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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former Treasury minister
Chancellor Rachel Reeves has made a clear attempt this week to change the narrative about the UK economy and the ability of the Starmer government to help boost it. This was necessary. The negative background mood, after hopes rose ahead of the election and immediately after, relapsed following the October Budget to one of recurrent disappointment, low expectation and dismay at the apparent lack of a narrative.
The UK has re-entered a period of close to zero economic growth. The hit to business confidence, induced by the Budget, has been compounded by concerns about rising global bond yields and the constraints this places on the government’s ability to spend, and with it, to borrow.
In her speech, Reeves acknowledged the cost to business from the national insurance increase — and again attempted to explain that she felt it necessary to get the finances under control. But as she pivoted to talk about the supply side, the picture became much more hopeful.
Rather than becoming overly stressed about demand management, I believe this supply-side focus is right. First, because much of the demand will be determined by the Bank of England: if interest rates are reduced in the way many forecast, this should be an important driver. So Reeves would not want to take steps to offset this possibility too much — not least because it would probably help bring UK bond yields down.
Second, as ministers have been eager to tell anyone who will listen, the government is constrained by its own fiscal rules, the first of which limits current spending. If it wants to avoid further tax rises, it will have to stick to them — or something close to them.
Third — and this is especially important — the UK’s problem going right back to the 2008 financial crisis, and before, has always been the supply side. Namely, our woeful productivity and our weak private and public investment. Since the crisis, feeble average growth of 1.5 per cent has been almost completely driven by very strong labour force growth. Productivity growth has remained extremely weak. If we are to have stronger growth while being less inflation-prone, we need more investment and more productivity — it really is that simple.
So Reeves needs to ensure that the government’s 10-year infrastructure strategy is centre stage from now on.
The chancellor correctly talked about excessive regulation, planning approval blocks and a lack of commitment to growth-enhancing investment projects. She promised support for a large scattering of projects to address the persistent delays and barriers to infrastructure, including the Ox-Cam project, support for a third runway at Heathrow as well as a number of schemes in the north of England.
What was missing was the framework. There was no place in her narrative for the institutions that will be crucial to delivering transparent, high-multiplier investments — and they are not actually yet up and running. But this emphasis will be necessary if the government is to instil confidence in investors.
Chancellors always like to announce big attention-catching investments even if, like the Heathrow expansion, they are controversial. Very often, though, these are not accompanied by fresh government capital and are announced on a “trust us” basis in terms of real, lasting benefits.
In this, Reeves is no exception. She cited Frontier Economics research suggesting that a third runway would have positive multipliers outside the London area — this should become part of the framework for every major initiative. But it must be done systematically, especially as the government will need to observe its second fiscal rule, and borrow to invest. Without such a framework, “trust us” might not get such a positive response from the gilt or equity market.
The new National Infrastructure and Service Transformation Authority will not be established until April. But this entity, along with the National Audit Office and others, will be absolutely fundamental to encouraging business, inside and outside of the UK, to boost the economy’s growth potential with investments. I am surprised that the chancellor chose not to talk about it: in effect, this will add and support the growth-focused division of the Treasury that both Reeves and Sir Keir Starmer have promised to establish.
In this spirit, I hope that Reeves will empower Nista to be completely transparent about the investment projects that will have positive multipliers. Because this is also the pathway for indirectly boosting the demand side of the economy, unleashing longer-lasting animal spirits in business and consumers alike.
