Over the past half-century, economic growth in Britain has been gradually slowing, becoming more concentrated in the south east and less evenly distributed. Each government, whether Labour or Conservative, has grappled with this problem in more or less the same way: recognizing the need for more investment, yet refusing to countenance public spending on the necessary scale. The outcome has been an uneasy combination of state expansion and austerity. Paradoxically, while successive social and geopolitical crises have left Britain with a state far larger than anyone in the nineteenth century could have imagined, investment has nonetheless been constrained by a highly conservative Treasury and the power of private capital. 

The current Labour government is no exception. Its strategy for restarting growth, crafted by the Chancellor Rachel Reeves, has three main pillars: fiscal stability – inspiring confidence in investors and entrepreneurs through rigid spending rules and a dogged commitment to ‘balanced budgets’; deregulation – a favourite tool of every administration since Thatcher but one which, this time round, is specifically intended to benefit the property and construction industries by ushering in a ‘build big’ era; and, finally, infrastructure investment – improving Britain’s dire transport system and public utilities, but only when the private sector thinks it’s worth the money. 

The government’s Spending Review on 11 June, which set out the upcoming departmental budgets for day-to-day spending and capital investment, was the most recent attempt to advance this agenda. It promised to ‘renew Britain’ by allocating £113bn over the next four years to invest in defence, nuclear energy, transport and housing: an overall budget increase of 2.3% annually. The plan elicited the usual media hyperbole, with the Guardian describing it as a ‘shower of gold’ and the Mail as a ‘reckless’ spending spree. Yet behind the headline figures it remains ultra-cautious, marked by the timidity of the Treasury accountants and their deference to the markets.

Despite the Review’s £39bn worth of investment in affordable housing, for example, it looks like the historic builders of Britain’s council houses – local authorities – will continue to be squeezed over the course of this parliament. The funds will instead largely be used by housing associations to buy idle units and boost demand for construction, lining the pockets of developers. The government’s approach to transport follows the same parsimonious logic: a large chunk of the £16bn allocated to projects outside of London was unlocked by cancelling the northern legs of the high-speed rail network HS2. And for all the talk of £149bn extra in day-to-day public expenditure, 90% of this will be taken up by investments in health – the minimum amount necessary to stave off the collapse of the service – and defence. The latter is one of the major winners of the Review, amid the increasingly jingoist mood in Westminster, with a budget increase of £11bn and an additional £600m for the security and intelligence agencies.

Day-to-day administrative budgets will meanwhile be cut by 16% on average, affecting staffing and many essential services. Departments have already begun to respond by freezing recruitment and expanding voluntary redundancies – soon to be followed by compulsory redundancies and the further firing of back-office staff. Flat spending in real terms also means that ministers and senior civil servants will only be able to fund new projects by cutting old ones: undermining vital services to pay for shiny new ministerial priorities. The upcoming welfare reforms – including potentially bruising cuts to personal independence payments for millions of disabled people – are part of this same attempt to further hollow out the state.

This is, in short, an economic strategy without an underlying vision of the economy, devised by a Chancellor who has spent much of her career running the complaints department of a retail bank, along with a team of advisers recruited from the world of centrist think tanks who are morbidly attached to the banalities of Brownism. It ensures that Britain will remain starved of adequate public funding, which in turn will force the government to search for other ways to stimulate growth.

The politics of the Spending Review reflect the process by which it was drafted. There was an internal struggle between the Public Spending Group, which fought for fiscal discipline, and their rivals in the Enterprise and Growth Unit, whose outlook is more Keynesian. Many of the accountants in the spending teams, currently led by George Osborne’s former private secretary, have devoted their entire careers to bean-counting in the finance department and are committed to fiscal conservatism, while those in the growth unit favour greater public investment in areas like science, innovation and technology. But in this conflict, the balance of power lies with the spending teams, who also get to decide on the overall departmental budgets, placing hard limits on the amount of money that can be disbursed.

Indeed, the Treasury’s favoured method of stimulating growth is to secure private-sector investment; hence Reeves’s many meetings with private equity leaders – from Blackstone’s Stephen Schwarzman to BlackRock’s Larry Fink – over the past year, in which she seems to have promised to greenlight various lucrative infrastructure projects. (BlackRock signed a deal to buy Global Infrastructure Partners, the owners of Gatwick Airport, in January 2024; Starmer approved a second runway there less than six months into his administration.) Labour has made similar supplications to the City of London, particularly in Reeves’s Mansion House Accord, which beseeched large pension funds and savings accounts to invest in infrastructure, property and stocks. And its new Infrastructure Strategy, announced last week, will also bring back the public-private partnerships of the New Labour era, which had been banned by the Tories in 2018 and which, according to John Manzoni, former permanent secretary for the Cabinet Office, had only ever existed to ‘keep the debt off the public balance sheet’.

Starmer and Reeves have also tried to charm private capital by committing themselves to massive deregulation and fighting a forever war against the quangos. State bodies responsible for protecting public safety and the environment have been told that their primary focus must be ‘growth and efficiency’. Officials who fail to meet the brief will be swiftly replaced by willing hands from the private sector: Amazon UK’s former boss is now chair of the Competition and Markets Authority, tasked with regulating private sector monopolies; Clare Barclay, former CEO of Microsoft UK and non-executive director of the scandal-ridden CBI, now leads the Industrial Strategy Advisory Council; the chair of the Environment Agency has been given the boot as part of Labour’s assault on green protections. There’s also a new Regulatory Innovation Office whose entire remit is to develop novel ideas for deregulation.  

Given this direction of travel, it’s unsurprising that Labour’s widely trailed Industrial Strategy – which aims to deliver ‘long-term, sustainable, inclusive and resilient growth, by spurring investment into all parts of the UK’ – was beset by delays. Finally published on 23 June, it will force government departments to spend their money within specific, predetermined sectors of the economy – from life sciences and artificial intelligence to defence and financial services – yet it has made almost no new money available, beyond a commitment to reduce energy costs for major electricity users, which won’t come into effect until 2027. 

Nor does Labour seem interested in using R&D to kickstart growth. Most direct funding for research, worth around £14bn a year, is currently channelled through an arms-length body called UK Research & Innovation. With the Spending Review, the Chancellor has given this vital body a flat budget for the next four years, with the upshot that any new R&D spending must be balanced by cutting existing programmes. Eye-catching announcements like £750m for supercomputers cannot hide the fact that cash-strapped universities will be receiving no extra funding this year or next. Meanwhile, the UK’s generous tax-relief-for-research system – worth a further £7.7bn annually – has done less to drive innovation than to create a cottage industry of consultants profiting off dubious tax claims. (HMRC estimates almost a quarter of all claims by small and medium-sized businesses are fraudulent.)  

Labour’s hope is that the forward march of AI will save the day by creating unprecedented ‘productivity gains’, with only minimal support from the state. At the encouragement of the Tony Blair Institute and the venture-capitalist-cum-government-AI-adviser Matt Clifford, the Treasury has announced an AI Opportunities Action Plan – a strategy to encourage its rollout across multiple sectors – which it hopes will generate £400bn in new growth over the next half-decade. Last year’s Autumn Budget was part of this techno-productivist agenda, with increases in national insurance contributions and the minimum wage intended to incentivise unproductive firms to invest more in technology and spend less on low-wage workers. 

The testing ground for the project appears to be the civil service itself, where Labour is aiming to make £45bn of AI efficiency savings per year. Of course, automating large sections of the state in a short period of time will be painful and chaotic, and there is no guarantee that the hoped-for productivity gains will come to pass. Yet a government that has closed off every other plausible route to growth is naturally tempted to embrace such reckless schemes. Since the 1980s, the Treasury has encouraged successive governments to embrace an agenda of deregulation and ‘efficiency’, while politicians have simply waited for some deus ex machina – free-market competition in the 1980s, globalization in the 1990s, artificial intelligence today – to turn things around. The new Spending Review marks the extension of this logic. Its ultimate message is that to live within our means we must live in a state of stagnation.

Read on: Matteo Tiratelli & Ali Helwith, ‘Sinking Ship’, Sidecar.