Labour and the Productivity Diagnosis

Rachel Reeves's Mais Lecture, delivered in March 2024 just three months before she became Chancellor of the Exchequer, was a statement of Labour's economic plan. Her speech reflected a consensus, which had emerged in the 2020s, on the state of Britain’s economy and the necessary priorities of future economic policy. This was the view that since the crisis of 2008 economic growth had been constrained by a very low rate of productivity growth, which in turn had led to a prolonged period of stagnation in living standards.

The productivity diagnosis

According to this diagnosis, the task at hand for any government was to undertake major reforms to improve productivity, especially in those regions of the country where productivity growth has been especially weak and living standards have fallen behind most. The consensus is that such reforms must be wide-ranging and various; that there would be no silver bullet solution; and that it would take many years for the reforms to have any substantial overall impact. This productivity failure diagnosis had emerged as economic commonsense in large part as a product of research and analysis conducted and promoted by non-partisan think-tanks and academic networks, most notably the Resolution Foundation. Reeves’s lecture was a re-statement of this well-credentialled consensus.

While one might criticise Reeves’s naïve view of economic growth as panacea for all ills, or for her narrow emphasis on supply-side reform as the only means to achieve growth, it was politically sensible for her to embrace the new consensus. To do otherwise would likely have exposed Labour to criticism by a potentially hostile media and business class that had accepted the new commonsense. Therefore, rather than a frontal assault on orthodoxy, Reeves’s politically more effective strategy was to embrace the ‘legitimate’ consensus position that had emerged, to present Labour as its most effective champion (by comparison with the chaotic final years of the Conservatives in government), and then to use the consensus on productivity as a vehicle to pursue the party’s higher social democratic goals of greater equality and popular empowerment.

The major advantage of embracing the productivity failure diagnosis is that the path to higher productivity is not pre-determined, and that the consensus view is that it will take many interventions across all dimensions of the economy. This grants a Labour government great scope to enact and experiment with a package of reforms in which it is possible to translate social democratic priorities into the language of productivity and growth.

Links to social democratic goals

Labour has done this before, most notably during the New Labour years when it tied economic prosperity to improvements in the quality and provision of education at all levels from pre-school to university. Widening access to education and skills are an essential part of the productivity agenda, while simultaneously contributing to an egalitarian social and economic programme.

Reeves’s lecture also pointed the way to other means by which social democratic aspiration could be hitched to the productivity and growth mission. Her support for improving worker rights and placing new limits on the abuses of a flexible labour market could be presented as a policy of discouraging employers from relying on low-paid and insecure employment, which inhibited investment in both human and physical capital. Orthodox critics of such interventions in the labour market could at least be placated with other reforms – most especially to the national planning system (described by Reeves in her speech as ‘the single greatest obstacle to our success’.)

Ultimately, however, there is a major political problem posed by the productivity agenda. If, as Reeves said, ‘there are no easy answers, no quick fixes, [and] no short cuts’ and that ‘what is demanded is a decade of national renewal’, how can Labour maintain sufficient electoral support to see the project through over two Parliamentary terms? If, after five years of hard work, the benefits of improved productivity have not yet fully materialised, and that the rewards have not yet reached the electorate, how can Labour avoid simply handing the foundations of future prosperity to the Conservative party?

It may be possible to maintain public support by delivering some tangible improvements in public services (a very difficult task with no short-term solutions), or as a result of the likely continued fall in inflation. But beyond this the government will need to find a way to maintain public ‘buy-in’ to the productivity project, so that a compelling narrative of the need for patience and persistence is widely shared. To do this, the government, led by the Prime Minister, will need to explain, ad nauseum, the productivity agenda in clear and simple terms. In the face of an electorate that is distrustful of politics after 14 years of over-promising and under-delivering, the new government has hoped (in vain) that it would some credit for honesty on the scale of the task. Unfortunately, since entering office the Starmer government has tended to simply assert that they are committed to ‘growth’: an abstraction that is essentially meaningless most of the population.

A culture of empowerment

The government must go further and invite the public to be active participants in the productivity agenda. It should promote a culture of improvement in the private and public sectors, and it should encourage people to develop and share their own ideas for better productivity in their workplaces. Worker knowledge and experience, which is so often overlooked in managerial hierarchies, can be presented as a vital resource for national economic renewal. In fact, a Labour government should go even further and mandate official worker representation in all workplaces as a formal means to generate and harness productivity ideas. This is another example of how the productivity agenda can be a vehicle for the traditional social democratic desire to empower workers at work.

Of course, the ‘marginal gains’ achieved through popular participation may be relatively minor in comparison with large-scale planning reform, or major institutional innovations, or by raising the extremely low rate of investment in the economy. But it will at least help to give Labour a more solid basis of support or acceptance among the population as a whole while the productivity mission unfolds slowly.

The search for something more

In the background lurks, however, a bigger problem. Labour’s agenda assumes that an increase in economic productivity and growth will translate into improved living standards for the population. Even if this proves to be the case, it is doubtful that it will denude the rising political threat of the far-right, in its new guise as the Reform Party (and in some parts of the Conservative Party). Despite the obvious successes of Bidenomics (which Reeves sought to align Labour’s agenda with), Donald Trump has been re-elected to the White House. Despite the higher levels of productivity and household incomes in France and Germany, the Rassemblement National and Alternative für Deutschland are achieving major political success. Electorates are clearly searching for something more, and so simply delivering material prosperity alone will not secure a second Labour government. Nor, more consequently, will it stop the Farage right.

Instead, Labour must recruit the British people to participate in a shared project of collective national renewal that goes beyond a technocratic productivity and growth agenda delivered from on high by Whitehall, and which has tangible and comprehensible meaning for people’s lives.