Good afternoon on this, the eve of the fifth anniversary of the signing of the EU-UK Trade and Cooperation Agreement and the week that Rachel Reeves tried to put the rocket-boosters under Labour’s economic growth strategy.
Her upbeat speech in Oxford observed that getting Britain growing again was based on three pillars: political stability, regulatory reform and the combination of private and public investment.
There wasn’t much to disagree with, but because of the damage done by the Budget, it will take more than a sprightly speech for Reeves to dispel the underlying sense that this is a government still struggling to find the “political stability” that is essential if they are to plausibly present themselves as agents of enduring change.
Reeves praised MakeUK, the manufacturers’ organisation, but reacting to the speech, chief executive Stephen Phipson warned that the government needed to resolve the contradiction between its growth-suppressing Budget and the paper ambitions set out by the chancellor.
“There is a clear contradiction between implementing laudable measures such as planning reform and infrastructure investment whilst, at the same time, applying a handbrake through measures which will inevitably reduce investment and freeze recruitment. This is a clear dichotomy that the government needs to resolve internally.”
And therein lies the challenge.
The headline announcements that the government is backing a third runway at Heathrow, is getting behind the Oxford-Cambridge Arc again and will support the Manchester United regeneration project sends a clear signal to international investors that the UK is “open for business”.
Less clear is whether a government led by a prime minister who is now less popular than Rishi Sunak at his nadir, has the political gumption to make the arguments necessary to deliver on ambitions that will pay relatively slow dividends.
This is not to be churlish, but to observe that Reeves’ speech was delivered by a chancellor already on the back foot. Last summer this would have sounded like Labour firing the starting gun on its rescue mission for Britain, not a government trying to rescue itself.
New administrations usually start with an announcements phase followed by a period of delivery and then a recrimination phase when, inevitably, they come up short. This government managed to skip straight to the recrimination phase.
Goodwill hunting
The bungled Budget has starved the government of goodwill with the public and business community that it badly needs. Because the road ahead will be hard — there will be opposition to Heathrow, downside risks from deregulation and furious Nimby protests.
The revival of the OxCam Arc is a case in point. Hitting the high-growth scenarios outlined by Reeves, will require driving through the final section of the East West Rail line from Bedford to Cambridge while building a lot of houses along those tracks in one of the most congested areas of the country.
The last attempt by the Tories failed because of local opposition. As Local council leaders in Cambridge told me this week — including the Labour leader of Cambridge City council, Mike Davey — it’s imperative that this government doesn’t repeat the political mistakes of the last one and lose public goodwill.
As Lucy Nethsingha, the Liberal Democrat leader of Cambridgeshire county council, put it:
“The Arc in its previous version failed because it didn’t convince local people that it would bring tangible benefits for them. If it is to succeed this time it will be crucial that local people understand what it will do for them and their neighbours, not just what the benefits might be for big business or developers.”
To put in context the scale of the task. Reeves announced that the Environment Agency had finally cleared the long-delayed 5,400 home new town development at Waterbeach in Cambridge.
But according to research by Public First for the Oxford-Cambridge Supercluster Board seen by the Financial Times, the region will need 15,000 homes a year on average to hit a high-growth trajectory — that’s a threefold increase above 2023 levels in Greater Cambridge, Oxford and Milton Keynes.
Brexit blues
The Budget is not the only place where election manifesto red lines have generated policy contradictions that are now hobbling Reeves in her growth mission.
The chancellor talked about the need for greater investment and trade, but the UK’s “reset” with Europe — which might have convinced investors that the UK was “back” — is severely limited by the decision to rule out rejoining a customs union or the EU single market.
Five years after the TCA came into force, what is notable is how little anything has changed, despite the change of government.
Labour pledged to “tear down the barriers to trade” with the EU while sticking to the same Tory red lines that created the Tories’ “failed” Brexit deal — Reeves’ words, not mine — in the first place.
There was some positivity this week when (finally) the UK indicated it would look to relink the UK and EU carbon-pricing schemes and may consider joining the Pan-Euro Mediterranean customs agreement, but like Reeves’ growth plans, for now these are paper commitments.
EU officials now tell my colleagues in Brussels they expect a UK-EU summit “in the first half” of the year. That could be April or June, given the purdah period around local elections in May. The EU then needs to collectively agree a mandate. Don’t expect talks until September or even October.
And as the UK in a Changing Europe think-tank observed in its comprehensive survey of the past five years, Labour’s plans for the EU reset, including a veterinary agreement and a deal for creative artists will deliver only marginal reductions in friction.
“Whilst benefiting certain sectors, these proposals would do little to address the overall economic impact of Brexit,” it found.
The reality, as we reported this week, is that the EU “reset” discussion is going nowhere fast, with even the legally non-binding Security Partnership now hung up on the familiar issues of fish and youth mobility, including restoring the rights of EU students to pay “home” fees when they come and study at UK universities.
You can blame the EU, and the French in particular, for being stuck playing old tunes about “no cherry picking” despite the strategic fears over Ukraine, but in truth the UK has done nothing to really shift the dial or build momentum. It has put no prizes on the table that would make EU member states behave any differently.
As with the October Budget and business, the government has managed to put itself into the “recrimination phase” with Brussels before it has even announced what it wants. That is a remarkable own-goal.
In a braver world, Starmer would have done a fast deal on fish (the last government already failed the fishermen) and embraced youth mobility as a cultural and economic opportunity, driving the negotiation with Brussels into a genuinely different place.
Indeed, even very recently, as the Treasury and No 10 went into panic mode over growth, there was a moment to make arguments that going deeper with the EU should be part of the fix, as much as a third runway at Heathrow.
But that didn’t happen, trapped as the government is by its framing of the problem and the potential opportunity. As one despairing Whitehall insider put it: “It is eerily reminiscent of 2017. We are now in serious danger of sinking back into a low-ambition doomloop.”
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Britain in numbers
Reeves described investment as “the lifeblood of economic growth”, but as she also acknowledged, the UK has a long-standing problem with both public and private investment, sitting at the bottom of the G7 pack for much of the past 25 years.
Brexit deepened those investment struggles, according to Stephen Hunsaker, the trade specialist at UKICE (see pp90-94), with public investment taking a particular hit after 2016 as a result of the UK’s withdrawal from the European Investment Bank (EIB).
The UK has done its best to create domestic alternatives, such as the National Wealth Fund, but Hunsaker calculates these are still “years, if not a decade” from reaching the levels of investment the UK was accustomed to receiving while a part of the EIB.
As things stand, UK investment banks’ financing levels are still 58 per cent less than what the country received from the EIB in 2016, he calculates.
The numbers look even gloomier if you consider “what might have been” by comparing actual UK post-2016 investment with the level of EIB investment received by France — a country with a comparable record to the UK’s when it was an EU member.
The gap, according to Hunsaker, means that in real terms the UK has suffered a potential “loss” of more than £44bn since 2017, compared with the UK remaining in the EU and continuing to receive similar levels of financing to France.
That’s a lot of bat tunnels, as they no longer say in the Treasury.
I am now away for two weeks, travelling for both business and pleasure. I am going to leave you in the hands of two colleagues, Delphine Strauss and Jen Williams, who will give you a change of pace and subject matter.
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