Danger ahead

Donald Trump’s resounding victory in the United States is a wake-up call for progressive politicians everywhere, including in the UK. Trump not only won the presidency convincingly, but his party now has control of both houses of Congress, a major political achievement. Much is being written about where it all went wrong for the Democrats as the incumbent party. The Labour party must avoid being a UK version of the one-term Biden administration it once admired.

The scale of the fiscal, economic and political challenge facing the UK Labour government is unprecedented. That much was clear before the election, but it has become even more apparent since. There is barely a public institution in Britain that is not operating in crisis mode, engulfed by scandal: people dying unnecessarily because the NHS cannot treat them quickly enough, despite more doctors and nurses than before the pandemic; transport improvements delayed, and even when commissioned, with costs well over budget; defence procurement that squanders taxpayers’ money without delivering the security needed. Achieving improvements in one policy sector often requires politically contentious reform elsewhere: for instance, to drive up NHS performance, a major overhaul of social care is needed, yet no proposals have been implemented for over a decade (Labour’s pre-election call for a Royal Commission has yet to be enacted). No wonder the government has had such a testing first hundred days in office.

This was the inauspicious context for the autumn budget. Heralded in advance as laying the foundations for Labour’s mission of delivering the highest sustained growth in the G7, and an antidote to the doom and gloom conveyed since July, its focus was on buying more fiscal time for a growth and reform strategy to be devised in the Treasury. Yet as Trump’s victory shows, Labour may not have the luxury of time given the strength of the populist insurgency afflicting rich democracies.

Labour’s strategy is to be blunt with the nation about the inevitable pain ahead. The budget was accompanied by stern declarations that raising the tax burden to historic levels was a necessary evil, while improvements in public services would inevitably take time. The independent Office for Budget Responsibility (OBR) projected a short-term boost to the economy, pushing it above capacity and so increasing the risk of inflation, before growth falls back to a steady 1.5 per cent per annum. Worryingly, the OBR forecast a decline in business investment over the lifetime of the parliament, with public sector investment only stimulating growth after the next election.

The budget has inevitably faced criticism. It makes a series of much-needed tough decisions including updating the fiscal rules and laying out a plan to sustainably increase public sector investment in the UK after years of Conservative indecision. There is a particularly significant boost in operational funding for the NHS.

Nevertheless, while Labour’s package of fiscal reforms required a coherent ideological rationale, ministers had to work hard to explain it in the days afterwards. The explanations given for raising taxes were largely technocratic, ‘there is no alternative’, rather than constructed as necessary choices to overcome enduring economic inequalities. Little was said about what kind of society Labour sought to create, and how life for individuals and families would be better as a consequence of the budgetary measures.

More fundamentally, the Starmer government is confronting strong economic headwinds. The cold, hard fact is that the outlook for UK productivity remains poor. As a consequence, as it stands, there are fewer resources to improve wages and invest in the public services we need. With Trump threatening policies such as prohibitive tariffs on UK exports (the National Institute for Economic and Social Research forecast that new US tariffs on Britain, the EU and China could halve the UK growth rate by 2029), there is a risk that growth deteriorates further, entailing even more difficult choices ahead on tax and public spending.

The government requires a coherent view of structural change in the world economy, taking account of factors from energy security to new technology, in which a serious approach to economic policy can be grounded. Deregulation and the liberalisation of planning controls advocated by the prime minister are important, but only part of the growth story: the UK government needs to unleash dynamism and innovation at the technological frontier across all of the UK’s burgeoning growth sectors. Meanwhile, the likely isolationism of Trump 2.0 and his potentially conditional support for NATO means the UK will have to spend a higher proportion of GDP on defence by the end of the parliament, reversing the cold war peace dividend of the last 40 years.

In our recent pamphlet, Power and Prosperity, published by the Fabian Society, we argue that Labour needs a coherent policy agenda and uplifting story to see it through the hard times ahead. This political narrative must allow Labour to explain its actions clearly to voters, while helping ministers and their advisers to take principled decisions, however unpopular. Labour should root its agenda in values, drawing from ethical socialist doctrine that prioritises above all else the capacity of the individual to flourish in the community, focused on fairness and the equal worth of all.

Meanwhile, the fundamental importance of a flourishing civil society has been neglected: as the economist, Raghu Rajan highlights, we need civil society to operate as a ‘third pillar’ to counter-balance the power of markets and states, ensuring the vulnerable are protected from the disruptions wrought by globalisation and new technology. Supporting the civic realm includes investing in families to better manage the growing care burden in ageing societies, while cultivating intergenerational solidarity: in Power and Prosperity, we propose formal payments through the tax and benefits system to grandparents who do childcare work for family and neighbours. It also means defending borders from illegal migration.

Biden failed to properly articulate that sense of community and underplayed how his economic plan was helping workers and communities, leading to an inevitable focus on high inflation as food and gas prices soared in the wake of the pandemic. After a promising start to her campaign for the presidency, Kamala Harris abandoned a forward-looking economic agenda and lacked any credible plan to reform government to ensure public bureaucracies delivered for citizens, not vested interests. Retaining a political message anchored in hard-edged reforms is vital to prevent this Labour government in Britain from being a centre-left one-term anomaly.

There is little doubt that ideology still matters in UK politics. Without it, the Labour government will lack a clear political identity while its message will be framed by its opponents. If the party approaches the next election without a convincing story to tell accompanied by substantive governing achievements, a more hostile narrative will prevail: the emphasis will be on the cost of living crisis still being felt, with inflation and interest rates not yet low enough, job security yet to improve, higher operating costs for businesses, public services failing and out of touch with people while taking more of their money in taxes, alongside a visible decline on the world stage as the defence sector resists change. Many of these elements undoubtedly contributed to Harris’s defeat in the US.

While it is wrong to believe that economic growth will solve all of the government’s political problems, economic expansion felt in people’s wallets and their day to day experience is without doubt a powerful antidote to populist cynicism. Yet growth that is both fairer and more sustainable will require the radical transformation of our economy. That may impose costs in the short term, and it will require greater willingness to tackle vested interests and curtail rent-seeking behaviours that inhibit investment in the productive capacity of the economy. We know that raising productivity is not easy. Almost certainly, stronger economic ties to the EU single market will be required as a spur to innovation and competitiveness, particularly in a world where the US is imposing additional trade barriers. The UK public sector will have to operate very differently so it can deliver for citizens during an era of fiscal constraint. Meanwhile, Labour must remain focused on what matters to people and families, refusing to be distracted by forms of identity politics that cultivate resentment and merely fuel greater polarisation.

This Labour government is still relatively new in office, and it is led by politicians of energy, talent and conviction. There is time to refocus on its missions and the mechanisms to deliver them, to put in place the elements for another election victory and subsequent term in office. We know that the price of failure would be high, not least if a Labour defeat were to pave the way for a UK equivalent of Donald Trump’s administration. In these circumstances, there is not a moment to lose.

Image credit: Gage Skidmore via Flickr