Chancellor Growth Reset
Recently the billionaire hedge fund manager Ray Dalio delivered some sobering analysis on the UK economy:
“When you get to the point that you have to borrow money to service the debt and interest rates are rising, so that debt service payments rise, so you need to borrow more money to pay them, you’re in what the markets call a death spiral…”
It’s not easy to dispute this characterisation. On January 9th, with inflation seeming more stubborn than expected and Trump tariff threats looming, gilt yields spiked to over 4.9%, catapulting borrowing costs to their highest levels since the financial crisis. The frenzy highlighted a government at the mercy of the changing whims of bond market speculators. Suddenly government plans for loosened fiscal rules for more capital investment, and pledges not to raise taxes, no longer seemed credible.
This is the inevitable result when debt is left to spiral. In the year to December 2024, the government borrowed £130 billion, adding to a total debt stockpile of £2.8 trillion, or 101% of GDP. Meanwhile, the cost just to service this debt was £107 billion, well over the amount spent on defence.
And yet after so much borrowing and a tax burden at the highest levels in 70 years, austerity fatigue sets in and key public services appear to be on their knees. The NHS – the one big department to eschew Cameron era cuts – has a backlog of some 7.5 million people awaiting elective surgery (a number which has doubled in the last decade), 38,000 of whom have been waiting for longer than a year. The reason for this, as numerous commentators have pointed out, is of course low growth. Annual average GDP growth in the 15 years preceding the financial crisis was 2.55%, in contrast to 1.19% in the 15 years after. But pinning the blame on post-crisis Osbornomics would miss the point. When growth fell negative in 2008 and tax receipts plummeted accordingly, further borrowing wasn’t an option – it risked crowding out the private sector investment necessary for the economy to recovery.
There were some errors in how these spending cuts were implemented. The favoured approach of salami-slicing budgets rather than addressing the problems which bake in overspend, such as the Social Value Act or Pensions Triple Lock, meant harsh cuts to police and prison officer numbers, and the delay of key infrastructure projects. The primary issue though was that while there was some tax reform – such as reductions to corporation tax and the top rate of income tax – which did help to improve UK competitiveness and increase government tax revenue, private capital investment had hardly anywhere to go. It was unleashed into an economy without the supply-side capacity to allow for the same high rates of growth predating the financial crisis. Then came Brexit, then Covid.
The Labour government seems to have grasped this diagnosis. Writing in the Times, Kier Starmer talked of the need to dismantle the ‘‘morass of regulation that effectively bans billions of pounds more of investment from flowing into Britain.’’ Reeves’ speech on Wednesday at the Siemens facility in Oxfordshire, suggested this was more than rhetorical. The flurry of announcements – a third runway at Heathrow, support for new towns on the Oxford-Cambridge corridor, backing for the lower Thames Crossing – spell out a government committed to being ‘builders not blockers.’
These announcements are significant on their individual merits. An expansion to Heathrow, the largest airport in Europe, is well overdue, with the UK not having built a runway in the South East since the 1940s. With a fifth of UK trade handled through the airport, the benefits of increased trade were put at £55 billion in 2015 by the Airports Commission, creating 180,000 jobs. The project has been victim to decades of oscillation and stasis, as concerns over air pollution, carbon emissions and noise have trumped growth. The decision to overturn this shows a government up for a fight to meaningfully revive economic growth. The government’s newfound love for airports – which also extends to expanding City Airport, Stansted and reviving the Doncaster Sheffield Airport – is a welcome development.
Also significant is support for planned new towns along the Oxford-Cambridge corridor, not only in the approval stage but also with the necessary infrastructure to connect these hubs – with a new East-West rail to connect the two cities. ‘It takes over two and a half hours to travel between Oxford and Cambridge by train’ bemoaned the Chancellor on Wednesday. In the nearer term, she delivered the good news that the Environment Agency has lifted its objections to a new development around Cambridge, to include 4,500 new homes and an upgrade to office and laboratory space in the centre of Cambridge.
Of course grand state designs for growth areas don’t always deliver the goods assured by organic demand-driven construction. But the revival of the Oxcam arc idea is a promising signal. It shows a government willing to back one of Britain’s most productive regions, rather than succumbing, as Boris did, to putting concerns about addressing regional inequality over growth. A rising tide lifts all boats. Creating Europe’s ‘Silicon Valley’ would also give Britain a crucial advantage in the worldwide AI and life sciences race.
These announcements are of course most significant when seen in the context of the broader planning reforms being undertaken by Rayner. A new approach to planning on land around stations, increasing planning officers’ ability to rubberstamp proposals without permission from council committees and a curtailment of the judicial review which often derails large scale developments shows decisive intent to address the broken incentive structures which condemn all efforts to solve the housing crisis to failure.
The central truth which has finally been recognised is that planning reform is Britain’s silver-bullet. Britain lags behind the US, France and Germany in productivity, and its stagnation since the financial crisis has contributed to its anaemic growth. If high growth regions are legally prevented from expanding, as they have been in Britain, then this phenomenon is hardly surprising.
A central criticism of the Chancellor’s changes so far have been that they will take time. This, of course, is emblematic of exactly the mindset which has stymied these changes for so long. But there is a short-run pay off too. As the Birmingham City Football owner (and, naturally, hedge fund manager), Tom Wagner has noted, moving fast on planning would help restore ‘animal spirits’ in the private sector. Markets are willing to tolerate large deficit spending if they expect growth – just take the fact that US gilt yields are 40 basis points lower than in the UK despite the fact the US deficit is expected to remain above 6% of GDP this year, in contrast to the expected fall to 4.5% in the UK.
It’s a shame that Labour are turning to planning reform due to an absence of any other options. Improve relations with the EU? Marginally improve growth but become a rule taker, losing out on the supposed Brexit opportunities for regulatory divergence. Also risk alienating Eurosceptic Labour heartlands and playing into the hands of Reform.
Even Reeves’ overdue decision to uprate capital spending to 2.5% of GDP, from its planned fall to 1.7%, and unlock money for investment spending, has little payoff when interest rates are so high, and the cost of borrowing therefore exceeds the benefits for growth. Capital spending also won’t go very far if costs of development remain sky-high due to inadequate supply.
Labour’s problems aren’t just a product of their inheritance. The government has hit businesses with a rise to National Insurance Contributions, the minimum wage, and now looks to implement the Employment Rights Bill, jacking up costs. A dogmatic approach to the non-dom tax regime, while partially reversed, has also led to an unprecedented exodus of wealth creators. Data from New World Wealth showed that one millionaire has left Britain every 45 minutes since Labour has come to power. It left a fiscal hole the size of Manchester.
But Labour has learnt the right lessons from the bond market frenzy. Finally growth is king, reigning over irrelevant secondary objectives.