For a Chancellor often criticised for a lack of direction and conviction, Rachel Reeves is increasingly insistent on setting out her economic vision.
In a recent lecture delivered at the Bayes Business School, Reeves made the case for ‘securonomics’ (one of the snappier phrases to come out of recent government). An attempt to rebrand the chancellor’s economic policy, ‘securonomics’ identifies stability, fiscal responsibility and, crucially, productivity gains as a route to much-needed economic and fiscal security.
You don’t need to have a PhD to realise that the UK economy is struggling. Growth has lagged behind many of our European peers, government debt is stubbornly above 90% of GDP and another energy crisis looks set to erode already-fraught household finances.
Beyond the headline statistics, for most of the country people feel poorer, are less optimistic about their financial future and are increasingly searching for political alternatives.
So, what’s the plan? And crucially, can it deliver the stable, responsible growth the Chancellor, and the Labour government as a whole, is banking on?
Reeves’ speech is best boiled down to the issue of productivity – mentioned a whopping 12 times. This would seem reasonable: GDP per hour, a key indicator of productivity, is lower than in comparable economies like Germany and France, and much lower than in the US. Labour productivity has plateaued since the financial crisis, and is a large, if not the largest, contributing factor to sluggish growth in the wider economy.
The Chancellor identifies a number of key contributing factors to this productivity gap alongside solutions:
Lack of investment – The UK suffers from a chronic lack of investment, reducing the ability of businesses to find funding to grow and modernise. The government has expanded public funding for companies, aiming to support start-ups and home-grown businesses and proposed changing pension rules to increase the pool of private sector funding, hoping to increase the input of capital into the economy and drive ‘modernisation’.
Barriers to market access – Resolving the impact of Brexit on productivity is also a key target for the Chancellor. Ongoing talks with the EU aim to reintegrate the UK into wider European markets (although in what capacity remains unclear), with the ambition that greater competition will engender a productive, more innovative private sector.
Sluggish adoption of new technologies – Compared to the US, the UK lags behind in the adoption of automation and the creation and use of technological advancements, such as AI. The chancellor has put aside £500 million for investment into home-grown businesses and accelerated the adoption of AI across the public sector, including the NHS and the civil service.
Regional inequality – The UK has the largest regional inequality in all of Europe with investment and wealth massively concentrated in the capital and the South East. Increased devolution, through increasing locally-generated tax revenue into councils and giving authorities more powers to invest in infrastructure and innovation, aims to rebalance the UK’s economic geography.
So, that’s a lot of problems and a fairly large amount of policy. But what does it mean, big picture?
There are two key takeaways: one, that the UK’s growth strategy is significantly reliant on ‘technological innovation’ and investment in a particular model of modernising the private sector, and two, that the Chancellor’s growth strategy is, to a significant extent, politically contingent – reliant on deals, policies and motivations largely out of her control.
Reeves’ model of modernisation is overwhelmingly focused on AI – but this has its limitations. Recent quarterly productivity growth in the US has led many to claim that the technology is finally delivering efficiency gains, as AI continues to increase in adoption across the states. However, the ‘noisiness’ of productivity data (its volatility in short time periods and difficulty to measure) means it can only really be understood long term, and eager predictions of doubling US productivity gains are at best premature.
Relying on the same technologies to kickstart a UK modernisation drive is therefore a huge gamble, especially when the government is diverting significant amounts of capital into the private sector in order to do so.
Political contingency similarly increases risk. Plans to devolve funding to local authorities necessitates capable councils with the capacity and expertise to identify areas for growth, as well as the financial resources necessary to make this priority. This may be convincing for an authority like Greater Manchester, but for struggling councils like Birmingham (who declared bankruptcy in 2023) increased funding seems doomed to be spent on balancing the books, providing minimum statutory council services, or swallowed up by the same inefficiencies and failings that led to bankruptcy in the first place.
Similarly, trade talks with the EU rest on a similar political contingency – whether the EU is capable of and motivated to make a fair deal with the UK government, and whether the deal will be expansive enough to make any real difference.
Productivity, as a whole, is famously hard to measure, hard to predict and hard to legislate for – economists continue to argue whether there is any policy that can predictably lead to increases.
All policy decisions come with risk – that is the nature of government. But tying the UK economic future to the mast of productivity is a huge gamble.
Secure? Stable? Responsible? Not necessarily.
