Why Things May Not Get Much Better
Sir Keir Starmer is right to be cautious about how quickly Labour can revive Britain's stagnating economy. The economic model of the last 30 years is broken and it is not obvious how to fix it
Sir Keir Starmer has only been prime minister for two days but already there is much to welcome. He has appointed some impressive political outsiders to ministerial jobs, suggesting a seriousness about policy that has largely been missing in recent years. A press conference on his first full day signalled a commitment to transparency. Pointedly, he has already met with his independent adviser of ministerial standards. Today he is meeting with the leaders of the devolved governments in Scotland, Northern Ireland and Wales and on Tuesday with metropolitan mayors. The new foreign secretary flew to Berlin on his first day to meet his German counterpart. A government that respects the constitution, institutions and allies is the first essential step to drawing a line under the chaos of the last 14 years.
Of course this is not what most of the media coverage has focused on. The Labour leader may have pulled off one of the most remarkable election victories in British history. He took a party that had been decisively rejected by voters in 2019 to a 174 seat majority and in the process reduced the Conservative party to a rump of just 122 MPs, the lowest in its history. But many commentators have pointed to Labour’s low share of the voter, at just 35 per cent is the lowest of any winning party and four percentage points lower than it achieved under Jeremy Corbyn in 2017, to question the strength of Labour’s mandate. Starmer’s achievement has been widely dismissed as a loveless landslide, a Potemkin majority, built on an electoral sandcastle.
It would be easier to take these arguments seriously if the right-wing media had not spent much of the past six weeks insisting that a vote for anyone other than the Conservatives was a vote for a Labour government. Unless they think voters are too stupid to understand the rules of Britain’s electoral system, then it is reasonable to assume that 76 per cent of the electorate preferred a Labour government. The low vote share and turnout suggests that voters voted tactically to get the Tories out, or did not feel the need to vote in an election whose outcome they were told was a foregone conclusion. Besides, the only mandate that matters under the British constitution is a parliamentary majority, regardless of how it was achieved.
What is true is that there is little of the sense of excitement that accompanied Tony Blair’s landslide win in 1997. Starmer has the lowest approval rating of any incoming prime minister. The mood of the country is clearly one of relief that the Tories are out, rather than an expectation that, in the words of Blair’s election anthem, things can only get better. Starmer acknowledged as much in his speech outside Downing Street, blaming this lack of enthusiasm on the breakdown in trust in the political process:
When the gap between the sacrifices made by people and the service they receive from politicians grows this big, it leads to a weariness in the heart of a nation, a draining away of the hope, the spirit, the belief in a better future…
If I asked you, now whether you believe that Britain will be better for your children, I know - too many of you would say: no.”
Starmer’s problem, however, is that the difference between now and 1997 is not just down to a lack of trust. Back then, things really were getting better. As I have written in an essay for the forthcoming edition of Prospect magazine, a new economic model was emerging based that completely recast the terms of political debate.
For most of the 20th century, the focus of political debate was on how to revive domestic industry. Various remedies were applied, none ended well: protectionism, nationalisation, exchange controls, prices and incomes policies etc. By the early Nineties, Thatcher’s solution based on radical free market reforms, privatisation and tax cuts appeared to have failed too. Two deep recessions had devastated industry, leading to soaring unemployment, a stock market crash and a house price crash.
Yet within a few years, Britain’s economic fortunes had been transformed. Thanks to the collapse of communism and the launch of the European single market, the City of London found itself sitting on two of the greatest business opportunities in history as new global markets opened up for its financial services and as London emerged as the financial capital of this new European single market. By the time of the 1997 election, the City was booming and had become the engine of the UK economy.
Yet it was Labour that benefited from this transformation. While the Tories wallowed in their growing euroscepticism and were blamed by the public for the economic pain that had gone before, the outward-looking Blair saw the political opportunities and embraced the new spirit of globalisation. He convinced Labour to stop worrying about domestic industry and inequality and focus instead on how to redistribute the bounty being generated in the City. Or as Peter Mandelson put it: “we don’t mind people getting filthy rich, so long as they pay their taxes''.
Starmer’s problem is that this model is no longer working - and it is not obvious what can or will replace it. The financial services industry remains the engine of the economy but London faces growing competition from America, the European Union and the Middle East. Brexit took Britain out of the single market, creating new regulatory obstacles to financial services trade. The scrapping of the non-dom rules have reduced London’s attractiveness to the global financial elite even as other countries are introducing their own generous regimes. In any case in these days of work from home, services can be delivered from anywhere in the world. Many services sector jobs may be particularly vulnerable to new AI driven technologies.
Meanwhile many of the assumptions that underpinned the political consensus over the last 30 years have turned out to be wrong. The wealth from the City did not trickle down or level up, instead inequalities and regional disparities have widened. The privatised utilities failed to invest adequately, resulting in crumbling infrastructure. Low taxes did not lead to increased savings and investment, but instead fuelled consumption, leading to a growing reliance on foreign investors to plug the gap in an ever-widening current account deficit. The new services industries in which Britain now specialises have turned out to be hard to scale, have low productivity, and rely on an openness to immigration for which there is little political support.
The impact of this failing model is everywhere. It is evident in average wages that have stagnated in real terms for 15 years, leaving low income households 27 per cent worse off than those in France and Germany. It can be seen in the number of food banks rising from 35 in 2010 to over 2,500 today. It is evident in the crumbling public services, not least the health and prison systems that the new government has rightly said are broken. It is evident in the woeful underperformance of the London stock market, which trades at a 20 per cent discount to European markets and a near 50 per cent discount to US shares based on next year's forecast earnings, as well as in the alarming lack of dynamic new domestic companies seeking London listings.
If things are going to get better for Labour, Britain is going to need a new economic model, one that revitalises the domestic economy and addresses those long-standing pathologies of chronic low investment and weak productivity that used to obsess British governments before they struck financial oil in the City. To be fair, the previous government recognised this and took important steps to encourage investment with its policy of full expensing. Labour clearly gets this too, which is why Starmer has made boosting growth his more important mission and has made planning reform an immediate priority to unlock investment. One reason to welcome Labour’s landslide victory is the strong mandate it provides to deliver this.
Even so, the investment that Labour hopes to unlock will not come free. Infrastructure investors will expect a return which will have to be met by higher customer charges. Some element of patient charging may be needed to fund investment in the health system. Then there is the question of where the investment will come from. Much of it is likely to have to come from overseas given the low level of domestic savings. But in that case the income will flow back overseas too, limiting the boost to tax revenues to fund public services. Higher levels of domestic investment will require either higher taxes or measures to encourage higher savings, which will reduce disposable incomes, and lower corporate dividends.
No wonder Starmer has been at pains to warn that things will not get better overnight. The new prime minister may succeed in restoring Britain’s reputation. But it will take more than sentiment to tackle problems that have been ignored for three decades. It will take investable projects, efficiently delivered. In the meantime we will have to make do with what Starmer promised on the morning of his victory: “the sunlight of hope, pale at first but getting stronger through the day”.
A good post fleshed out more thoroughly in your Prosepct article (I didn't know about the legal action taken by the OFT which effectively triggered the Big Bang, for example). However, given the trailed tax increases (in multiple news outlets) in the forthcoming budget and the election to parliament of people like Torsten Bell, I don't see a recognition on the part of the new government that domestic savings and investment should be prioritised, quite the opposite in fact.
A raid on extant savings vehicles (especially ISAs but primarily pensions) would, logically, be the next step should the touted increases in CGT be implemented which would, in my opinion, be a serious error given the mobility of capital and, as you note above, labour in this day and age because the only way to stop people and capital leaving would be the kind of capital controls abolished in 1979.