The new government led by Mr Burnham has raised Labour’s poll ratings a little and has revived media interest in what changes it might put through. Both the voters and the markets are keen to see if the new team will make a difference to the growth rate and will find ways to boost living standards. There was general disappointment with the tax rises, the increase in unemployment and the often sluggish growth under the Starmer administration, which led to higher long-term interest rates and a fall in housebuilding.
Mr Burnham has been flexible in his views over his political career. He has been a loyal Blairite as a Minister, a supporter of the party when Jememy Corbyn won the leadership, then developing his own approach as Mayor of Greater Manchester.
He has provided us with more up to date evidence of his views in speeches to win the Makerfield by election and in his subsequent talks as Prime Minister. He told his electors that he would apply a Makerfield test to everything he and the government do. This test is to bring fairness to places Whitehall has neglected. He set out five principles of “unity, honest politics, distinctively Labour direction, all place government and devolution of power from Whitehall.”
He has said “We will make this moment a circuit breaker for Britain, bringing forward the biggest changes in the last forty years”. He proposes a new political and economic model to be defined, and a 10 Year Plan to be drafted. “In the 1980s Britain took some wrong turns. Political power was centralised, economic power privatised, large parts of the country de-industrialised, and they still haven’t recovered”. He wishes to “carry power to every postcode in the land”. He wants “to put life’s essentials back under stronger public control”.
Burham plans to “re industrialise Britain, using public procurement to back British industry”; to build more Council houses, refusing to revise down the very stretching 1.5 m new homes target for this Parliament. He promised to “honour our commitments on defence to our international partners”, “to meet our fiscal rules” and “to end rough sleeping”. A new National care service has been mooted, with a caveat for further study and cross party involvement. Previous governments have tried to get a consensus on social care reform without success. It would be expensive with Reform and the Conservatives ruling out a dedicated tax.
He has backed a “duty of candour” in public life after criticising the failure of the Establishment to tell the truth about the Hillsborough disaster in 1989.He has promised to be “relentless” in tackling illegal migration, whilst also saying he wants more to enter by safe routes. He often sounds as if he is campaigning against Margaret Thatcher, a Prime Minister in office four decades ago.
Increased defence spending with the promise of more work for UK factories and shipyards is part of the Growth plan which he inherited. The PM has been careful not to commit to large additional spending on defence this Parliament. The Chancellor, John Healey, resigned from the last government because he judged the budget increase in defence to be insufficient to defend the country and to meet NATO commitments. Both men agree that defence buying should be used to provide more orders and jobs for businesses to be based in the UK, though there were always more permissive rules for defence spending to allow more home content.
They have highlighted the work at UK shipyards already underway to provide new ships and new submarines for the navy.
The last government agreed to increase defence spending to 2.7% of GDP by 2027/8 and to keep it there until 2030. Mr Healey wanted more rapid progress to 3% by 2030 requiring £13 bn more. The 3.5% NATO target for 2035 would be achieved by a successor government nearer the target date.
The extra spending of £15bn put into budgets relies on £10.3bn of cuts in other departments, £1bn of identified savings in the Ministry of Defence budget and a further £3.7bn of unidentified MOD cuts. There remain big issues to be agreed between PM and Chancellor before the budget.
Housing too was an important component of the inherited Growth plan.
The 1.5m target for new homes 2024-9 looks unachievable. In the first two years they have witnessed the construction of under half the number of homes needed to hit this rate. The PM’s idea of more Council homes probably means more social homes, as directly financed Council houses will be part of public spending subject to the budgets and decisions of local Councils. The aim will more likely be to get the Housing Associations to raise private finance to let them build and rent out more.
The government has stated a spend of £39 bn over ten years to 2036 without yet translating that into specified annual budgets. With subsidy on a socially rented home in London extending to £170,000 per unit, around £4bn a year will not add sufficient to achieve a target of 300,000 new homes in total each year. There is both a financial and a building industry capacity constraint on how many more homes can be built. Private sector housebuilding for sale which is usually the dominant part of residential construction is limited by dear mortgages, high prices and low levels of confidence amongst potential homebuyers. The pressures on the UK government bond market keeps the interest rates for mortgages relatively high.
Further tax rises would be unhelpful, as it is widely observed that the increases in National Insurance and IHT under the last government reduced employment and hit small businesses and family farms. The PM has promised to observe the Manifesto by avoiding Income tax, National Insurance and VAT hikes on working people as he seeks more money to spend. It is difficult to see he has any scope to raise Income tax thresholds for which he has shown some support, and which would increase spending power for employees. There may well be other tax rises, with rumours about capital gains tax which could be unhelpful to business growth.
The government wish to spend more of its cash on buying British needs to tackle three issues to bring this about. The first is the need to obey international trade rules. The second is that the UK has missing capacity in various cases making it difficult to find suppliers who can deliver what is needed. The third is the state is often a bad customer, as we see in MOD procurement with large cost overruns and cancellations of expensive programmes, with the customer often changing their mind over what is wanted. This can lead to excessive public spending and more pressure on interest rates.
The government may be able to impose a so called ” social weighting” under World Trade rules on contract bids and has already said it will do so. This means that it can consider the benefits in tax and social outcomes of having more of the work done at home. This needs to be proportionate, and foreign companies must be free to bid with carve outs in their proposal for some additional UK based work.
All governments claim they will learn the lessons of bad procurement, visible in the Post office computer, NHS computerisation, the Ajax armoured vehicle and others. Mistakes have so far continued.
Mr Burnham wants to reverse some privatisations, seeing nationalised businesses as a source of growth he can direct. Labour inherited the policy of full rail nationalisation from the outgoing Conservative government. Labour in office from 1997 nationalised the track, signals and stations of the railways, forming state owned Network Rail. They are now adding the train operating companies as their licences expire. They have a target of increasing rail freight substantially, but it is unlikely there will be much extra growth from a nationalised railway.
Labour decided to intervene to take operating responsibility for British Steel (Scunthorpe) over a year ago. They have just completed its nationalisation. The business owns two very old blast furnaces, is losing £1.3 m a day and is considering an expensive plan to build a replacement electric arc works. It would then shut down the blast furnaces and shed a substantial amount of the workforce. Meanwhile, because the Government did not reach agreement with the Chinese owners in the first place, they now face a claim for £1 bn of compensation for a heavily loss-making business with many liabilities. The Steel Plan when it emerges is likely to mean fewer employees and little or no net additional steelmaking capacity.
The nationalised Post office runs the counters businesses we see on some High Streets. It has been losing around £500m a year, now disguised by payment of a large grant. The Post office does not yet have a convincing growth plan.
The government would like to privatise water, but the costs of buying out the current owners who in some cases include UK pension funds and small savers would be very high. Thames Water which has got into serious financial difficulty could be put into administration if they cannot sort out their refinancing. This might provide an opportunity for state ownership but given the size of Thames and the need for major investment in new pipes, new reservoirs and treatment works it would be a big increase to the public spending figures. There are inherited plans to build more reservoirs, but these are all proceeding very slowly to letting contracts to build.
Growth will largely be determined by the success of the private sector economy. As yet, there are no new policies that could get interest rates or taxes down to provide more stimulus. It is true the Burnham opinion poll bounce may help with confidence. The PM needs to avoid plunging the country into weeks of fears of new and higher taxes in the run up the budget which hit confidence and activity under the previous Chancellor.
The government will struggle to find a way to hit their housing targets which was scored favourably for growth when first devised. Increases in defence over and above the £15bn accepted by the last PM will be modest, with the main increases put off into the next Parliament. There is limited scope to get more defence work done in the UK given industrial weakness and the substantial use of UK main contractors already for much of the programme.
The government is likely to give the much delayed go ahead to the Jackdaw and maybe Rosebank fields in the North Sea but will not unleash more activity by licencing more drilling for prospects. This will give a small boost to UK GDP. General de industrialisation which has been proceeding rapidly in recent years thanks to very high energy prices is likely to continue in the absence of big moves to cut energy taxes and renewable subsidies. Government spending will increase a little. More effort will be made to direct public investment into infrastructure, energy and water but it will prove difficult as these large projects are very delayed by UK planning and regulation.
It is doubtful that Mr Burnham will pull off the large revolution he envisages over his first year in office. As he wants growth to be public sector led and to be spread into every postcode he will find there are many delays and obstacles in the way of getting things done which have frustrated previous governments. Tax cuts on enterprise, investment and savings do not seem to be part of his thinking, and substantially lower energy taxes and prices seem ruled out. These might be more helpful in boosting growth.
While the’ jury is out’, there are some positives in that UK services will continue to grow, and services trade remains a UK strength. Inflation should stay under reasonable control as money and credit are not excessive and wage increases in the private sector relatively restrained. Where there is less time to reflect is in an attractively valued UK stock market, quite cheap by international standards, which is, as a result, attracting a significant number of bids for important companies. Others are moving their listings to the US seeking a higher rating. The engine for Mr Burnham’s growth plans is under duress.
About the author
Lord Redwood is a well-known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government minister.
In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios.
John provides insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.
Lord Redwood has supported the team at EPIC Markets with regular thought pieces, and with their migration to WH Ireland, will continue to add his personal views on topical matters.