Chancellor Rachel Reeves will use a trip to Brussels this month to make the case that closer working with the EU will help boost the economy against a backdrop of flagging growth and a Budget backlash.
Businesses have been complaining about the increased burden of taxation and sluggish forecasts for the future path of Britain’s GDP.
But the Chancellor and her allies are adamant that the Government has an armoury of policy ideas which can boost growth in the coming years – with the aim of ensuring that voters experience notably higher living standards by the time of the next general election.
Reeves’ attendance at a meeting of EU finance ministers in early December, will be the first time the gathering will have had a British presence since the UK left the EU in January 2020.
She is understood to see the “reset” of post-Brexit relations as a key way of improving Britain’s economic performance. “That is an indication of how seriously we take that issue, and the importance we put on it,” a source close to the Chancellor said, underlining the significance of her trip to Brussels. “Improving relations with the EU, tackling those trade barriers, is part of the growth agenda.”
Trade is one of the three areas she sees as crucial to achieving Labour’s promise to make the UK the fastest-growing economy in the G7 – along with regulatory reform, and an overhaul of planning rules.
Reports this week suggest, however, that this specific target is being quietly sidelined in favour of improving household income. The Prime Minister is due to deliver a Plan for Change speech on Thursday in which he will lay out the Government’s five priorities, linked to his five missions announced in Opposition.
One of these was “securing the highest sustained growth in the G7”, but economists say it will be difficult to beat the pace of growth in the US economy.
Pranesh Narayanan of the left-leaning Institute For Public Policy Research (IPPR) think-tank said: “What we saw in the Budget is not the growth plan – they were focused on bringing stability, though things like the investment we saw were very positive.”
Nevertheless, he said, the decision to increase taxes in order to boost funding for public services would also help the economy, saying: “In ensuring no austerity, you are doing something to boost growth.”
Economists, MPs and Labour insiders have listed a number of options to improve the growth picture despite the gloomy picture painted by industry.
Better trade with EU
Some MPs want the Government to go faster in repairing shaky relations with the EU in order to provide an economic tonic for the UK.
James MacCleary, MP for Lewes who is the Liberal Democrats’ spokesman on Europe, told The i Paper that some of the Budget had been “completely baffling” and complained that the Chancellor and the Prime Minister had “missed so many easy wins”. He continued: “An obvious one is by failing to engage in negotiations for a youth mobility scheme with the EU. Along with giving our young people the same opportunities that we had, it would provide a boost to our economy.
“We need to see the UK back at the heart of Europe after years of the Conservative party wrecking our economic relationships and that should start with a youth mobility scheme. We must also tear down the Conservatives’ red tape which was imposed as part of their botched Brexit deal and is holding growth back.”
But Anand Menon of UK in a Changing Europe warned that the economic effect of closer ties to the EU could be limited, as long as the Government sticks to its red lines of staying outside the single market and customs union.
He said: “The real growth forgone is the growth tied up in the single market and customs union. There are more limited sources of growth available from the European Union, from things like the veterinary deal. But the cumulative impact of all the things Starmer is talking about is pretty trivial.”
Better trade with US
Boris Johnson suggested last week that the return of Donald Trump to the White House could lead to a UK-US free-trade deal – insisting that he came close to sealing an agreement during the Republican’s first term in office but it was scuppered by Joe Biden, who was resistant to signing bilateral deals.
The ex-prime minister told the Spectator: “The problem I had was I came in in 2019 and Trump, if you remember, loses in the end of 2020, so we only have a year to get it going… We would have been capable of closing the free trade deal but then Joe came in.”
Fred de Fossard, a former special adviser to Sir Jacob Rees-Mogg when he was Business Secretary, said a deal with America “would cement Britain’s already strong economic relationship with the largest and most dynamic country in the world”.
The Government has suggested it may be open to a transatlantic free-trade agreement, although it has also promised to uphold existing rules on product safety and animal welfare standards which experts say could prove a barrier to any deal.
Edward Jones, an economics professor at Bangor University, suggested that Britain could embrace a halfway house with closer ties to the EU on some issues and the US on others. He told The i Paper: “With Trump coming, he will likely impose tariffs on the EU, so we need to box clever to develop relations and ties in the US and EU. It might mean aligning regulation with the US in certain industries – potentially service industries – and then deciding in the EU we want to focus on certain other industries, such as food.”
A BMG poll for The i Paper last week suggests that if a choice has to be made then voters would prefer the European option. It found that 49 per cent favoured a closer relationship with the EU, compared to 28 per cent who preferred a free trade agreement with the US.
More private investment
Before the Budget, the Government hosted an investment summit featuring the announcement of £63bn of commitments from international companies; and in the Budget, Reeves increased borrowing by £30bn in order to put more money into state investment.
Economists from across the ideological spectrum suggested that the two could go together, with public-sector investments encouraging the private sector to continue putting its own money in.
Julian Jessop, a free-marketeer who has worked with the Institute of Economic Affairs, said: “One hope is that the large increases in public investment in the Budget will have plenty of long-term benefits. The Office for Budget Responsibility (OBR) has been cautious in assessing the impact on growth until there is more clarity on where and how the money will be spent, so there may be some good news to come here.”
Narayanan of the IPPR added: “There is a case to argue that public-sector investment crowds in private-sector investment. It can give private sector confidence to invest alongside the public sector.” He agreed with the suggestion that the OBR may have underplayed the pro-growth effects of the moves already announced by the Treasury.
And Christopher Martin, economics professor at the University of Bath, said: “The July election saw the rejection of the idea that you can grow the economy by cutting taxes and the acceptance of the view that you need to grow the economy through government investment.”
Planning reform
A promise to overhaul the way that planning permission works for the construction of new homes, businesses and infrastructure was at the heart of the Labour election manifesto.
MPs privately admit that building more homes and infrastructure such as electricity pylons will not be welcome to many people whose local areas are affected – but they see it as crucial to delivering on a more dynamic economy.
Inside the Treasury, ministers are understood to be hopeful that the OBR will soon upgrade its GDP forecasts on the back of the planning reforms – possibly as early as the spring statement which must be delivered before the end of March.
Martin said: “Building houses and transport links will grow the economy. But this construction will only happen if the planning process if made easier and if the power grid is modernised. So I think we need the whole package of measures.”
Energy revolution
Energy Secretary, Ed Miliband, is spearheading plans to ramp up the construction of green infrastructure such as onshore and offshore wind turbines in order to remove fossil fuels from the electricity grid by 2030.
The policy is highly controversial with the Conservatives claiming that the move will make the grid less reliable and push up costs for consumers.
But Labour insiders are adamant it will reduce bills for both households and companies, boosting the economy and attracting investment from private firms.
“The Government’s energy policy will prove itself a considerable growth inducement in this Parliament,” said Josh MacAlister, the MP for Whitehaven & Workington. “There is a really comprehensive plan to crowd in large amounts of private investment that creates jobs and boosts growth… The energy policy is about trying to bring on the grid tens of gigawatts of clean energy in this sprint before the clean energy goal of 2023.”
Cutting red tape
In her Mansion House speech earlier this month, Reeves announced that she would shift the balance of regulations imposed on the City after the global financial crisis to focus more on boosting competition than on ensuring safety.
A Treasury insider said the Chancellor would seek to extend that approach to other industries, asking: “Where is the regulation that is holding back the economy, and how do we strip it back?”
A deregulatory agenda risks criticism from the left over fears it could reduce consumer protections. But Jessop said that cutting red tape was “important for growth”, adding: “The Government is saying the right things about the need for structural reforms – notably easing planning restrictions, tackling the productivity crisis in public services, encouraging more people back to work, and rolling back the over-regulation of the financial sector.”
Picking winners
In the new year, the Government will publish a new version of the industrial strategy which will lay out how the state will intervene to promote the most productive businesses.
Experts have warned that this approach must come with an acceptance that some investments will not work out. Jones said: “The Government needs to promote innovation. One step is making sure the British Business Bank becomes comfortable with losses. You can’t always back winners. You make losses on seven out of 10, two out of 10 break even, but one out of 10 is a star. That’s the sort of premise they work on in Silicon Valley.”
There are also political risks to the strategy. A Labour MP said: “We need to pick winners, which also means picking losers.”
According to allies of the Chancellor, her focus in the coming months will be working on moves to promote growth – having broken the cycle of holding two fiscal events a year, which Treasury insiders believe made the department overly focussed on these set pieces rather than the job of boosting the economy.
A source close to Reeves said: “She wanted to break the cycle that the Treasury was there to count beans and tax and spend.”
Liz Truss needs to take her own advice, and cease and desist