X Close

Labour shouldn’t bank on a strong pound

How much change will Labour be left with? Credit: Getty

June 26, 2024 - 7:00am

Keir Starmer wants and needs economic growth to pay for Labour’s aspirations. The same can be said for all prime ministers, as they then get to preside over rising living standards and improving public services. With the pound rising this week in response to the sheer predictability of the upcoming general election, he’s in a promising position.

But growth in the UK is driven much more by external events than it is by almost anything which governments do domestically. One way of looking at this is to compare the evidence on economic growth since 1949 under Conservative and Labour governments. The Tories have been in power for 47 of those years and Labour for 28.

The record of the two parties is effectively identical — growth averaged 2.2% under Labour and 2.5% under the Conservatives — but it is a completely different matter when comparing the years immediately following an external shock with the rest. For instance, Harold Wilson inherited a very difficult situation in 1974, when oil prices had just quadrupled and provided a massive shock to Western economies. By the time Labour next faced the electorate in 1979, growth had averaged a miserly 1% and the party was duly booted out.

Thanks to the financial crisis of the late-2000s, during the 2008-12 period there was no growth at all, while the Covid-19 pandemic and the Ukraine war were followed by another energy price shock in 2022. All these events put the dampeners on growth, to put it mildly, and the consequences of the latter two are still working their way through the system. The destruction of the public finances by disastrous lockdown policies has thereby created a severe constraint on Labour’s proposed spending plans.

Yet, despite everything, confidence is slowly returning. As inflation falls real wages are rising, boosting consumer spending power. The latest business confidence index of the ICAEW shows a significant improvement on a year ago, rising to its highest level since the pandemic. Capitalist economies are very resilient beasts, and usually return to growth after a shock purely of their own accord.

So is Starmer just very lucky? Although the world environment remains uncertain, the economy is bouncing back. Amid the Conservative implosion and Reform UK’s splitting of the Right-wing vote, talk is of him surpassing Tony Blair’s huge victory in 1997, in terms of the number of Labour seats if not the share of the vote.

But the parallels with 1997 soon run out. Then, Ken Clarke — the Conservative chancellor under John Major — had done Blair and Gordon Brown’s work for them. Following the short recession of the early Nineties, the economy had boomed. The average annual growth rate from 1993 to 1997 was 3.1%; in the election year itself, 1997, the economy expanded by a massive 4.9%. Brown pledged to change very little in Labour’s first few years of power, and the momentum continued, with an average of 3.4% growth between 1998-2000.

Now that sterling has strengthened to a two-year high against the euro, further rises are widely expected given the current political turmoil in France. The UK, in comparison, is a potential haven of stability.

But you can always have too much of a good thing. A Starmer government could face the reverse of the positive shock which sterling’s ejection from the European Exchange Rate Mechanism (ERM) in the early Nineties gave to the economy. Labour, like every UK government since WWII, is at the mercy of external events.


Paul Ormerod is an economist, and the author of Why Most Things Fail.

OrmerodPaul

Join the discussion


Join like minded readers that support our journalism by becoming a paid subscriber


To join the discussion in the comments, become a paid subscriber.

Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.

Subscribe
Subscribe
Notify of
guest

11 Comments
Most Voted
Newest Oldest
Inline Feedbacks
View all comments
UnHerd Reader
UnHerd Reader
25 days ago

Economic growth figures here are hughly suspect. Cpi is always a huge underestimate and massively lags house price ( and rent) inflation. This massively skews gdp etc. If we used real inflation figures we would probably see a decline in living standards Also immigration dilutes any benefits of economic growth by increasing demand for any socialised goods and services while boosting growth figures due to household formation. This is not an argument against immigration which also has dome benefits but simply a statement on gdp ( and related) and living standards

Mike Downing
Mike Downing
25 days ago
Reply to  UnHerd Reader

Yep; Economists can always explain what happened after the event in slightly better detail but hardly ever make even fairly accurate predictions. Why anybody pays attention to the likes of the IMF is beyond me.

Governments change what goes into the CPI figures to suit themselves quite often and housing costs are astronomical now.

I don’t know how anybody gets anywhere to live nowadays. All around I see whole families still living with their kids as nobody can afford to move out.

That’s why young people are voting for ‘extreme fringe’ parties in droves.

Prashant Kotak
Prashant Kotak
25 days ago

There is no version of high-growth possible within the UK as is. Our polity is now high-regulation with lots of layers of oversight and process, so most enterprises undertaken ground to a halt sooner or later somewhere while navigating to the goal and everything ends up delayed and costing more and more as ‘stakeholders’ pile in with their tuppence worth of ‘input’. Don’t get me wrong – I’m not advocating laissez-faire, the bureaucracy is an outgrowth of increasing technological complexity and globalisation. I’m simply stating my childishly simplistic observations made over years, and people are free to pour scorn.

Labour coming in cannot possibly do other than exacerbate the problem, because they are layer-junkies – they cannot help but add layers of process, and these cannot do other than add cost. It’s the equivalent of assuming in your plans that you will drive from one end of London to the other in half an hour and it will cost you a tenner, because it’s only 15 miles, but ignoring the fact that *you* put in the congestion zones and the 20 mph zones, and the ulez zones and the diversions. The idea that developing ‘green’ ‘industries’ will generate growth and wealth while simultaneously reducing human impact on the planet is tautologically oxymoronic – industries have always been and remain inherently extractive (as in, not possibly ‘green’), and by their very nature cause inequitable transfers of wealth, it cannot be other. The ‘green’ projects will fail because many, many people will reject them as the costs to themselves become visible, even while many other people will fight tooth and nail to keep them going, so we will end up with a fractured society.

This all is caveated of course – it can work (somewhat) in homogeneous, high-education, high-trust scenarios, or it can work in ‘benevolent dictatorship’ scenarios, or you need to get lucky and strike oil (but you then need to utilise that good fortune instead of rejecting it), e.g. some in Scandinavia, or the Confucian nations and so on. Note that the decades of stratospheric growth in China were marked by laissez-faire in practice, even while the governing strata were chock full of rules, and the moment they actually started to assert their rules, growth started tanking. That leaves the US – why does it remain high growth? Well, aside from the in-built wealth of the continent, my observation is that the US eschewed high-regulation in favour of high-litigation – they have in effect outsourced regulation to the private law industry.

Peter B
Peter B
25 days ago
Reply to  Prashant Kotak

Some excellent points. Labour policies will certainly drive up regulation and costs. And thereby throttle innovation. And hence growth.
I’d go a little further and suggest that too many in Labour are believers in what we might call the “Krushchev fallacy” – the belief that Communism was failing because central planning hadn’t yet been perfected and that once it was, the Soviet Union would overtake the US. As ever, these beliefs neglect the human dimension and the fact that the central planners can never have enough information and are at least as fallible (usually more so) than the decision makers in industry they wish to supplant.

A D Kent
A D Kent
24 days ago
Reply to  Peter B

Labour may do that, but they will also do nothing to reduce the gross inequality in our economy. They will continue to be happy with the lions-share of the benefits of productivity going to the holders of capital (who won’t spend or recycle it) rather than the workers (who do). See ‘The Spirit Level’ for more details.

RA Znayder
RA Znayder
25 days ago

Growth is rather arbitrary isn’t it? There are many ways to produce growth that aren’t actually that productive. Especially in speculative economies with trade deficits.
In fact, during the lockdowns much of the economy was literally shut down. However, the government printed a lot of money and one year later there was already enormous growth and low unemployment. Keynesians, of course, always understood this. Moreover, I think this enormous injection of money during the pandemic is still making the economy look good on the surface.
But there is also a problem. Economist stare at their statistics and decide all is fine and they just can’t understand why people are complaining. But they should just talk to people and ask how they are actually doing. You will quickly find that people have problems with their most basic necessities like housing. And this is exactly what you would expect if you inject the economy with a huge amount of money, but you do it in such a way that most of that ends up in assets and not the real economy. First, you get huge inequality but everything also stagnates because the economy focuses on speculation and rent seeking. In fact, in housing that is precisely what you see. Prices have exploded due to cheap credit and speculation on existing houses. And now all of sudden nobody can or wants to build them even though demand is huge. All these financial bubbles make planners and policy makers optimistic but under the surface something seems the be brewing.

Martin M
Martin M
25 days ago

Starmer needs ensure he doesn’t do anything Socialist. No good would come of that….

Michael Cazaly
Michael Cazaly
25 days ago

Ken Clarke DIDN’T do the work, leaving the ERM did the work, just as joining it did the damage

In fact, Clarke was totally incapable of taking full advantage of the more favourable conditions which a competent Chancellor would have.

John Tyler
John Tyler
24 days ago

External factors always play a part, but are overwhelmingly dominant so long as productivity remains low. I can’t see that changing while our elites maintain the status quo.

A D Kent
A D Kent
24 days ago

Covid19 was an external event, our UniParty’s LockDown policies and thereby hosing money at all sorts of corrupt institutions as a result, were not.

The Ukraine War was an external event, our UniParty’s rush to sanctions and hurling ourselves behind the Ukrainians thereby hosing money at all sorts of corrupt institutions as a result, were not.

Labour could have a strong economy and strong pound, but like the Tories they will choose not to.

Michael Clarke
Michael Clarke
23 days ago

Labour should be hoping for a weak pound if it wants Britain to re-industrialise.