Introduction
The measures taken by the UK’s Labour Party since taking office in July 2024 will appear bizarre to most economists. They are based on a cluster of theories that go under the name of ‘modern supply side’, which has also been called ‘securonomics’ and ‘Bidenomics’. Despite the appropriation of the words ‘supply side’, its ‘modern’ version espouses the opposite of what would customarily be understood as ‘supply side’ measures.
How ‘supply side’ stimulates market activity
The essence of ‘supply side’ is to make it easier for actors to enter a market and to operate profitably in it, thereby encouraging more market actors to enter. This increases the range of offerings available to buyers, and compels suppliers to strive to constantly improve their Value Equation – Price + Performance = Value. Prices tend to fall, new features and functions are introduced (i.e. by innovation), there is greater competition, and buyers purchase more. The result is economic growth, capital formation, and repeated rounds of new investment.
What ‘supply side’ measures normally consist of
The means employed to bring about such a market are an expansion of the private sector of the economy and restraint over the public sector, reduction in regulation, a more flexible labour market, the fostering of capital formation and a reduction in taxes, accompanied by investment incentives.
Labour’s ambition through its ‘modern supply side’
Rachel Reeves, Labour’s Chancellor of the Exchequer, recently repeated her ambition ‘that economic growth was now our national mission’.1 She claimed that in the measures taken ‘we are providing stability for the long-term’ and that the measures were necessitated by the need to bring stability to the UK’s public finances ‘because instability in our public finances leads to instability in our financial markets’. Stability/security are projected as essential underpinnings of growth, rather than as precursors to stagnation, to reduced risk-taking, and to decline.
What Labour has done
The measures implemented and proposed by Labour are the opposite of ‘supply-side’:
- Increased regulation, notably in the automotive market as part of the supposed path towards Net Zero;2
- Award to various types of workers in the public sector of pay rises well above the rate of inflation, switching money from the private sector to the public sector;3
- Stronger worker rights, reducing labour market flexibility;4
- A substantial increase in the minimum hourly rate of pay for an employee;5
- Interdicting capital formation by reducing the benefits for entrepreneurs that flowed from a reduced rate of tax on their capital gains when they sell shares in a company they founded;6
- Increasing the payroll tax (called Employer’s National Insurance Contributions) from 13.8% to 15% and, more seriously, meaningfully reducing the threshold from which it becomes payable – from a wage level of £9,100 per annum to £5,000 per annum;7
- No hint of investment incentives, but instead major plans for the government to take a more active role in the UK economy, for example by the establishment of Great British Energy to ‘speed up the transition away from fossil fuels and towards home‑grown clean energy’8 and of the National Wealth Fund for ‘crowding in private finance to sectors and technologies which are critical to the UK’s clean energy and growth ambitions’.9
Results so far
The result so far is the predictable reduction in economic activity:
- Business confidence has slumped, according to the Institute of Directors;[10]
- The UK’s economic growth increased by only 0.1% in the quarter to 30th September, having risen by 0.5% in the quarter to 30th June;11
- There was a fall in GDP in September, after dwindling expansion in July and September, and indeed any apparent growth that did occur can be attributed to price inflation;
- This decline preceded the Budget in on 30th October when most of the measures were announced: retail sales have fallen after the Budget;12
- Delays and cancellations of companies’ plans for new job hires, though not yet great evidence of redundancy programmes;13
- The yields on UK government bonds have risen from in the range of 3.90% per annum to 4.60% per annum, making credit more expensive.
Feed-through into the UK’s public finances
The Office for Budget Responsibility (OBR) has issued its figures for October 2024, which factor in what happened between Labour coming to power and the Budget.
It is too early to observe the feed-through of the measures taken in the Budget.
UK public spending is forecast to be £1,276 billion for 2024/5 (£45,000 per household and 45.3% of national income).14 Public income is forecast to be £1,149 billion (£40,000 per household or 40.8% of national income). That gives rise to an annual deficit of £127 billion or 4.5% of national income.
National debt is forecast to be 98.4% of national income.
Prospects for the UK’s public finances
The UK’s public finances are in a parlous state, with debt at the same size as the economy and likely to grow, both to finance increases in day-to-day expenditure, and to fund the more active role which the government plans to take in the UK economy.
While public spending continues to grow quickly, it seems to have eluded Labour that there is a possibility of tax revenues declining:
- Collapse in company profits, hitting receipts of Corporation Tax;
- Redundancies, reducing Income Tax and both Employer and Employee National Insurance Contributions;
- Â Recession, reducing receipts of Value-Added Tax.
Were this to occur, the revenue and expenditure lines of the UK’s public budget would move even more dramatically out of line with one another and push national debt above 100% of national income.
Conclusion
Labour’s measures have nothing to do with ‘supply side’ economics. ‘Modern supply side’ is used as a theoretical fig-leaf to mask a proposed transfer of wealth from employer to employee (while attempting to make sure the employer is denied the opportunity of discharging the employee), and from the private sector to the public sector.
The claim to be restoring stability to the public finances is bogus: the UK’s public finances are careering towards a crisis.
Recession, rather than growth, is indicated.
The wealth that should be transferred to employees and the public sector scarcely exists other than in Labour’s theory books and it will soon run out, probably in  the first half of 2025.
1 Transcript of Rachel Reeves’ mansion House speech on 14 November 2024
2 https://www.yahoo.com/news/zero-emissions-vehicle-mandate-skewing-100000815.html accessed on 2 December 2024
3 https://www.personneltoday.com/hr/public-sector-pay-rises/ accessed on 2 December 2024
4 https://www.gov.uk/government/news/government-unveils-most-significant-reforms-to-employment-rights accessed on 2 December 2024
5 ‘Autumn Budget 2024 – Fixing the foundations to deliver change’, para 5.141 p. 139
6 ‘Autumn Budget 2024’ para 2.49 p. 48
7 ‘Autumn Budget 2024’ para 2.40 p. 45
8 From the ‘Great British Energy Founding Statement’, p. 2
9 https://www.ukib.org.uk/news/uk-infrastructure-bank-becomes-national-wealth-fund accessed on 2 December 2024
10 https://www.iod.com/news/uk-economy/iod-press-release-confidence-levels-approach-covid-lows-amongst-business-leaders/ accessed on 2 December 2024
11 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpfirstquarterlyestimateuk/julytoseptember2024 accessed on 2 December 2024
12 https://www.bbc.co.uk/news/articles/c4gmy9xldgno accessed on 2 December 2024
13 https://www.telegraph.co.uk/business/2024/11/25/two-thirds-of-companies-slash-hiring-plans-after-tax-raid/ accessed on 2 December 2024
14 ‘A brief guide to the UK’s public finances – October 2024’
Photo by Boris Dunand
