The Growth Delusion

In today’s Budget, Jeremy Hunt talked about ‘growth’ but delivered policies that will lock Britain into years of low pay and crumbling public services.

Chancellor Jeremy Hunt leaves Downing Street with the despatch box to present his spring budget to parliament. (Dan Kitwood/Getty Images)

Jeremy Hunt opened his budget speech today by arguing that the state of the UK economy was ‘proving the doubters wrong’. The country will, he argued, avoid a technical recession in 2023. Hunt’s budget—which he termed the ‘budget for growth’—centres on building on this apparent success.

While Sir Keir Starmer delivered some typically ‘forensic’ responses to Hunt’s budget, he is largely in agreement with the Chancellor. Starmer and his Shadow Chancellor Rachel Reeves have focused their efforts in opposition on highlighting the Tories’ poor record on growth and attempting to paint Labour as the party of economic competence.

Both sides of the bench, it seems, are focused on growth at all costs.

For the Tories, this strategy is of questionable wisdom. The UK may avoid a technical recession this year—defined as two successive quarters of negative growth—but it may not.

Investors were already beginning to question the future economic prospects of the UK, a country that has been wracked by political turmoil, trade and industrial disputes, a deep cost of living crisis and a decade of slow growth and productivity.

Now, the UK’s outsize financial sector may experience a hit as the panic over the collapse of Silicon Valley Bank spreads throughout the international financial system. Even if UK banks remain relatively insulated, the fallout from the SVB collapse will likely have some impact on the world economy and, therefore, rates of economic growth in the UK.

Hunt can try to promise to return the UK to growth, but there is a multitude of variables weighing on UK growth rates that are largely out of his hands. He could rely on counter-cyclical government spending, but high interest rates would make such spending prohibitively expensive for a party committed to ‘balancing the books’.

As it stands, markets are barely blinking at the policies Hunt has announced in his budgets, which suggests that they’re basically insignificant in determining the UK’s future economic prospects.

Reforms to the pension system, an increase in the free childcare allowance and even tougher disciplining of job seekers and the disabled are unlikely to achieve the significant increase in the labour force that the government is clearly hoping for. Meanwhile, its ongoing attempts to strengthen fortress Britain will hamper efforts to expand the country’s labour market.

The continuation of the energy price cap was all but inevitable given the severe economic hardship many families continue to face. Inflation is likely to level off this year, but its important to remember that inflation is the rate of change in price increases. Prices will continue to rise, albeit at a slower rate—and many people are already struggling to make ends meet.

For his part, Keir Starmer responded by quibbling with the Chancellor’s forecasts, pointing to the IMF’s prediction that the UK would be the worst-performing economy in the G7 in 2023.

But for Labour, the focus on economic growth doesn’t make much sense either. While the OBR doesn’t exactly have a sterling record on economic predictions, the UK may well avoid a recession this year. And if the rest of the world economy does not, Labour may be forced to admit that the government isn’t doing such a bad job after all.

But perhaps an even bigger problem with the focus on growth is that the UK has managed the near-unprecedented feat of a decade of GDP growth without wage growth. Modelling from the TUC now suggests that real wages are unlikely to return to their 2008 peaks until 2026—an astonishing period of wage contraction for an allegedly advanced economy.

It’s worth bearing in mind that, in the UK at least, the cost of living crisis isn’t just about prices. It’s about wages too. A few handouts to help people with rising bills aren’t going to deal with the underlying problem with the UK economy—that wages have stagnated for the longest period in the history of modern capitalism.

What neither party is willing to admit is that the only ways the government can deal with this problem are to strengthen the hand of organised labour and increase salaries for public sector employees.

Astonishingly for a party built by the trade unions, Keir Starmer’s Labour is quite happy to leave workers fighting for wage increases out in the cold if it means he’ll be given a slightly easier ride in his media rounds. And the Tories—the party that single-handedly destroyed the UK labour movement—are unlikely to change their record on this issue any time soon.

In many ways, both parties are still living in a world that has long since died—a world in which distributional conflicts can be suppressed through broad-based economic growth.

This is precisely how the UK’s post-war developmental state dealt with conflicts between capital and labour. Keynesian economic policies were deployed to prop up growth rates, and bosses and workers agreed to come to the negotiating table to ensure that their relative shares of the pie remained broadly constant.

But that world is long since dead. Even if either party had any desire to return to Keynesianism, it is highly unlikely that in a world characterised by slowing productivity, financial instability and climate breakdown, it is even possible to grow our way out of the problem of distribution anymore.

In short, political choices have to be made. Winners and losers have to be chosen. And which side loses largely depends on who is the strongest—which is the real reason both parties will avoid any measures to strengthen the hand of workers.