the budget deficit and control borrowing. In contrast President Biden has launched his policy based on a major fiscal stimulus which has so far allowed good US growth.

The Public Spending Review will present difficult choices, and the investment led approach to growth will need the government to find ways of speeding up public sector projects and permissions for both public and private projects.

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Labour’s long term aims and manifesto

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