The new Labour administration came to power last year on the promise to kickstart economic growth, naming it as its central mission for this parliament and targeting the highest sustained growth in the G7.
Chancellor Rachel Reeves’s October Budget, Labour’s first in 14 years, set out a plan to “put public finances on a sustainable path to create the conditions for growth”. The government also began consultation on its new industrial strategy and outlined the eight key areas of growth it will focus on. A multi-year spending review is still to come this year, which the Treasury says will “take a mission-led, reform-driven, technology-enabled approach to funding public services while investing in long-term growth”.
In his “Plan for Change” speech in December, prime minister Keir Starmer gave a new, more tangible emphasis to this central mission, underpinning it with measurable milestones. But reaction to Labour’s efforts to drive growth so far has been mixed.
What has Labour got right?
The International Monetary Fund said the Budget would “boost growth sustainably” and praised the government’s “focus on boosting growth through a much-needed increase in public investment while addressing urgent pressures on public services”.
The Budget was also praised by the Institute for Public Policy Research, which said its increase to public investment “has the potential to significantly increase growth”, while the chancellor’s tweaks to how government measures debt in its fiscal rules showed “an important, pro-growth approach”.
The Budget’s rise in capital spending will keep public investment broadly flat at around 2.5% of GDP over the next five years, rather than dropping to 1.7% under ex-chancellor Jeremy Hunt’s plans from last spring.
“It’s definitely a step in the right direction,” Pranesh Narayanan, a research fellow at IPPR and former Treasury official, tells CSW. “The main thing the Budget got absolutely right was around public investment.”
What this means, Narayanan explains, is “a lot more investment in the real foundational parts of the economy, such as transport infrastructure, energy infrastructure and the capital side of public services. So, improving the technology that the NHS uses, improving buildings. It’s something that even organisations like the IMF have been recommending the UK do”.
Narayanan views the top-up to the health department’s budget and Labour’s commitment to NHS reforms to improve productivity as crucial for growth. “There’s a very clear link between declining health and worse economic outcomes,” he says.
Prof Richard Davies, head of the Growth Co-Lab at the LSE, says the government has “correctly identified productivity as the UK’s core underlying economic challenge” and has “really interesting and ambitious plans, particularly on investment”.
But he says the context of historically high government debt means there is “quite a lot less room for manoeuvre than in previous governments”.
Giles Wilkes, a senior fellow at the Institute for Government and former special adviser to Theresa May, says the Budget was “overall a foundation for more pro-growth policies” and was the start “Labour had to make”. But his optimism is quelled by the “really lousy starting point” for the new government.
“Now we’ve got Donald Trump and the risk of trade protectionism to add to it all,” Wilkes says. “So I’m not going to say, ‘yay, it’s all great, upgrade Britain’, but hopefully they can now work on the institutional changes they think are needed to get a good industrial strategy going.”
What are the concerns about Labour’s approach?
The Office for Budget Responsibility, Institute for Fiscal Studies and Resolution Foundation have all been more lukewarm about the plan.
In its report published alongside the Budget, the OBR slightly upgraded its growth forecast for this year and next, but it also adjusted them down in the latter three years of this parliament, forecasting GDP growth of 1.1% in 2024, then 2% in 2025; followed by 1.8% in 2026, and then around 1.5% from 2027 onwards. This leaves the average rate of growth over the next five years unchanged compared to Hunt’s March Budget.
IFS director Paul Johnson described the October Budget as a “non-event” and said: “The increase in investment spending apart, there was nothing there for growth, supposedly the central focus of this government.”
And Resolution Foundation analysis found the fiscal event hadn’t “delivered a decisive shift away from Britain’s record as a ‘stagnation nation’, with the outlook for growth and living standards remaining weak in this parliament”.
There has also been concern among businesses at increases to National Insurance contributions, with the Confederation of British Industry’s chief executive Rain Newton-Smith warning that “margins are being squeezed and profits are being hit” and when you “hit profits, you hit competitiveness, you hit investment, you hit growth”.
The CBI’s post-Budget survey found almost two-thirds of firms think the Budget will damage UK investment. Why? Because of increases in employer NI contributions alongside a rise to the National Living Wage and potential costs from Labour’s employment-rights reforms.
Davies agrees this could become a problem for the Labour government. “Ultimately, the country as a whole needs business to be making investments in order for the economy to grow again, because the reason we don’t have growth is essentially a very low investment rate,” he tells CSW. “There’s a direct link between the confidence and, essentially, cash flows of UK businesses and the investment rate in the economy as a whole.”
However, he says it is “very difficult to think of a sensible alternative” to raise the money needed to stabilise public finances and boost investment. He says Labour will be hoping “it’s a short-term pain long-term gain kind of scenario”.
Wilkes agrees: “NI contributions are not a great thing to go after. And business is going to grouch a lot.” But, he adds, “it doesn’t scupper Labour’s growth mission”.
Narayanan says it is “possible that some of the tax-raising measures, like the employer National Insurance contributions, could potentially dampen growth”, but that it is “difficult to tell right now”.
He believes the Treasury is betting that businesses will view higher employment costs as an incentive to automate some of their activities. “If the bet is correct, then you will see more productivity growth,” he says. “If they don’t, if businesses just cut jobs without driving investment forward, then you’re in a situation where that’s probably negative for growth. I think that is the big uncertainty around what they’ve announced.”
How does Reeves’s growth mission plan stack up?
The Budget set out Labour’s growth mission plan, which is structured into seven “pillars”: economic and fiscal stability; investment, infrastructure and planning; place; people; industrial strategy and trade; innovation; and net zero.
“It’s not totally different from other governments’ growth plans and, as a recipe for growth, those are the right ingredients,” Narayanan says. “Putting industrial strategy in as its own pillar, putting net zero in as its own pillar – I think those are positive things.
“Obviously, we’re still trying to figure out the details of how much weight the government is placing on each of these pillars. And I think we’ll find out more about that during the Spending Review.”
Davies says the themes are familiar: “They haven’t invented a new engine. But the way you set that engine up, the way you operate it, the way you drive it, will make a big difference to how fast you go.
These are things that we know drive the economy: investment, research and development, and a clear strategy covering all that.”
But Wilkes says the plan lacks “a sense of an overall philosophy for why this cocktail of different interventions is going to be any better than the last lot”.
What does Labour need to do next?
The next big looming checkpoints that will set out Labour’s path to better growth are the industrial strategy and Spending Review.
Wilkes says the industrial strategy needs to be developed using a “well-evidenced and quite ruthless process of prioritisation within the sectors they’re asking for”.
The government also needs to make its investment offer to the rest of the world “really compelling” and give international business executives “a reason to think twice about the UK, which is often about just being really available to them to explain what your priorities are”. Ensuring Poppy Gustafsson, the minister appointed to head up the new the Office for Investment, has “clout” will be key to this, Wilkes says.
Davies agrees that Labour’s next focus to drive growth should be the industrial strategy, but he says it should hone in on steel in particular.
“We need a really clear industrial strategy, particularly in the context of the election of Donald Trump and the implications of that for global trade,” says Davies. “Lots of people are saying there might be a trade war between the US and China. That’s completely wrong.”
Davies says the focal point of the trade war is the steel tariffs Trump put in place in 2018. “China is making lots of cheap steel. The US is then blocking that steel, which means this subsidised, environmentally unfriendly Chinese steel has to find somewhere to go, and it ends up in countries like Britain,” he says.
“And so what we’re seeing right now is the complete failure of the British and European steel industries. And this is important for industrial strategy, because steel is the foundational material in absolutely everything in every industry. We need an urgent plan to set that right.”
What reforms could help departments to drive growth?
Labour’s manifesto says its determination to drive growth will “depend on a dynamic and strategic state”. What might this look like in practice?
Narayanan says ministers should make sure they are getting “a real flow of information into central government from local authorities who really know their regional economies” about their economic strengths and where businesses are struggling to grow. “Overall national GDP growth is just growth across all the regions added up and a lot of the growth we’ve seen, especially over the last few decades, has pretty much just been driven by London and the south,” he says.
“I think there is a real opportunity to bring some of the other regions along, and that provides bigger growth benefits because these areas haven’t seen great levels of growth overall for a fairly long time.”
Wilkes would like to see the civil service better reward officials who are good at working outside of their department as well as within it.
“So often, just doing well at your own thing is what gets you noticed,” he says. “I think it would be good if civil servants were rewarded not just for sticking to their own agenda, but for reaching out across government and working with their colleagues in other departments.”
For Davies, one of the most important changes is already happening. In the last year, the government has ramped up its use of “areas of research interest” – where departments set out the key research questions that they are seeking evidence on. This is “a really good development and the government should continue doing that and even expand it”, Davies says.
Is growth the right central mission?
Narayanan – speaking with great prescience a few weeks before Starmer’s Plan for Change speech in December – said the intent behind the mission is the right one but the focus on growth itself is wrong.
“I think the focus should be on what growth actually delivers for people, and what growth delivers for people is better living standards.”
The target of raising living standards in every part of the UK as part of the economic growth mission was announced as a key element of Starmer’s Plan for Change, with a promise to measure progress through higher real household disposable income per person and GDP per capita by the end of the parliament.
No.10 insisted, however, that achieving the fastest growth in the G7 remains the government’s central mission in this parliament.
Is this realistic? UK economic growth has slowed substantially since the 2007-2009 global financial crisis: GDP per capita grew at only 1.3% annually in the following decade, a drop of around one percentage point from the decade prior to the crisis.
The UK economy has also taken longer to recover from the Covid pandemic than most other G7 countries, and in 2023 had the second-lowest growth rate in the G7, only faring better than Germany.
Key to the stagnation is the UK’s average rate of productivity growth, which was just 0.6% in the decade after the financial crisis. This is slower than in France (0.9%), Germany (1.2%), and the US (0.9%).
“I would say it’s a very ambitious, stretching goal,” Davies says, “because economies change speeds pretty slowly, outside of things like a financial crash or pandemic. And our growth is currently much lower than America’s.
“There are some economies – let’s say Germany, Italy – that we really should be able to beat. But coming number one, that means beating America as well, which is a really challenging task.”
This article was written for Civil Service World's 2025 Winter edition, which went to press on 3 Jan. You can read this feature and much more in the CSW Winter 2025 issue here