Labour should always choose growth over redistribution
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Sir Keir Starmer has set Labour the task of making people “materially better off in the sense of ‘more money in my pocket’”. In his mission to improve living standards, Labour’s leader has put his finger on what really matters to people — a sense that their own finances will improve over the next five years.
Although much of the election focus has been on public finance issues, what happens to incomes will determine Labour’s success in government if it wins. There is no doubt that the past 14 years has seen miserable progress on living standards. Real household disposable income per person has flatlined in the UK since the 2019 election, compared with roughly 2 per cent annual growth in most parliaments since the second world war.
More interesting is the distribution of income changes over the past five years and the whole period the Conservatives have led government since 2010. Despite a huge rise in food bank use and cuts to social security for working-age households, the surprise is that it is the poorest households that have done better than the rest of the UK.
Better is a relative measure, however. Taking detailed income data up to 2022-23 and updating this with known trends thereafter, the Resolution Foundation finds that only the bottom 20 per cent of the income distribution saw any real income gains in the latest parliament. Everyone else was hit harder by high inflation. And rather than the poor being hardest hit in their pockets by the earlier austerity years, income gains were higher for poorer than richer households.
Over 14 years, real disposable income gains towards the bottom of the income distribution of non-pensioners were around 10 per cent — itself a paltry figure. But they were truly terrible for middle-income and richer households, with gains close to zero.
With the largest gains coming despite working-age benefit cuts, an important question is — what was going on?
To a large extent it was that employment growth was strong so private incomes rose while benefits declined. Perhaps this was the effect of tough love in the benefits system forcing people to get a job. But these are remarkable numbers and there has been something of a conspiracy of silence in the research world in explaining them.
Whatever the cause, the data carries a stark warning to Starmer. The outcomes for working-age household incomes since 2010 — low average growth skewed towards the bottom end — is exactly what you might expect a left-leaning government to produce. People hate it.
So Starmer’s mission to create growth and wealth must be Labour’s first, second and third instinct. They do not have to go full Peter Mandelson, delighting in people getting “filthy rich” so long as they paid their taxes, but growth needs to come well before concerns about distribution.
This means working with the Bank of England and Office for Budget Responsibility to run as high pressure an economy as possible without reigniting inflation. It means sweeping aside planning regulations with a willingness to err on the side of building rather than conservation. It means encouraging people to move jobs, which probably involves more stringent rights for workers to foster individual risk-taking.
It means getting much closer to the EU’s regulatory realm and demonstrating that the UK is open for business. But it also means avoiding new regulations that undo Conservative efforts to foster enterprise. None of this is easy.
There is unlikely to be one silver bullet. We do not understand the causes for the UK’s growth malaise sufficiently to know exactly what works. But we do know that people are much happier getting a fair share of a growing pie than fighting over the non-existent proceeds of stagnation.
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