Britain’s economy is deeply flawed. These are the three pledges Labour must make to fix it

By Larry Elliott, The Guardian.

Overhaul rigid planning rules, invest in infrastructure – there is no magic bullet, but this would set us on a far better path.

It is a statement of the obvious that Britain’s economy has deep structural flaws that are badly in need of fixing. A chronic balance of payments deficit, massive and growing regional disparities, weak productivity: all need addressing by an incoming Labour government that has pledged to introduce an industrial strategy built on partnership with business to help remedy matters.

Suffice it to say that there is no magic bullet, because if one existed, it would have been fired a long time ago. An industrial strategy will only deliver if it is crafted by business for business, rather than by civil servants in Whitehall. But there are also things the government could and should do.

1. Boost growth with a UK development bank

The UK is not short of good ideas or entrepreneurial spirit. Where it has often struggled is in converting innovation into viable commercial propositions, and that has much to do with low levels of business investment. In 2019, the UK had the lowest rate of business investment in the G7 group of leading industrialised nations, and in 2021 ranked 27 out of the 30 members of the Organisation for Economic Co-operation and Development (OECD) nations for which data was available.

The problem for many small and medium-sized enterprises is that they lack the record and collateral that would enable them to secure the capital necessary for them to grow – an issue first identified by the Macmillan report as long ago as 1931. Labour should pledge to create a UK development bank – adequately funded and decentralised – to plug the financing gaps.

Bigger businesses can more easily access funds to expand or make themselves more efficient, but often lack the incentive to do so. A Labour government could help put pressure on companies in two ways: it should reform the pension system to create a smaller number of bigger, more active funds; and it should make it mandatory for larger companies, those with more than 250 employees, to have worker representatives on boards.

2. A commitment to spending on infrastructure

Since the turn of the century, Britain has devoted less of its national income to public investment than other rich nations – and it shows. Commuters struggle into work on crowded trains or congested roads. In 2020, the year of the Covid-19 pandemic, the UK had the second lowest number of hospital beds per capita of 23 comparable European countries.

Governments of both left and right have seen public investment as an easy target when times are tough. In large part, that’s because the Treasury makes no distinction between day-to-day spending on wages and salaries, and investment spending that produces an asset for the country’s balance sheet.

The lesson is clear: a Labour government should commit to investing a minimum of 3.7% of GDP – the average for the OECD nations – each year to state capital spending, with no strings attached.

If the fiscal rules are an obstacle to a sustained, guaranteed flow of investment spending, then change the fiscal rules. And if the Treasury objects, then consider following the example of some European countries and split the Treasury into a ministry of finance and a ministry for the economy.

3. A complete overhaul of the planning system

As the Resolution Foundation thinktank pointed out, the UK is alone in the G7 in having seen no increase in the amount of built-up land per head since 1990. That’s not because the UK protects more acreage on environmental grounds than countries such as Germany, but because the planning system is complex and expensive.

One issue is particularly pressing. Labour is committed to the complete decarbonisation of the power grid by 2030, a pledge that can only be met by an overhaul of the planning system to make applications faster and cheaper.

Here’s the problem: the UK has the capacity to generate lots of green energy from offshore wind, but currently lacks the physical infrastructure to get the power from the big farms of the North Sea to users in the rest of the country. The existing grid network is a relic of the days when Britain’s energy needs were primarily met by coal-fired power stations. In a report to the government last year, the electricity networks commissioner, Nick Winser, said: “In Great Britain, around four times as much new transmission network will be needed in the next seven years as was built since 1990.”

Labour cannot duck this issue. The manifesto needs to commit to a streamlining of the planning system, with a fast-track approach for projects deemed of strategic national importance. Upgrading the grid should be phase one of a green new deal for Britain.