Does Labour's plans for ‘securonomics’ stack up?

In March the Shadow Chancellor of the Exchequer Rachel Reeves set out her vision on how to put the economy on what she called “strong and secure foundations”. She went on to add this was “the only viable strategy for growth in today’s world”.

Rachel Reeves has called this approach ‘securonomics’, as a counterpoint to the macroeconomic instability of the last few years.

Is it dangerous to develop a government macroeconomic strategy around a single focal point?

Arguably there is no alternative. As I have conveyed repeatedly in recent years, the UK desperately needs a coherent strategy to re-boot its anaemic productivity growth. Since the Great Financial Crisis (GFC) of 2007-10 the UK has been stuck in a low productivity trap. Labour productivity growth prior the GFC was around 2% annually. Subsequently to the GFC it fell below 0.5%.

The Chancellor Jeremy Hunt (Image: free)

Without that productivity growth, the UK faces some very unpleasant fiscal choices. Choices which, incidentally, have so far not been extensively debated as part of the current general election campaigning, as the Institute for Fiscal Studies (IFS) mercilessly remarked last week.

Support schemes such as furlough and business support during Covid were essential to avoid economic disaster but they have left the UK with a post-war high level of debt. The UK and Italy have the highest debt service costs in the G7, with the UK spending 4% of GDP in interest payments in 2022 compared to 2.1% in 2019.

As the IFS show in their illustrative scenarios, the fiscal rules which both main parties are sticking by may require serious cuts in spending for unprotected public sector budgets between 2024-25 and 2028-29. Both main parties have also ruled out major increases in taxes of around £20bn which would be needed to offset those cuts. In any case there will be more unforeseen demands on the public purse – and from defence to other spending areas, indicative electoral promises are accumulating fast.

So there is no alternative to re-booting growth. The Productivity Institute, a research collaboration funded by the ESRC of which the University of Glasgow is a partner, has mapped out what is needed to remove some of the obstacles to the UK’s growth prospects.

There is no silver bullet. There is a need to address underinvestment in businesses in both physical capital and in intangible assets (including digital capabilities and AI); investment in intermediate and advanced skills; investment in public infrastructure; improving diffusion of best practice between businesses; boosting public service productivity; reducing the inequality in growth performance across the UK nations and regions; and much more besides.

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But key to making this work, especially considering the finite level of public resources, is a greater co-ordination of public policy within government, with a greater laser-like focus on growth. This was at the heart of Rachel Reeves’ ‘securonomics’ proposition. It included reforming and strengthening the role of the Office for Budget Responsibility (OBR), introducing a new statutory Industrial Strategy Council (ISC), and a reformed and strengthened Enterprise and Growth Unit in the Treasury (acting as a quasi-economics ministry within HMT).

I would add the following suggestions.

First, it may not be enough to bolster the Enterprise and Growth Unit in the Treasury. Many of the policy interventions around bolstering productivity growth will require joined-up working with devolved governments and much closer cross-departmental working within the UK government. The latter seems most naturally done through a Cabinet Committee with executive authority, led by the PM and Chancellor – with a focus on economic growth.

This could be combined with another concept advanced by the Productivity Institute: a new ‘Growth and Productivity Commission’ which could include independent expert voices. These would help to co-ordinate work on productivity within Treasury and government departments, developing policy options.

Many other OECD countries have similar bodies with advisory functions, some established as statutory bodies. Indeed, having both a Cabinet Committee focused on policy decisions and a new institution focused on developing policy options on growth would allow a better separation of the advisory and political/executive functions. Second, Rachel Reeves suggested she would ask the OBR to report on the long-term impact of capital spending decisions.

This seems sensible and ensures that short-term fiscal decisions can consider the impact of the government’s longer-term policies. It would reward virtuous policymaking: policy announcements which would be seen to increase the medium-term growth prospects would be ‘rewarded’.

But one could also go further: asking the OBR to consider the potential impact of policy options developed by the ‘Growth and Productivity Commission’ and not adopted by government. It would retain political authority with the government but improve the scrutiny of the quality of policymaking.

The UK economy is performing poorly, compared to its peers (Image: free)

Finally, ‘securonomics’ faces a massive challenge: how to ensure the window of opportunity remains open. It will take time to implement any plans for growth and at least 3-4 years to see any major uptick in trend productivity growth. In the meantime, the fiscal constraint of the first years of government will be very tight.

Hence it would make sense not to limit the scope of public investment too tightly as part of the initial fiscal rule. Doing so may place some of the initial pro-growth policy choices out of reach, because of the consequent limits on public (co)-investment. And one should not shun the possibilities to boost growth in 2024-27 through short-term measures e.g. skilled migration. We know how much the increase in economic inactivity has constrained the UK’s post-Covid recovery. The UK is the worst-performing country since 2019 in this regard.

As we have seen from recent OBR projections, releasing the short-run labour market constraint could just about open the window to implement the longer-term elements of the ‘securonomics’ plan.

Sir Anton Muscatelli is an economist and the Principal of the University of Glasgow