11.07.2024

The economics of Rachel Reeves very much smacks of the strategy outlined by Mariana Mazzucato - the Italian-American leftist economist

Reeves and her ‘securonomics’

Labour’s leadership is relying on big business to bring the economic growth needed to fix ‘broken Britain’. Michael Roberts predicts a one-term government

We have had ‘Abenomics’ in Japan,¹ ‘Modinomics’ in India² and ‘Bidenomics’ in the US.³ Now we have ‘securonomics’ in Britain! This is slick terminology for the basics of the new Labour government’s economic policy - as expounded by its chancellor of the exchequer, Rachel Reeves - a former Bank of England economist.

When Reeves was in Washington before the general election, she told her audience that “Globalisation, as we once knew it, is dead”. And she was right. The great boom in world trade since the 1990s came screeching to a halt after the great recession of 2008-09 and since then world trade has basically stagnated. And that has been expressed in the UK, which now has its largest trade deficit in its history. And it is not just trade.

Foreign investment has been declining - something British capital has increasingly relied upon since the 1980s. The UK is getting less productive investment by foreign companies into the economy. The number of foreign direct investment (FDI) projects landing in the UK has fallen by 6% year-on-year for the past two years, hitting a low of 1,555 in 2023. This represents a significant 16% decline since the Covid pandemic.

The pandemic was in fact the last straw. Global supply chains collapsed, while trade and investment shrunk. World economic growth is slowing - the International Monetary Fund calls it the “tepid 20s”⁴ and the World Bank forecasts the worst growth rates in 30 years. It has become clear to Reeves that Britain can no longer rely on global expansion. It must fend for itself.

Thus we have ‘securonomics’, meaning in effect a nationalist approach to the economy. The watchword among many G7 economies is ‘industrial strategy’. ‘Free markets’ are out - now governments must launch policies that guide and encourage their own capitalist sectors to invest and produce in the ‘right areas’ to boost economic growth. Whereas ‘Abenomics’, ‘Modinomics’ and ‘Bidenomics’ were mostly a mixture of old-fashioned policies of Keynesian tax and credit stimulation to boost ‘aggregate demand’ and employment, along with neoliberal structural measures to weaken the labour movement and privatise state assets, Reeves claims that ‘securonomics’ is different.

In her recent Mais lecture (Mais is a business school in the heart of City of London), speaking to the representatives of big business and finance, Rachel Reeves set out a different view: that an “active” state can underwrite the security of businesses; to provide a “platform” of safety from which we can “drive sustainable economic growth”. As she put it,

Sustained economic growth is the only route to improving the prosperity of our country and the living standards of working people. That is why it is Labour’s first mission for government. It means being pro-business and pro-worker. We are the party of wealth creation.⁵

Securonomics means depending on “a dynamic and strategic state”, she continued. That “does not mean ever-growing government, but it does mean a more active, smarter government that works in partnership with business, trade unions, local leaders and devolved governments”.

So the new Labour government will not wait for the capitalist sector to invest, employ and grow: it will intervene to ‘encourage’ it into the right direction for Britain’s industrial revival. This is no takeover of capitalist sectors to be run by the state. Yes, there will be more public investment, but only “where it can unlock additional private-sector investment, create jobs and provide a return for taxpayers”. You see, Labour’s industrial strategy will be “mission-driven and focused on the future. We will work in partnership with industry to seize opportunities and remove barriers to growth.”

Humpty Dumpty

This smacks very much of the economic strategy of Mariana Mazzucato⁶ - the Italian-American leftist economist, who reckons that what modern capitalism needs is a “purpose-driven” partnership between the public and private sectors. Mazzucato argues for public-private that can “capture a common vision across civil society, business, and public institutions”.⁷ Governments and capitalist companies should share the risks and then share out the rewards: “It is not about fixing markets, but creating markets”. Mazzucato sums it up: “The Mission Economy offers a path to rejuvenate the state and thereby mend capitalism, rather than end it.” Such is the purpose of securonomics too.

But can securonomics put the Humpty Dumpty of a broken Britain back together again? The key must be a sharp rise in productive investment to restore economic growth that will deliver more income for all and more revenues for government to invest to meet the social needs in health and social care, education, transport, communications and housing - all of which are flailing and failing in a “broken Britain”.⁸

Where is the extra investment to come from? As I showed in my previous post on Britain, the UK’s investment-to-GDP ratio is pathetically low (around 17% of gross domestic product, compared to the G7 average of 23%) and investment by the big corporations is even lower at 10% of GDP. As for public investment, that ratio is as low as 2% of UK GDP.

A recent London School of Economics study called for an increase in public investment of 1% of GDP, or a rise of £26 billion a year at current prices.⁹ But what are Rachel Reeves and Labour proposing? They plan just £7.3 billion “over the course of the next parliament” - through a National Wealth Fund, “making transformative investments across every part of the country”. The Corbyn-led Labour Party proposed £25 billion; but the Reeves-Starmer leadership proposes just a quarter of that and a fraction of what even the LSE economists reckon is needed. Indeed what is needed for a proper transformation of industry and public services is more like £60 billion a year over next five years, or a rise of at least 2%-3% of GDP each year. Instead Labour’s plan actually implies a fall in public investment as a share of GDP over this parliament!

Of course, the hope is that this tiny increase in public investment will attract “three pounds of private investment for every one pound of public investment, creating jobs across the country”. But, even if it did (and that is doubtful), then the total increase would still be way, way short of what is needed to turn the UK economy around.

Why are the Labour leaders so timid about increasing public investment? The first reason is that, because the UK economy is so weak, government tax revenues are too low to fund increased investment. The only way to do so would be for the government to borrow more: ie, issue government bonds to the banks, etc. But that would increase the deficit on the government budget and raise the level of public debt - already at a record high.

Yes, the government could ignore the lack of ‘fiscal headroom’, as it is called, and just go ahead and borrow a lot more, with the expectation that the extra investment would boost growth and revenues and so pay for itself and avoid a rising debt burden. That is what Sharon Graham - the leftist leader of Britain’s biggest trade union, Unite, suggested to Reeves.¹⁰ Indeed, if you are a supporter of ‘modern monetary theory’, you would not even bother with issuing bonds: instead just ‘print the money’ (ie, get the Bank of England to credit the banks with more billions).

But what would foreign investors and bond holders make of that? Back in October 2022, in effect, in her drive for ‘growth’, the briefly appointed Tory prime minister, Liz Truss, proposed just that. What happened? The Bank of England did the opposite and raised interest rates, while the foreign bond holders went into capital flight and the pound collapsed in value. The Labour leaders are afraid of a similar investment-strike by financial markets if they borrow ‘too much’. So instead they are planning to borrow too little!

Starmer-Reeves have also placated the City of London by announcing that they will not be raising income tax rates, or social security rates (given that tax revenue relative to weak GDP is at a post-war high). Indeed, they have even pledged not to raise the corporation tax on big business - at 25% already the lowest in the G7 - in order not to ‘deter’ investment. They even say that, if other countries cut their rates, they will follow the race to the bottom by cutting further. And they will continue to provide 100% tax allowances on capital investment. The irony is that cuts in business taxes and exemptions have failed to boost private investment anywhere over the last two decades.

Vicious austerity

Where will securonomics concentrate its timid investment strategy? The answer is in financial services, the automotive industry (wholly owned by foreign companies), life sciences and ‘creative sectors’ (film, design, theatre, fashion, etc). These are supposedly the sectors where the UK has an edge.

But what about the broken public services in Britain? The national health service is starved of funds and staff. During the election campaign, Reeves promised not to raise the main tax rates, which account for three-quarters of total tax revenue. Instead, she pins her hopes on higher growth, coupled with a narrow range of revenue rises worth around £8 billion. According to the latest optimistic estimates of UK economic growth, that means Reeves has just about £10 billion to spare on improving public services, unless Labour breaks its promise not to raise taxes or to borrow more. That means the vicious austerity that the NHS, local government and schools and universities have experienced over the last decade or more will continue - at least until the miracle of faster growth appears.

Indeed, the Nuffield Trust reckons that the current spending plans of the new Labour government for the NHS will mean a further period of austerity.¹¹ A 0.8% annual growth in total health spending would result in the next four years being the tightest in NHS history under the Labour pledges - tighter even than the former Tory coalition government’s “austerity” period, which saw funding grow by just 1.4% in real terms a year between 2010-11 and 2014-15.

What about housing? The new Labour government says it will aim to build 300,000 new homes a year through the next five years. Sounds good, although it is way less than needed and way less than Labour governments built in the 1950s and 1960s. But how is even this to be done?

It is not going to be through a National Building Corporation that will employ building workers, architects, etc directly to build good houses and flats to be owned by local council at reasonable rents for tenants, to get the huge waiting lists down. No, the whole housing plan will depend on private developers building homes for sale with minimal monitoring for ‘affordable homes’. The Labour leaders are more concerned with removing planning regulations in local areas, so that private developers can build where and how they want.

And who are these developers? As has been pointed out, they are the likes of BlackRock, the American investment company, which already owns 260,000 British homes on which it is charging some eye-watering fees - around £1.4 billion last year. So the likes of BlackRock will be the beneficiaries of this housing expansion.

Securonomics means that there is to be no public takeover of the productive sectors of the economy; or the financial sector; or the big investment funds. Take the disaster and scandals of the Royal Mail since its privatisation (it is now being sold by its private equity owners to a Czech billionaire). What is Labour’s plan?

Royal Mail remains a key part of the UK’s infrastructure. Labour will ensure that any proposed takeover is robustly scrutinised and that appropriate guarantees are forthcoming that protect the interests of the workforce, customers and the United Kingdom, including the need to maintain a comprehensive universal service obligation.

So it is regulation, not the restoration of public ownership, that matters in this “key part of the UK’s infrastructure”.

Then there are the energy and water utilities. The scandal of these privatised utilities is for all to see, where shareholders have got billions in dividends, while debt and prices rise. The total collapse in the water infrastructure has reached the point where the UK’s water supply, rivers and beaches are no longer safe to drink or touch. And yet, Labour has no plan to bring these utilities back into public ownership. Instead, it wants ‘better regulation’. Apparently, it wants less regulation in housing and more regulation in utilities and the postal service.

Labour has pledged to bring railways back into public ownership - but only gradually, as the private franchises (some 10-years-long) expire. Labour under Corbyn pledged free broadband for all as a public right. This was called “communism” by the rightwing press. Labour under Starmer only proposes “a renewed push to fulfil the ambition of full gigabit and national 5G coverage by 2030”.

‘Securonomics’, however, does mean more investment in one key sector: defence. The new Labour government has pledged to raise defence spending to 2.5% of GDP in this parliament in order to ‘secure’ the country - supposedly from the threat of invasion by Russia or China, but in reality to meet the demands of the US and Nato. UK defence spending already stands at 2.3% of GDP - but more is to be spent, while the NHS remains in austerity mode.

One-term Labour

Securonomics is really a return yet again to the idea of ‘public-private partnership’. What that means is that the government will borrow or tax a bit more to invest a bit more - mainly to encourage and subsidise the capitalist sector to invest more and let them take the lion’s share of any extra revenues produced. Public-sector investment will mainly be used to help the capitalist sector invest, not to replace it.

That makes sense if your founding belief is to make capitalism work better. Capitalist investment in the UK is some five times greater than public investment. It would be a different economy if that ratio was the other way round. But that will not happen under securonomics.

The problem is that the capitalist sector has failed to invest enough over the last three decades and much of its investment has not been in productive sectors of the economy, but in finance, real estate, defence, etc. The reason is because it was just not profitable enough to invest elsewhere. Labour’s plans do not suggest any change in that trend.

Securonomics is supposedly a strategy for British capital to ‘take control’ of its economy with the help of a pro-business government, and so fend for itself in an increasingly stagnant and protectionist world economy. But the UK economy is frail and it has not escaped (and will not escape) the twists and turns of the global capitalist economy. There is every likelihood that the world economy will enter a new slump before the end of this decade. Slumps emerge every 8-10 years and the last two were the worst in capitalist history. Even without a slump, global growth is slowing and trade is stagnant, with little sign of improvement ahead.

Labour’s plans do not suggest ‘security’ against vicissitudes of capitalist accumulation. After each previous slump, the incumbent government has been ousted (Labour in 2010 after the slump of 2008-09 and the Conservatives eventually in 2024 after the pandemic slump of 2020).

This could be a one-term Labour government.

Michael Roberts blogs at thenextrecession.wordpress.com