The Chancellor’s ‘Levers of Growth’ Problem - Why Governing Is Hard
Lord Stewart Wood, former New Labour adviser and Non Executive Director at Bradshaw Advisory, looks ahead to the Chancellor's Spring Statement.
Whatever your view of the Prime Minister and Chancellor, you can’t accuse them of being unclear about their number one priority: growth.
But good government is about more than words and slogans. When it comes to governing Britain, things have not exactly gone smoothly since Starmer won that stonking majority of 174 seats last July. Blink and you will have missed Labour’s honeymoon, and just 250 days since the election the waters are proving very choppy at home and abroad.
As we approach the Spring Statement at the end of March, why exactly has Labour struggled? What is holding them back from delivering the change promised? And how quickly can they begin to turn things around?
The growth story so far...
“Labour is governing in fragile, nervous & financially-constrained times.”
Labour’s problems are down to bad luck, bad timing and some bad decisions.
While Starmer’s election triumph drew inevitable comparisons with Tony Blair’s victory in 1997, the economic context for the two victories could hardly have been more different. The late 90s was a time of immense global optimism and hope. Plus Blair & Brown inherited a strong economy and sustainable public finances. In 2025, Starmer faces unpredictable global economic headwinds and international political instability unimaginable a few years ago. Labour is governing in fragile, nervous & financially-constrained times.
Tariff wars have been centre-stage since Trump’s arrival back in the White House. Energy costs, though down from their peaks in 2022, are still significantly above averages for the previous two decades. The economic fallout of conflicts in Ukraine and the Middle East continues, with the potential to be either inflationary or recessionary (or both) in the coming months.
Aside from the US, where growth last year was a solid 2.5%, there is a shortage of demand in world markets that makes prospects for a kickstart to global growth hard to see in the near term.
Unlike Blair, Starmer’s domestic economic inheritance was unenviable. After arriving in Downing Street last July the government immediately faced a toxic combination of the highest debt level since the 60s, the highest tax burden since 1948, public services suffering from over a decade of austerity and record low levels of satisfaction with the National Health Service. And all in the context of an economy reeling from the twin impacts of Brexit and Covid, and enjoying the lowest level of investment of any G7 country for 24 of the last 30 years.
But the choppiness of the waters is also due to some of the Government’s own decisions.
Labour’s risk-averse election strategy intentionally set out a narrow economic landing strip, doubling down on restrictive fiscal rules and pledges not to raise personal taxes. But at the same time, they promised a fresh start for public and private investment, as well as significant additional resources for our ailing NHS.
The November Budget (bolstered by a redefinition of one fiscal rule) was Reeves’ tightrope-walk to combine these commitments.
Many employers see higher taxes on employment to help growth as a contradiction. The real challenge for the Chancellor lies less in the reaction to the employer NI increase, but more in the narrative among many in the business community that - in combination with other flagship policies like the Employment Rights Bill - it holds back the economic recovery the Chancellor wants and needs.
Ahead of the OBR reporting, the Bank of England has already confirmed the continuing fragility of the UK economy. Already meagre growth forecasts for the coming year have been halved and a fresh spurt of inflation fuelled by energy and food costs is expected over the next 18 months.
Five lessons about the levers of growth
So what does the Chancellor do now to get Britain growing again?
Under pressure from both commentators and colleagues, Reeves vowed to go “further and faster” and announced a list of potentially growth-enhancing projects. These projects are designed to be the ‘levers’ for growth.
But here the Chancellor bumps up against a problem that has plagued every one of her predecessors: the complicated and imperfect relationship between the levers of growth and growth itself. Consider the following five challenges:
Contradicting priorities: Chancellors may prioritise growth, but they also care about other economic outcomes just as much. Take the control of the public finances. Reeves’ fiscal rules politically are critical for her reputation and the credibility of the Labour Government. Yet not only can fiscal rules mean some growth levers are unpullable, but meeting the fiscal rules may make restoring economic growth even harder.
Control and uncertainty: Many of the levers that the Chancellor pulls can be reversed by others down the chain. From airport expansion to a new Oxford-Cambridge ‘Silicon Arc’, to reducing the bureaucracy of planning major infrastructure projects. Each can be championed and authorised by Chancellors, but vetoed at numerous points at national, local and judicial level.
Political Trade-Offs: The levers that the Chancellor wants to pull can create political problems for other signature policies. The tension between the increasingly urgent need to restore growth and championing the transition to renewable energy may be one prime example. Or consider the fact that Britain is suffering chronic skills shortages, and that an era of building new infrastructure projects and record numbers of houses undoubtedly requires more skilled workers from abroad than Labour’s immigration promises allow.
Time-Frames: While some levers will work to raise growth, the time-frame within which they work is so long as to be practically irrelevant for a Chancellor who needs to kickstart growth within the lifetime of a single Parliament. Rachel Reeves will be looking back on her past political career by the time any planes land on Heathrow’s Third Runway, or any professors begin the commute to Cambridge from new satellite towns in Britain’s Silicon Valley. Like Chancellors before her, Rachel Reeves is caught between the dangers of sugar-rush measures and sensible major supply-side reforms with payoffs on horizons far beyond this Parliament.
When Your Fate Is Not In Your Own Hands: The final is the most frustrating, and in Rachel Reeves’ case perhaps the most important. There are levers that will determine whether growth and Labour’s political fortunes turn faster than forecast: it’s just that they are in the hands of other people. One is in the hands of the Bank of England, more sensitive to fears of inflation than of stagnant growth. Another is in the hands of Donald Trump, currently ushering in an age of tit for tat tariffs that could hurt allies and enemies alike. EU Commission President Ursula Von Der Leyen has an important lever too. Her decision on whether and how widely to open up EU-UK trade could be pivotal to the UK growth trajectory in the remainder of this Parliament. And then of course there are the financial markets, in whose hands the Chancellor’s fiscal room for manoeuvre lies.
What is to be done?
None of this means that Rachel Reeves’ quest for growth is doomed, or simply in the hands of the gods.
A relentless focus on long-term supply side reform is crucial for building business confidence to invest more and employ more now.
As are reforms to pension funds, planning regimes and empowering new combined authorities with leaner, smarter powers to build and grow enjoy strong support in UK plc. And there are comparative strengths for the UK that international investors continue to appreciate. In an age of political volatility unprecedented in the West since 1945, Starmer and Reeves lead a stable government with a large majority - and will do so for at least four more years.
For all the UK’s woes, the IMF forecasts that the UK could be the fastest growing major European economy over the next two years, and PwC ranked the UK as the second most attractive country in which to invest behind the USA.
But two things are clear:
First, by the time of the next election, the Chancellor needs things to change from their current trajectory for her growth mission to be judged a success.
Second, many of the things that need to change are not in her control.
Reeves will see her task as continuing to champion ambitious reform, removing barriers to growth where she can (and where her Cabinet colleagues allow her), and maintaining discipline in public spending. With the stars aligning less favourably than she would like, I suspect she and the Prime Minister will soon contemplate taking greater political risks in the quest for growth and healthy household incomes.
“Further and faster” may be the new mantra, but expect “further and faster 2.0” in the months ahead.