[NB: this post started life as a video, but the edit went wrong, so it has become a blog post instead. That might explain the style: the transcript survived when the audit did not].
Rachel Reeves is making growth a national mission, so she says.
I'm not sure that everybody else is signing up to it but that's her plan and that's what she intends to deliver.
Why? Because she believes if she delivers growth she will get the extra revenues that she needs in government to deliver the transformation that Labour says it's going to provide for our society.
Does this make any sense? I have to tell you, not at all.
Have a look at this chart. It's based upon data provided by the Office for National Statistics. So, this is official UK government information. It shows the change in our gross domestic product, that is our national income, in percentage terms year by year since 1949, running up to and including 2023. It is as up-to-date as we can get at this moment.
Look at the pattern. That red line shows that we have a very erratic pattern of growth.
But then look at that black dashed line that runs right through it, and what you'll see is something that is very clear. The trend, which is what that line shows, is marked and decidedly downward.
If we look at some of the averages, because they are more important than any one year's change, one year on another, then the story is even more marked.
Overall, the average rate of growth from 1949 to 2023 was 2.4 per cent per annum.
But that doesn't tell the whole story because from 1949 to 1975, during the post-war era, the average rate of growth was 3.1 per cent per annum.
But let's just look at another period that is good for comparison. That is the period from 1997 to 2009, because those were the Labour years when it was last in office. The average rate of growth was 2.2 per cent. In other words, it was lower than the average for the period as a whole and 0.9 per cent lower than it was on average in the period from 1949 to 1975.
Then look at the period from 2010 to 2023, the most recent period on the chart, and, of course, the period that overlaps with the Conservative government that has just left office. And the average during that period was 1. 6%. Almost half the rate between 1949 and 1975. And significantly lower than the average, of course. In fact, only two-thirds of the average over the whole period.
What is Rachel Reeves going to do when she talks about boosting growth?
Let's suppose that she increases growth to the 1997 - 2009 rate instead of the average current rate. In other words, if she achieves the performance that the Labour government did from 1997 onwards, instead of that which the Conservative government delivered from 2010 to 2023, she would achieve £61.1 billion of growth in a year.
At the recent Conservative Party rate, it would be £44.4 billion pounds a year.
So she would increase growth, at the best, by £16.7 billion pounds a year, at least at first.
And how much would she get to spend out of that on average? The increase in rate is only £16.7 billion a year. And at best, she'll get 40 per cent of that in tax. And she probably won't even achieve that. This is £6.6 billion or so in a year.
Of course, these figures do compound over time, but not by that much. That means that they will increase over the five-year term of the parliament, but so will inflation, and so will demand for services as a great deal of growth is based on a growing population. In other words, the net real additional contribution over this period is going to be small, running to a few tens of billions overall, at most, if she increases growth to the rate Gordon Brown achieved, and that would be optimistic.
Is that really going to transform our society and deliver all the things that we need? As far as I can see it isn't even enough to do all the outstanding repairs on government properties, schools, hospitals, roads and so on, let alone to build what we need or to transform those properties to net zero state and to deal with everything else on which there is a requirement for investment at present, like education and health and justice and so on.
Growth cannot deliver what Rachel Reeves needs. It simply isn't possible. She's going to have to look elsewhere if she wants to meet the needs of the people of the UK.
The only answer to that is that she has to tax wealth.
Will she? I don't know. But what I do know is that growth is not going to work for her, even if she succeeds to the extent that her predecessors did. Growth is not a plan for the country.
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“And how much would she get to spend out of that on average? The increase in rate is only £16.7 billion a year. And at best, she’ll get 40 per cent of that in tax. And she probably won’t even achieve that. This is £6.6 billion or so in a year.”
This money already ear-marked for the National Wealth Fund:-
https://www.theguardian.com/business/article/2024/jul/09/rachel-reeves-national-wealth-fund-labour
Contrast with the United States’s IRA Act government spend of over £60 billion per annum:-
https://home.treasury.gov/news/featured-stories/the-inflation-reduction-acts-benefits-and-costs
(Note dollars to the pound rate taken at 1.3. Note also Goldman Sach’s puts the fiscal spend at over £92 billion per annum)
This begs the question: given both countries have a fiat currency, given Biden is quite happy to print/issue bonds to fund the IRA, given Reeves can hardly claim to be ignorant of what is happening in the USA, why the fundamentally different approach?
Perhaps neo-libtard rules tend not to apply to the USA gov, but Reeves feels bound to follow them (or is forced to follow them)? It is bizzare. Maybe the USA still feels the need to take over lumps of the UK that are not under its control (health?) UK gov spending a la USA would slow that down, certainly in the case of health – which US corporates continue to slaver over..
Growth can not produce more tax revenue.
In 1965, the UK generated about £10-billion in tax revenues.
In 2022, the UK spent around £1,200-billion.
Where did the extra £1,190-billion come from?
It wasn’t from the private sector, the National Debt in 1965 was only £30-billion.
It wasn’t from bank loans, all of which needs repaying.
The only solution is government spending.
We know that
But we are continually playiong away in this game right now
Presumably if there is an economic downturn Reeves will make commensurate cuts in government spending making life even worse for ordinary people than it is now.
It would seem so…
Armed forces minister Luke Pollard on this morning’s Today programme said the only way a 2.5% of GDP target for defence spending can be achieved is by growing the economy.
I can think of more urgent priorities than spending 2.5% of GDP on defence. But Pollard’s maths does illustrate another problem with reliance on growth. He doesn’t seem to realise that if the GDP denominator is increased, the spending numerator would have to be increased. A 2.5% of GDP target is no easier to achieve with high growth than with low growth.
Statistics, damned statistics and polticians’ grasp of them
Just make the denominator smaller and that too will grow the economy. For then we will have more numerating power per denominator.
Of course it is total nonsense. They are all confused about the difference between differential and absolute values. Call this the political differential. The difference that exists between politicians we have compared to those we wish we had. And it is in deficit.
The percentages are a bit opaque, probably by design. So let’s have some real numbers.
The UK’s GDP was about £2,700 billion in 2023. The tax take was about £1,000 billion.
2% of GDP is about £54 billion.
2.5% would be £67 billion.
So we are saying that at present the UK cannot afford to increase defence spending by £13 billion per year. About £200 per person.
This is by the way similar to some estimates for the additional cost of a fully funded NHS style social care system. Essentially a form of social insurance, spreading risk across society, because no one knows in advance how much help they will need or for how long.
If GDP increased by say 10% to about £3 trillion then:
2% of GDP would be about £60 billion.
2.5% would be £75 billion.
Apparently increasing GDP by 10% would permit defence spending to increase not by £6 billion but instead by over £20 billion.
And then the question is what would we buy? An army private is paid about £23,500, significantly below median earnings. £13 billion would be about half a million private soldiers. The whole of the British armed forces is about 180,000 (140,000 regulars and 40,000 reserves). An F35 costs about £85 million. So that is about 180 of them. The RAF had about 600 operational aircraft total, including about 100 Typhoons and 35 F35s. The nuclear submarine fleet will cost about £30 billion to replace not including operational costs. And so on.
The important question is to work out what sort of threats the UK and overseas territories faces, and what sort of military force we might want to project around the works. I’d suggest it is not tanks rolling across Germany but (taking lessons from Ukraine and Palestine) air and missile defence, drones and anti-drone technology, protecting national infrastructure such as power generation and water supply, and electronic and “cyber” warfare.
Thanks
You are correct; the idea that “growth” will ride to the rescue and mend all that is broken in our public services is nonsense…. and Labour must know this. In an election campaign dominated by Napoleon’s maxim “never interrupt the enemy while they are making a mistake” it was handy to avoid serious debate by invoking “growth” as the answer to all problems.
Robert Kennedy famously said that GDP measured everything except what was important… and wouldn’t it be marvellous if a journalist played the clip of that speech to Rachel Reeves and asked “tell me, was Robert Kennedy wrong?”
… and the follow up question is “so, if growth numbers don’t capture what is important, please tell what really is important.”
Very good
I might borrow that idea
GDP as a notion, as a measurement of economic success is so outdated. Like Manuel in Fawlty Towers, I Know Nothing…. But, how can an economy on a finite planet continue to grow?
It clearly cannot, forever
Please excuse me for being an ignorant Yank as I ask this question.
Why is Rachel Reeves not interested in investing (spending) on UK industries that are under distress such as agriculture (pastoral and arable), public services (transportation and water eorks) and energy.
Agriculture (see Clarkson’s Farm and the Australian Trade Deal), public services (see Thames Valley Water Works) and energy (The UK has the most advantageous geographical location in the world for wind farming) are three things the USA highly invest in and/or subsidized for national security and the public good and public stability.
Because we no longer believe that the state works, and it cannot back anything wihout it failing. That is the belief.
Having lived in the United States what impressed me was that Americans want to “work smart” and this mentality applies in both publicly run businesses as well as private. In the UK much less so. The people here just drift along. Joined-up thinking seems in short supply!
@Schofield
One cannot just “drift along” in the USA or one will get left behind.
No chance of it reaching her but I did write to Rachel Reeves yesterday – including the link to that speech – and expressing my dismay that she seemed to see increasing GDP without using the power of the public purse as her focus.
GDP measures the economic activity in terms of money changing hands, except for a few anomalies when it doesn’t. It completely ignores whether or not that activity contributes anything useful to society.
I am more interested in a society where everyone is reasonably well off, where everyone has the opportunity to engage in activities that benefit both themselves and society as a whole, and which does not degrade the environment. If it leads to an increase in GDP, then so be it. If not then so much the worse for GDP as a measure of the good society.
It’s disappointing that getting rid of the Tories has not got rid of putting dogma above facts. Does Reeves really think her plans add up? The only hope is that the Civil Service gives her a dose of reality, quickly.
Unfortunately much of the civil service will agree with her.
Richard, if you took the same data points from your chart and produced an SPCC (Statistical Process Control Chart – showing the calculated lines for the Upper and Lower Control Limits and the average), I bet we’d see a chart that shows most of the data points as being within the Upper and Lower control limit lines and therefore in the realms of simply being the natural variation of the system (wee Deming, Shewhart, et al), and very little to do with the policies of government. If the data points of GDP for each year are therefore the natural variation of the system, then how can the Labour or indeed any Government claim to be in control of growth or decline?! That would be the fallacy of their claims and needs to be pointed out.
On varations I agree
On trend I doubt this is true
But to suggest the trend could be changed quickly is absurd, even without big government spending.
How long will Reeves survives when there is no growth?
Listened to an interesting programme on Radio 4 about empty properties in UK [Ghost Houses] Government needs to deal with such things.One poor lady had been made homeless as, due to interest rate increases, her landlord had been forced to sell up and she’d lost her home.So Bank of England didn’t help there.
I am no economist but feel some government economics is just smoke and mirrors and robbing Peter to pay Paul.They put interest rates up to curb inflation but to someone whose mortgage goes up as a result, they have suffered from inflation and many will suffer various adverse effects of the policy.
It worries me that having worked for the BOE Rachel Stevens can only think in terms of growth and continual growth will surely not leave a good legacy for future generations.
Why do I not here blinkered politicians stand up and say lets clear up our polluted rivers and beaches urgently as such mess surely must have an adverse effect on tourism and businesses and thus growth and GDP and I read of one poor chap whose surfing shop was doing poorly because of lack of people wishing to go into foul seas.
We need growth but not at the expense of our very life support systems surely.
I know we need houses but I fear Reeves like so many politicians is, rushing and bullying people and that houses may be built in the wrong places and poorly.
We have a mandate they all shout in their arrogant manner and I want to shout back no you don’t a minority of people voted for you and you Starmer you blind fool got a reduced number of votes so show a bit of humility.No hope there. [Sorry about poor grammar quotation marks etc but my vision is worsening]
Sorry just a few thoughts .
I feel little hope with such people running things.
Sorry to waffle
Mark
Spending more money on reducing pollution will add to GDP.
Agreed
To be fair, we’d probably be better off with S Club 7 running the treasury.
🙂
Growth and its partner GDP are chimeras and it’s time to do the kindest thing and put them quietly to sleep. There are alternative ways of looking at the problem of finite resources, such as “degrowth” or a “steady state economy” and other indices, or socioeconomic paradigms, such as “wellbeing”.
But the cult of GDP, like that of the State as a household, will be extremely difficult to beat. As will the necessity under any alternative to ensure equity and fairness for all and not as at present where a very small group grab most of the cake.
Growth? Where and how.
’12 Freeports and 74 Special Economic Zones (SEZ’s) are currently carving out extraterritorial spaces the length and breadth of the UK’.
https://x.com/EuropeanPowell/status/1771658822857191586
At heart this is just privatisation within designated areas of the UK. With their upfront government funded financial ‘incentives’ and 10 year freedom from taxes, any growth within these areas will no doubt be good for those that benefit from privatisation (just like the UK wide PFI companies and the water industry does in England), but overall it’ll likely just be another financial loss for the UK. Since the UK freeports & SEZ’s will be privately owned, that would also prevent rejoining the EU or even just the single market, so there goes another growth opportunity. Growth is good is just an updated version of greed is good. Wealth extraction as opposed to wealth creation.
Tim Watkins agrees:
https://consciousnessofsheep.co.uk/2024/07/10/labour-has-already-failed/
I’m not sure I agree with everything in that podcast, but, yes, Labour has already failed.
As a suggestion as to why Rachel Reeves is pushing this idea , could it be anything to do with the ‘lovebombing’ of the party by lobbyists over the last 18 months or so? Open Democracy has been looking into this.
https://www.opendemocracy.net/en/dark-money-investigations/lovebombed-by-lobbyists-how-starmer-labour-became-the-party-of-big-business/
“Politics is a concentrated expression of economics” said Vladimir Lenin, and Reeves knows no different that her economics (including her predecessors after 1975) are wrong.
Perhaps somebody bought her some rose tinted glasses for her last birthday. Who knows! Stranger things have happened.
I looked at the global Real Hourly Wages chart in the following article by Bill Mitchell and couldn’t help wondering how much of the UK’s wage inflation is being driven by the house price inflation bubble that the Bank of England along with both Conservative and Labour governments have failed to control particularly in regard to the knock-on inflation in rental properties.
https://billmitchell.org/blog/?p=61850
If this is so base rate has been raised to control a self-induced problem and corruption and cluelessness is now the norm in this country!