The Labour government’s plans for growth: explained

8 July 2024

In her first public speech as Chancellor of the Exchequer, Rachel Reeves MP said that economic growth is the Labour government’s “national mission”, repeating what she told staff at the Treasury during her first address to them on Friday 5 July. 

Economic growth also featured prominently in Labour’s election campaign, with the party’s manifesto setting out several policies it claims will achieve improved rates of growth compared to recent years.  

The party said it would “kickstart economic growth”, seeking the “highest sustained growth in the G7, with good jobs and productivity growth in every part of the country making everyone, not just a few, better off”. 

In an interview with ITV last month, Labour leader and now Prime Minister Sir Keir Starmer expressed an ambition for annual GDP growth of 2.5%; this would be a substantial increase on the 0.1% GDP growth the UK saw last year, and above the 0.8% forecast for 2024. 

At Full Fact we often say we’re not able to fact check the future, and we can’t say for certain what impact the new government’s policies will have on GDP growth. 

But we’ve taken a look at how economic growth is measured in the UK, what current forecasts say, and in more detail the main policies Labour have said will improve growth, as set out in the party’s manifesto. 

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How do we measure economic growth?

The main measure of economic growth globally is Gross Domestic Product (GDP). In the UK, it is generally expressed as ‘economic output’, the value of goods and services produced in a given period. 

The Office for National Statistics (ONS) releases figures on the UK’s GDP on a monthly, quarterly and yearly basis. 

The most recent figures estimate that the UK’s economy did not grow (or shrink) in April 2024, and that GDP increased by 0.7% in the first quarter of 2024. GDP fell in each of the previous two quarters, meaning that the UK was in a ‘technical recession’ at the end of last year. Across the entirety of 2023, the UK’s economy grew by 0.1% and had a cash value of £2,687 billion. 

Economic growth can be hard to predict, as unforeseen events (such as the Covid-19 pandemic or the Russian invasion of Ukraine) can impact the economy. 

The Office for Budget Responsibility (OBR) is among the bodies which forecast what may happen to the size of the economy. Its latest forecast, produced for the last Conservative government’s Spring Budget in March 2024, said GDP would grow by 0.8% in 2024, and by 1.9% in 2025, though their forecast for growth is higher than the median of forecasts made by a range of organisations in the previous three months.

Labour’s plan for growth 

In its manifesto, Labour said it wanted “the highest sustained growth in the G7”, but didn’t give a specific figure. In an interview during the campaign with ITV Tonight, Mr Starmer said that under the last Labour government, the economy grew “by about 2.5%”, and when asked if he was looking for that kind of growth if Labour were returned to government he replied “certainly, yes” . 

As it stands, the UK’s GDP is not forecast to grow by this amount annually across the new parliament, though it’s important to note that current forecasts were produced under the policies of the previous government. In March 2024, the OBR’s forecast pointed to UK growth peaking at 2% in 2026, before falling in 2027 and 2028. 

The OBR confirmed to Full Fact that the “normal mechanism” for publishing a new forecast would be that it is commissioned by the Chancellor of the Exchequer. Typically the OBR publishes its five-year forecasts twice a year, accompanying the Budget and Spring Statement. 

Is Labour’s plan realistic?

Responding to Mr Starmer’s comment about 2.5% GDP growth, Bloomberg economists Dan Hanson and Ana Andrade said: “A laudable goal? Absolutely. Realistic? Unfortunately not”. 

When, in 2022, former Prime Minister Liz Truss said she wanted a similar growth target, Bloomberg economists concluded “a sustainable growth rate of around 2% might be the best that can be hoped for”. 

After Mr Starmer’s comments, they said: “Looking at Labour’s manifesto, we don’t see reasons to alter that view.” Achieving it would require a “significant boost” to investment, productivity and labour supply, against a baseline expectation for growth to average 1.2% over the next 20 years. 

Others, including the Institute for Fiscal Studies (IFS), have noted that Labour in government may experience lower or slower growth than it hoped for, and so will be constrained in its ability to raise revenue and invest in public services beyond its manifesto pledges. 

Financial planner AFH Wealth Management said issues that it believes have previously restricted economic growth in the UK, such as poor productivity growth and a shortage of skilled workers, “will probably continue to stifle the UK economy’s capacity to grow during the next parliament”. 

How does Labour say it will achieve growth?

“Kickstart economic growth” is the first of Labour’s “five missions to rebuild Britain”, and the party’s manifesto outlines six ways it aims to achieve this: “tough spending rules”, “a new partnership with business”, the creation of a National Wealth Fund “to invest in jobs”, “planning reform to build 1.5 million new homes”, devolution of power across England and a “new deal for working people”. 

Below we look at each in turn.

Tax and spending rules 

Labour says in government it will stick to its fiscal rules. The party said “the current budget must move into balance, so that day-to-day costs are met by revenues and debt must be falling as a share of the economy by the fifth year of the forecast”. 

But the IFS has said that the new government will face a “stark choice”—dubbed a “trilemma”—of having to either raise taxes by more than pledged, implement cuts to some areas of spending, or borrow money and see debt rising for longer. 

With Labour committed to restricting borrowing and ruling out raising a number of taxes, the IFS analysis suggests that current plans are likely to see real-terms cuts to ‘unprotected’ areas. It said these could be up to £9 billion a year by 2028 for unprotected departments (outside NHS, childcare and defence) under Labour’s plans. 

However, it says that economic growth up by 0.5 percentage points a year “might strengthen public finances by around £30 billion allowing cuts to be avoided”, and a decline in growth by 0.5 percentage points would “weaken public finances” by the same amount. 

The Institute for Government (IfG) said Labour’s focus on growth “is undoubtedly important”, but warned that “the narrative that it will enable them to avoid tough choices on fiscal policy will not survive reality”. 

If the public finances do deteriorate, the government would be faced with a variety of choices in how to rebalance government spending—usually, this comes down to increased revenue through increased taxation, or cuts to government spending. Labour has said it won’t increase some specific taxes while in office, such as VAT, income tax, National Insurance or corporation tax.

Business partnerships 

In its manifesto, Labour says an “enduring partnership with business” is required “to deliver the economic growth we need”, and one of the ways it will achieve this is through a “stable policy environment”. It will ask businesses to be involved on its Industrial Strategy Council as its government ensures “a pro-business environment”. 

Labour has also committed to replacing the current business rates system with a “new system of business property taxation” to “raise the same revenue but in a fairer way”.

The Confederation of British Industry has previously said the current system of business taxation had a negative impact on sustainable growth. A number of hospitality sector organisations have reacted positively to Labour’s proposals, though the manifesto does not contain details of how this new system will work in practice, and what taxes businesses will be subject to in lieu of business rates. 

Other businesses indicated they believed Labour’s policies, more broadly, would support trade and investment better than the Conservatives’. According to polling ahead of the election by IPSOS, 31% of businesses thought Labour’s policies were better for “boosting international trade and investment”, compared to 26% for the Conservatives’.

National Wealth Fund

Labour has committed to creating what it calls a ‘National Wealth Fund’ (NWF), which would see £7.3 billion spent over the parliament “to support Labour’s growth and clean energy missions”. 

Sums from the NWF would be allocated to upgrading ports, new gigafactories, ‘rebuilding’ the UK’s steel industry, accelerating the development of carbon capture and storage and supporting the manufacture of green hydrogen. 

The NWF is part of the party’s previously announced ‘Green Prosperity Plan’, which it said in April would support “the creation of up to 650,000 good jobs in Britain’s industrial heartlands by encouraging billions of private investment”. The party said that its plan included “investments to drive local and economic growth”, giving opportunities to a range of workers, such as plumbers, electricians and welders across the UK. 

Other details of the NWF have been outlined in more detail by the party in previous announcements made before the election campaign. 

In October 2023, Labour said its plans to “part-finance” gigafactory investment would create “80,000 new jobs” and “add £30 billion to the UK economy”. 

As things stand, two more gigafactories have been announced for the UK, though neither have opened. The Conservative government did provide financial support to these projects: reportedly subsidies of £500,000 to Tata, and £100,000 to Nissan, who already operate an electric vehicle battery plant in Sunderland alongside the company AESC. Former Ford chairman Graham Hoare previously said he thinks the UK will need four or five gigafactories by 2030.

Labour have also said they’d bring the deadline for the ban on the sale of new petrol and diesel cars forward and return it to 2030.

On the plans for ports, law firm CMS Law-Now have said there’s “little supporting detail” in Labour’s manifesto “about what form such upgrades would take”. 

Some have criticised the Green Prosperity Plan, and said the proposed investment from the government is not enough. 

The Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE) in February said Labour’s Green Prosperity Plan was “disappointing”, as Labour had “scaled back the ambition of its planned levels of investment”. Labour had previously said it would spend £28 billion a year on green investment, and the Grantham Institute said the “weaker level of investment will also provide less of a boost to our productivity and growth”; earlier this year, Labour said it would invest £23.7 billion over the length of the next parliament on policies that the Green Prosperity Plan included.

Labour says it wants the NWF to attract private investment, at a ratio of 3:1 private investment to public. A previous Conservative government scheme, the Green Investment Bank, achieved a similar ratio of private to public investment. 

The Institute for Public Policy Research (IPPR) think tank said that while Labour’s Green Prosperity Plan “promises to invest £4.7 billion more per year than” the Conservative government did, the plan “implies an overall fall in investment”.

1.5 million new homes 

The Labour manifesto states that “the housing crisis is well known to be one of the country’s biggest barriers to growth”, and pledges to resolve this by building 1.5 million homes over the new parliament, through “immediately” changing the National Policy Planning Framework and hiring more planning officers in local authorities. 

While investing in housing does contribute to economic growth, the target of 1.5 million homes over the next five years (an average of 300,000 a year) may be ambitious given recent trends. By some measures, the last time the UK built 300,000 homes a year was the 1960s. 

There are two main ways to measure house building in the UK. Net additional dwellings measures how many homes have been created, and encompasses new builds as well as conversions (such as a house converted into flats) and changes of use (such as an office building becoming a home), while indicators of new supply looks at new build dwellings. 

In 2022/23 (the most recent financial year we have data for), there were 234,400 net additional dwellings in England, 212,570 of which were new build homes. This measure was introduced in the 1990s, so data is only comparable to then, but by this metric the most net additional dwellings added to the UK’s housing stock in a year was 248,590, in 2019/20. 

Longer historical comparisons are possible using indicators of new supply. This data shows that in the calendar year 2023, in England, 159,290 new homes were built. The last year over 300,000 new homes were completed, according to this metric, was 1969, when 306,860 new homes were built. 

The manifesto’s aim of the equivalent of 300,000 new homes a year is similar to the Conservative party’s 2019 manifesto, which pledged to build 300,000 homes a year “by the mid-2020s”. Labour has also said it will “restore mandatory housing targets”, but its manifesto does not outline what these may be. Ms Reeves confirmed in her speech that the government will be reintroducing targets, but again didn’t specify a figure for these or what the consequences for missing targets would be.

It’s difficult to quantify the exact economic impact newly built houses could have on GDP, as many factors could influence this, such as the location of the properties and the prices in the area. The think tank Policy Exchange suggests the building of 100,000 more homes a year “could directly add £17.7 billion a year to the UK economy”, alongside indirect economic benefits. 

In its manifesto, Labour also committed to delivering “the biggest increase in social and affordable house building in a generation”. While the party didn’t put a specific figure on the number of social and affordable homes it plans to build, research produced earlier this year by economic consultancy CEBR, for Shelter and the National Housing Federation, suggested the building of 90,000 new social rented homes a year could add £51.2 billion to the economy, over 30 years. The research looks at direct economic impact, as well as indirect impact, such as savings it says would occur due to reducing homelessness. 

The National Federation of Builders said that Labour’s manifesto shows the party appears “committed to implementing” a plan for growth; it said that if Labour implement the reforms they’ve promised, then there will be “more homes and jobs”. While supportive of Labour’s plans, it said it has concerns “over the lack of detail on specific policy positions”. 

Devolution of power in England

Labour have committed to deepening pre-existing devolution settlements and bringing devolution to “more areas”. The party says it’ll introduce a statutory requirement for ‘Local Growth Plans’, and will “provide greater flexibility with integrated settlements for Mayoral Combined Authorities that can show exemplary management of public money”. 

But does increased devolution lead to higher growth? While the Local Government Association (LGA) argues that devolution can result in “greater growth”, the literature on this relationship is mixed. 

The IfG said that “international evidence on the link between devolution and economic performance is inconclusive at best, and certainly does not imply an automatic improvement in outcomes when powers are devolved”. The OECD said “decentralisation, as measured by revenue or spending shares, is positively associated with GDP per capita levels”, though notes the impact “seems to be stronger for revenue decentralisation than for spending decentralisation”. 

It’s possible that increased devolution as envisaged by Labour—which it says will also see local areas “able to gain new powers” over housing and planning—could mean more houses are built, with a consequent improvement in growth. 

Other bodies have said that local authority funding may be more relevant than increased powers when it comes to generating growth. Labour’s manifesto commits to providing councils with multi-year funding settlements, which it says will “provide greater stability”, but doesn’t specify figures.

Since 2010/11, English councils’ funding has fallen by 9% in real terms, and is 18% lower per person. In May, the LGA said councils in England are facing a funding gap of £2.3 billion in 2025/26 and £3.9 billion in 2026/27, “just to maintain services at their current levels”. 

Earlier this year, the New Economics Foundation (NEF) said “even the areas of England with new devolved powers and funding have experienced a net decrease in locally controlled spending since 2009”. 

The NEF said Labour’s suggestions for local government finances “come nowhere near what councils need”. Research by LSE academics found that decentralisation has “often led to ‘unfunded mandates’”, which they say are an imbalance between powers devolved and the resources allocated to them. Their research says “there is a negative, statistically significant, and robust impact of unfunded mandates on economic growth”, suggesting that higher growth would not materialise if devolution is not accompanied by sufficient funding—in other words, the opposite of Labour’s intentions. 

Additionally, the Bennett Institute for Public Policy at the University of Cambridge says that devolution “will only achieve growth” if it comes with “substantial investments in the private sector”.

A New Deal for Working People

The final point in Labour’s list of ways to ‘Kickstart economic growth’ is “a New Deal for Working People”. Labour says this will “boost wages, make work more secure and support working people to thrive” through policies such as banning zero-hour contracts, ending so-called ‘fire and rehire’, and delivering “a genuine living wage”, ensuring the minimum wage takes “into account the cost of living”. 

Labour hasn't specified by how much the minimum wage could increase. The former Conservative government introduced a new type of minimum wage in 2016, the national living wage, which initially applied to adults over the age of 25, but now applies to adults over 21. Labour has committed to getting rid of age bands around the national living wage and the minimum wage, so all adults are paid the national living wage.

Some have said these plans could have a negative impact. Analysis by the bank HSBC estimated the minimum wage could be increased to £12 across the UK (up from £11.44 as it stands now) or £13.15 for London. Economists for the bank said: “A higher minimum wage could increase costs and reduce efficiency, adding to unit labour costs. This in turn could either push firms into reducing headcount and/or sustain lingering inflation pressures”. 

The IFS said in their analysis of Labour’s plans that it expects “much, and potentially close to all, of the cost of the benefit [of raising the minimum wage] to be passed through to lower wages”.

Update 9 July 2024

This article was amended on 9 July 2024 to reflect the new UK trading name of AESC.

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