The hammer and the anvil: crafting a new settlement

Mathew Lawrence and Alfie Stirling

The same forces propelling Labour to office risk fatally undermining it in power. As conference seasons approaches, a paradox confronts the party: the dire conditions an incoming government would inherit – a stagnant economy, a threadbare state, a delayed transition, and millions of children growing up in families routinely skipping meals – at once make Labour’s victory more likely, and their task in office more difficult. The current government is set to lose the next election under the hammer of an economic and social reality largely of their own making. The reward for a victorious Labour opposition would be to simply replace them on the anvil. Whether any government can govern successfully under such conditions turns on a fundamental question: will they embrace the politics of necessity head-on, and take it to its logical endpoint of systemic reform? The answer to this question will shape the fortunes of the next government and that of the entire country in the decade ahead.

How to navigate the severity of that inheritance – how to govern in hard times – is the subject of Gavin Kelly and Nick Pearce’s recent sweeping Renewal essay. As they argue, the legacy of almost a decade and half of Conservative rule will inevitably shape Labour’s governing agenda: its priorities and statecraft, its institutional focus, and its political coalition-building. And that legacy is stark, a testimony to a punitive policy agenda and dysfunctional growth model. Not only has a combination of austerity, self-made political crisis, and a lack of deliberate industrial strategy driven a divergence in economic performance from the UK’s comparator economies, it has also driven a deep divergence from our own historic development path. It has left us poorer, less productive, and more insecure.

In that context, the necessity of a politics of social repair is overwhelming. As school buildings collapse, local authorities declare bankruptcy, and shared physical and social infrastructures fray, substantive government action will be required for the country to simply stand still. But here there is precedent. All Labour governments have come to office against the backdrop of demands for the knitting back together of a damaged social fabric: of the expansion of public goods, the revival of public services, and the re-embedding of markets. What is different to the last time Labour took office, as Kelly and Pearce note, is the parlous state of the economy and the wider global economic environment.

This then is the crux of the challenge: an incoming government must urgently attend to the UK’s increasingly broken social settlement. The task is immense, with almost every area of social policy needing urgent attention. Rebuilding the economy in service of this agenda – and not the other way around – is critical, both electorally and to create a more effective government: these are themes which run throughout Renewal’s latest issue, focused on the politics and economics of welfare provision. Yet even in taking on this task, there is a danger that economic strategy will continue to be treated as an overly discrete and technocratic sphere of policy. 

British politics has long assumed that the scope for progressive social policy is contingent on the wider economic climate. Kelly and Pearce caveat this by correctly highlighting reverse dependencies too; ineffective healthcare, education and employment reduce overall economic potential. But these are modest corrections to the mould, not a fundamental recasting. Indeed, Kelly and Pearce’s broad argument is one of social progressives riding a predominantly economic storm, with fiscal constraint emphasised as a prevailing headwind. 

But is this model right? We would argue it underplays the true nature of the relationship in each direction; both the extent to which a serious social agenda is contingent upon serious economic reform; and the extent to which the longer trajectory of the UK economy is dependent on the quality of its social settlement.

If the underlying economic system continues to reproduce and sustain levels of material suffering broadly similar to current levels, then even a strengthened safety net will quickly fray. At least 7.3 million families in the UK are already routinely going without essentials, such as sufficient food, basic toiletries and hot water. Even before the recent high-point in energy prices and interest rates, nearly half (48%) of all private renters1, and well over three million families were in fuel poverty. And over half a million more people are currently out of work due to long-term health issues compared with the pre-covid norm. These outcomes reflect and reproduce the underlying inequalities of gender, race, and class that so powerfully structure society. Accepting all this, or similar, as the product of some underlying economic steady state will likely keep the entire system under intolerable material and political strain. And that is before we see the effects of an ageing society accelerate through the 2020s bringing increased pressure on health and care services while reducing the working age tax base. It also leaves no scope for slack in view of the next internal or external crisis, leaving the UK’s society and economy brittle and exposed. Even if built successfully, a meaningfully improved social settlement, absent deeper economic reform, is unlikely to survive across either a parliamentary or economic cycle, let alone several. 

But the prospect for long lasting improvements in economic performance, without an accompanying overhaul of the social settlement, are just as bleak. Demand growth for new goods and services will continue to stagnate as spending power increasingly gravitates towards those who already have surplus income and excessive savings. Supply-side innovation and adoption will remain lethargic as firms – accountable to the incentives of short term financial intermediaries – struggle to invest, given uncertain demand growth and an abundance of flexible and cheap labour alternatives. 

Against this backdrop, talking about a country that is fiscally stretched or weak risks making a category error. Levels of tax, spending and debt are policy variables that need to be negotiated politically, they are not unnavigable features of some fundamental economic landscape. From a purely economic perspective, the weakness in the current outlook provides as much need (low investment and rising labour market inactivity) for expansive fiscal policy as it does genuine constraints (higher costs on government borrowing). This is not an optimistic view; it’s just a recognition of the fact that debt and borrowing are policy tools, not policy parameters, and the scope to use them can grow with adversity as well as shrink, depending on the nature of the problem.

The requirement, then, is for a nuanced consideration of policy tradeoffs and uncertainties. But this is made almost impossible if otherwise important electoral considerations over tax and borrowing are mislabeled as economic constraints. It is notable that the two domestic factors that Kelly and Pearce point to as drivers of the current economic malaise are a decade of austerity and Brexit. The first was the product of political choices that were successfully cloaked in economic, technocratic determinism. The latter was in part a reaction to attempts to repeat the trick. Any government seeking to build a lasting progressive settlement needs to start by avoiding language and concepts that risk a third iteration of the same mistake. There are genuine economic and ecological constraints we must navigate, but too often politics concedes prematurely to self-imposed limits that become self-fulfilling. What then are the real risks and opportunities in the economy today? And how can we build an alternative prospectus against this backdrop?

Pondering the productivity puzzle 

In simple terms, the economy can be understood as the things we value, the means by which we produce them, and how the proceeds are distributed. The UK is deficient on all three. What and how we value things is too often misaligned with what matters. Production is held back by chronic underinvestment and the rentier turn of the British economy. And provision and access to basic goods and services – heavily dependent on market entitlement and exchange – is costly and inadequate. The result is an economy that, despite important strengths, is incapable of generating the right level and type of remuneration for many, while generating extraordinary returns for a narrow few. Yes, real earnings are currently languishing at 2005 levels and are not set to recover 2008 levels until 2026. But alongside this, since 2010, only the richest 5% of households have seen cumulative real income growth comfortably in excess of 10%. Meanwhile, the process of converting productivity gains into increased time away from work has stalled. If the pre-1980 trend had continued uninterrupted, workers would be spending around 13% less of their time at work than they do today – which coincidentally is the same approximate gap in non-working time that the UK has with Germany. This is a near impossible foundation upon which to build a new social settlement.

So what might be an accompanying prospectus for governance to that put forward by Kelly and Pearce; one which attempts to sketch the economic reforms necessary to serve a transformative social policy agenda? We believe the best answers will take seriously the interdependencies between economic and social reform that we have tried to emphasise, as part of a concerted effort to build a new form of economic security through both demand-side management and supply-side reform. This likely requires a combination of two things: pushing a greater portion of structural economic governance onto the table for change, and foregrounding areas of social reform that are crucial to enabling a materially different economic arrangement. There are many ways to do this well. We offer some thoughts in the spirit of prompting further discussion and debate. 

Given its centrality to the exposure and insecurity of the UK economy, we start with a slightly closer look at the UK’s productivity problem. For many of the past 10 years, economists have sought to explain the slowdown on the supply-side of the economy. Since aggregate supply will always equal aggregate demand, the symptoms of low productivity will often be detectable in both sets of data. The uncertainty this presents, and in particular the challenge of identifying the correct direction of causality, is one of a number of reasons why the underlying forces behind the UK’s productivity problem have been hard to nail down. Despite this, most attempts to explain the puzzle have started with the supply side and traditionally technology is seen as the key factor behind long-run productivity. But even if technological innovation were in some form of secular decline (and there are numerous reasons to believe the opposite is true), or else creating value not captured in GDP (such as in the form of free at point of use digital services) neither of these factors can explain why the trend in productivity growth should pivot so sharply in the UK in just a single year following the financial crisis.

The inefficient allocation of capital across industry, comparing the pre-crisis economy with that since 2008, is perhaps the most often cited supply-side theory that takes into account macroeconomic events since 2007. The suspected cause of low productivity growth was low interest rates, reducing the pressure on low productivity ‘zombie firms’  which would have otherwise been unable to access loans to keep themselves afloat. But the key evidence simply doesn’t fit: much of the decline in UK productivity growth took place in the UK’s most productive, not least productive companies. Sector based explanations have also posited tighter regulation and less risk taking in finance, and reduced ‘offshoring’ of supply chains in manufacturing (as the pound fell and development in BRIC economies saw imports become more expensive) as explanations. 

But this doesn’t explain why the issue of low investment was shared across almost every sector of the economy. 

Similar issues plague most, if not all, attempts to explain the UK’s productivity puzzle from the supply-side alone. Weak business management practices, movements in oil price, poor skills development, shifting industrial composition and shifting cultures in financial intermediation and corporate governance all have some supporting evidence. It is possible, even likely, that each may have played some part in the slow down. But each explanation is only a partial fit with the evidence, and even if this was not the case, even collectively they are increasingly thought to have insufficient explanatory power to account for the full divergence in productivity growth.

The demand side mechanics that can affect productivity are reasonably straightforward. Pessimism or uncertainty over future demand growth makes firms less likely to invest where upfront costs might not be recovered, and instead more likely to opt for flexible labour inputs (fixed term, zero hour or outsourced contracts) which can be easily shed when demand growth fails to materialise. Not only does this lead to lower investment in, and adoption of, more productive capital inputs and business models, but it also reduces skills matching and progression in the labour market. Both can have a significant impact on long run productivity. Were this part of a national explanation for stalled productivity growth over a period of a decade or more, you would expect to see three things: a series of consecutive macroeconomic demand-side shocks, broad-based deterioration in investment, and a proliferation in insecure work and under employment. 

The UK has all three in spades. The financial crisis, austerity and Brexit (via a currency depreciation) all hit the demand-side of the economy in quick succession; econometric estimates suggest that more than half of the UK’s productivity slowdown pre-covid was due to broad-based underinvestment in the private sector; and the proportion of zero-hour contract employees, self-employed workers and one-person micro-companies grew by two fifths in the years following 2008. For these reasons and more, a growing number of economists from across differing political persuasions and schools of thought now think that stronger demand growth, induced by policy, will be a necessary ingredient to push the UK economy to a higher productivity equilibrium.

A new prospectus

The importance of demand management puts the UK’s macroeconomic framework at the centre of any agenda to restore and strengthen UK economic security. The violent swing from an ultra low interest rate, low inflation environment pre-covid to one jolted into high interest rates and sticky inflation due to imported price shock has shown the Bank of England’s existing tool kit and user manual can be deficient at both ends of the business cycle. More than anything, this has shown we ought to become more comfortable with fiscal policy taking on a larger share of responsibility for macro stabilisation, and redesigning the overall macro framework for greater collaboration to this effect. 

Much of the change needs to come on the fiscal side, but improvements to the Bank of England’s mandate and modes of intervention are also possible and desirable, while retaining its core mission and independence. Moving to a dual mandate that considers either employment or output, alongside prices (as is the case with the US Federal Reserve), would give monetary policy more formal flexibility to balance differing macroeconomic risks – whereas in the UK we currently rely upon the slightly ad hoc appetite of the monetary policy committee members to ‘look through’ the inflation target, or not. In addition, the inflation target could be lifted to 3% or so, to create greater headroom from the effective zero bound for interest rates, and new mechanisms for delegated fiscal stimulus could be designed, such as through horizontal taxation like VAT or through a new public investment bank.

But the real innovation and repair work is needed on the fiscal side. The status quo is mired by three challenges. First, there is presently too little institutional bite: when any particular debt or borrowing rule becomes too tricky to meet, the Chancellor and Treasury can simply change it at their discretion – the UK has had six new sets of fiscal rules across a period of just nine years. Second is a bias towards spurious precision over accuracy: ‘fiscal space’ is given by a complex mix of technical economic potential, the credibility of institutions and the global economic and political outlook. Yet measuring it for policy purposes is reduced to largely arbitrary targets for debt and borrowing as a proportion of GDP. Third, unlike inflation targeting, the framework has a lack of symmetry: fiscal rules rightly guard against excessive borrowing today in order to preserve fiscal space for tomorrow; but they don’t even attempt to protect future generations of tomorrow from underinvestment today. All this amounts to serious institutional weakness at the heart of fiscal policy making, with knock-on effects underpinning many of the challenges observed above. 

A number of potential solutions have been mooted in recent times. The best ones take seriously the need to reduce the power of the Treasury to set their own homework, increase meaningful parliamentary oversight and strike a better balance between independent judgement and quasi-objective rules. One option would be to continue the trajectory of reform that began with the Office for Budget Responsibility itself, and enhance its role as a fiscal council with greater access to macro models and perhaps some overlap in personnel with the monetary policy committee. The independent council could set a target range for borrowing over the forecast period (replacing Treasury fiscal rules). The target range itself would reflect the council’s collective judgement over the availability of fiscal space at each forecast, and the width of the range could be varied depending on the council’s judgement over the uncertainty and quality of evidence. Missing the range would be symmetrical, to guard against both over-borrowing and under-borrowing. In other words, the fiscal council’s target would be considered ‘missed’ if borrowing came in either too low or too high, with respect to the target range. If this happened, and borrowing fell outside the range in either direction, the chancellor would be obliged by law to say so in their budget speech, and follow up with a written and oral explanation to parliament. 

A democratically elected government could still choose to miss the recommended range at any time, but they couldn’t do so without taking on the political argument directly (as opposed to today, where they simply change or suspend the assignment in advance). A Conservative chancellor might be unlikely to enact such reform given the temptation to weaponise fiscal rules politically. But a Labour chancellor might do it for similar reasons to why Gordon Brown brought in central bank independence: to neutralise an otherwise vulnerable political front and to significantly improve long term macro stability and policy making.

Outside of macroeconomic reform, a number of shared policy levers between economic and social policy – from housing to care – could be used to rejuvenate and repoint demand, while at the same time putting in place strong foundations for a new progressive settlement. We mention a stronger minimum income floor – or ‘reservation wage’ – outside of the labour market first as just one example among many. The process of increasing out of work benefits can reset prevailing economic conditions for productivity growth in two ways; first by increasing demand more generally across the economy (especially if funded through progressive taxation) due to higher marginal propensities to consume for lower income families; and second by tightening the labour market, where employers need to compete to attract workers, as opposed to a race to bottom on pay and conditions. Where the gap between unemployment rates and minimum wages is particularly large, such as in the UK, this is also likely to dampen any negative labour market participation effects from higher social security payments. 

To do this the UK must set a course for higher benefit adequacy. One place to start would be to target a level of out-of-work benefits that at least covers the minimum costs of essentials (currently thought to be at least £35 a week more than the standard allowance of Universal Credit). An independent body – perhaps part of or adjacent to the existing Low Pay Commission – could be tasked with the job of assessing both the desirable target rate for social security, as well as an optimal path to get there based on an assessment of wider economic effects, just as we do with national minimum wages in the UK already. 

Other elements of a new social settlement could be added to supplement this strategy to support productivity growth, while also pre-wiring progressive returns and a wider appreciation of economic value. Housing policy would likely be at the centre of this, with a strategy aimed at reformed planning law to increase the supply of land while ensuring the proceeds from value uplift are better distributed, targeting a healthier balance of tenures across the market (including increased supply of new social homes and purchasing buy-to-let homes as landlords are pushed to a sell position by a high interest rate environment), and stronger regulation in the private rented sector across both quality and price. Another area of supporting social policy reform would be interventions in the labour market to increase the provision of paid time away from work to care for loved ones. This could be strengthened through longer and more generous parental leave, new statutory paid entitlement for carers and options for early and graduated retirement and pensions. Alongside this the Low Pay Commission could also be asked to recommend gradual increases to statutory paid leave on a similar basis to increases in the minimum wage. 

Interventions across both housing and care could support productivity improvements through improved skills matching (by strengthening both worker mobility and retention as needed), as well as through improved employee health and wellbeing. This in turn would incentivise firms to invest in the right capital improvements and business models to get the most out of the higher quality, and more expensive labour inputs. While there is wider momentum and demand growth in the economy, businesses at aggregate could meet these costs by exploiting the opportunity for increased output, turnover and profit. 

This strategy does not come without risks, and could not continue indefinitely. Particular care would need to be taken to manage demand growth gradually so that new supply can keep up, especially while domestic inflation remains elevated. But given the right mix of deliberate stewardship and market dynamism, the scope for adding new supply to a UK economy with significant ground to make up – across productivity, net-zero and workforce health – are substantial. Of course, to the extent that the demand-side strategy for economic security is successful, currently under-utilised labour and capital resources will be increasingly soaked up and the ability to catalyse further productivity improvements through demand growth will reduce. The intention, then, is that in getting to this point, a new social settlement will have not just been made more possible but indeed will have been partly built in the process.

Tax is the final major policy lever we mention here, given both its power to help guide the direction of demand itself in service of wider social and environmental objectives, and ensure a sustainable long-term funding trajectory for a new settlement. Tax can and should be used increasingly to help ensure that market prices reflect social value. To take but one example, carbon is conspicuously under-taxed given the need to embed the economy within safe planetary limits. Rising block tariffs – where the unit price of a resource, whether that be domestic energy or aeroplane tickets, rises as consumption increases – could be used to replace existing, far more regressive tariffs such as the Energy Price Cap and Air Passenger Duty. In the case of residential energy prices, a rising block tariff for the UK could see a subsidised energy allowance for all households (weighted by the number of people in a family and any disability needs), paid for through a higher unit price on all consumption above this. A simple social tariff could also be added that ensures anyone claiming a means tested benefit never pays the premium tariff. The means for deploying this system already exist, and it would significantly lower bills for the poorest households. It would also incentivise richer families to improve energy efficiency and could be accompanied by a mass programme of grants and incentives for home insulation and retrofit to address the fact UK homes are among the least energy-efficient in Europe. 

On the funding side, three headline observations are key. First, as all countries have seen rising tax rates through time to maintain service provision in view of an ageing population. Overall rates of tax in the UK remain conspicuously low by international comparison, lower than the average for 38 OECD countries, and more than 10 percentage points of GDP lower – equivalent to around £250bn a year in UK terms – than countries like Italy, France, Austria and Denmark. Second, the UK forgoes a significant portion of tax through a complex and poorly designed system of reliefs and allowances: this ‘shadow spending’ is far larger than any government department, including the NHS, and yet it receives a fraction of the scrutiny in terms of value for money. Finally, taxes overall are heavily biased towards under taxation of income from wealth compared with earnings from work, creating economic inefficiency and distortion through this arbitrary treatment. 

All three of these indicate that there is ample policy room for progressive and economically tax changes to help meet the long run costs of both a stronger social settlement as well as an ageing population, while also minimising the risks of inflation from during an initial period of demand-led productivity growth. Poorly designed reliefs carrying highest deadweight loss across business and finance could be redesigned or scrapped. Investment income could be taxed on a par with labour income through reforms to capital gains tax, income tax and national insurance – just as Nigel Lawson set out to do – while retaining a unified allowance for real profits. And inheritance tax could be replaced and incorporated into this reform through a new gift tax. A number of recent studies from across the political and academic spectrum have shown how such a package, if introduced gradually and sensibly, could raise tens of billions a year while also improving economic efficiency. 

But pointing out where and how tax could be raised is the easy part, far harder is securing political permission. Influenced by a mediamacro that routinely stresses the notion of an unprecedented “tax burden” , the British public are seemingly more anxious about their own, lower levels of taxation than counterparts in more highly taxed economies. Recent history has shown a pattern to what works and what doesn’t when it comes to navigating the politics of tax increases. Headline increases, even when discursively hypothecated to a popular public good, have a high mortality rate – as demonstrated by Theresa May’s ‘dementia tax’ and Boris Johnson’s health and social care levy. Indeed the most effective strategy has been to avoid a political ‘moment’ entirely, such as by simply failing to uprate tax thresholds with inflation: this ‘fiscal drag’ has been used successfully to raise tens of billions by recent governments of every colour. But even this isn’t a free political lunch, with such strategies stoking the harmful underlying narrative of deceitful politicians and smoke and mirror policy. And exhausting minimal goodwill for tax pennies when more serious cash is needed to repair and sustain a social settlement breaking under the pressure of inequality and an ageing population, is not advisable long term. 

Ironically, it is perhaps David Cameron and George Osborne that signpost a possible third way. The politics of austerity worked by making a virtue out of apparent necessity, backed up by formidable political conviction and clarity. Given the combined pressures of an ageing population, and the increased role of technology in economic production, a similar opportunity is there for a government willing to argue the necessity of tax rises on returns from capital to pay for the public services of the twenty-first century. Just as with the narrative of austerity, there would be no sugar coating: everyone would need to contribute to this necessary process of tax rebalancing, through either the returns on their pension, or the prices in the shops. But those with the most wealth would contribute more. Unlike many of the arguments for austerity, the necessity of tax rises (on capital) to ensure the next generation don’t become the first in decades to experience worse healthcare than their grandparents also has the benefit of being true.

Correcting the failures of demand-side management is only one necessary, if fundamental, step to addressing the UK’s economic malaise and strengthening its fragile social settlement. The other must be a modern supply-side approach rooted in a restructuring of production and provision through an institutional turn in ownership, governance, and economic coordination, all the better to underpin a secure economy and renewed social settlement operating within safe planetary limits.

High on supply

In the last decade, the hegemony of market capitalism has been profoundly challenged by three interconnected trends: the climate crisis, deepening secular stagnation, and the rise of China. In response, advanced economies have turned to a renewed supply-side agenda to expand the productive capacity and resilience of society. Critical to this has been the revival of active industrial strategy which is no longer a “yes or no” question, but a question of “how”. The “how” is particularly pertinent for Labour. The party’s Green Prosperity Plan promises to decarbonise the economy and scale green industries of the future, yet its details remain substantially undefined. Likewise, its bold claims to turn the UK into a “science and technology superpower” are unmatched by a strategy that substantiates this rhetoric. Here we suggest five shifts in economic governance that should be a fundamental part of a supply-side agenda to not just uncover productivity gains in a richer demand environment, but challenge gendered and racialised inequalities and build new public infrastructures, rights, and powers.

First, a shift from market-led coordination toward public coordination. Successful transitions – from decarbonising to building new technologies and infrastructures – depend on a synchronised dance of investment and divestment to transform capital and infrastructure stocks. Societies are hard-wired to view this dance and the risks of industrial disruption through the prism of recent past experience. In British politics, this is the traumatic deindustrialisation and job losses of the 1970s and 1980s as globalisation started to accelerate. But a key difference between globalisation and transitioning to net-zero for Western economies was that, alongside labour market disruption, the former also saw lower consumer prices through cheap imports. By contrast, arguably the biggest economic risk of decarbonisation is not mass unemployment, but a poorly coordinated market-led transition that creates growing price instability, which falls hardest on ordinary households. 

To avert this, a progressive supply-side agenda should actively develop tools of indicative planning and build out state capacity and a macrofinancial architecture to manage significant prices or sectors via price, consumption, and investment policies. In other words, successful transitions require more than increasing public investment. This investment must be accompanied by the crafting of new institutions of democratic planning to supersede the primacy of market coordination. 

Second, industrial strategy should operate through a developmental not de-risking state. Rather than unconditionally backstopping profits, and expensively bribing the private sector to invest, this would employ forms of public ownership, enterprise and financing to deliver a step-change in targeted investment. Crucially, investment would be based on how best to meet societal needs, not expected profitability. For example, in response to the recent Contract for Difference auction round, which failed to attract a single bid to develop offshore wind due to rising costs cutting into developer profit margins, this agenda would not use public resources to guarantee higher private profits in the hope of inducing private investment. Instead, it would embrace the unique powers of the public sector, notably its risk-bearing capacity, system-wide planning and coordination functions, lower borrowing costs and freedom from the imperative to prioritise shareholder interests, to invest in and develop publicly-owned renewable energy assets to rapidly decarbonise power. A similar approach could be deployed to, for instance, scale a new generation of social housing, not constrained by the imperative to protect the margins of for-profit developers. And perhaps most urgently, a developmental approach is required to attend to the wider foundational economy, which produces and distributes the basic goods and services we all rely on yet is in crisis due to the financialised and extractive business models that dominate it, matched by a retreat of social provision. The difference to a de-risking approach is clear and transformative. The key goal of industrial strategy would not be the backstopping of private profits as an indirect route to reallocating investment and driving sectoral change. Instead, it would focus on directly developing society’s productive capacity through a genuinely mixed economy and associated tools.

Third, it would challenge market power as part of a deliberate movement toward a pluralistic and dynamic economy. This would draw on the insight of the US-based “law and political economy” movement that markets are neither neutral nor self-regulating. Social in origin and constituted by law, public policy should stress markets are a public resource, and their design – and their limits – are rightly the subject of democratic oversight whose purpose is to serve the public interest. Policymakers should therefore ask if prevailing market arrangements are hindering or helping us address our major challenges and act accordingly. Take the safe development and application of AI, a tool of vertiginous possibilities which are often obscured by rhetorical excesses. A combination of ever-greater scale and a reliance on vast and growing data and computational processing power is increasing the market power of and dependency on the small number of big tech firms that dominate control of these resources and assets. The result is deepening rentierised dependencies, weakened strategic technology domains, and neutered domestic tech capability, with the further consolidation of dominant incumbents at the expense of a more innovative technological ecosystem. 

This dynamic is unlikely to overcome what the political economist Divya Siddarth has termed the technology trilemma: the false trade-off between progress, participation, and safety. What is the alternative? Here an ambitious industrial strategy can play a critical role, setting a clear goal of safely accelerating AI capability while democratising its development and use, and deploying tools to that end. As the Federal Trade Commission under Lina Khan’s leadership has shown, a progressive anti-trust agenda that challenges monopoly power and anti-competitive behaviour is key to this, as are fiscal levers like windfall taxes. After all, the governance of markets is too important to leave to markets alone; they must be actively stewarded to work best. But it could also involve greater experimentation, for example through public funding to support open-source models, or, as Siddarth argues, via the encouragement of innovative corporate structures for frontier technologies such as perpetual purpose trusts that lock in windfall distribution, stakeholder input, and transparency from the start. That same impulse – to challenge unaccountable power and actively support a greater pluralism of enterprise models – should be extended across an economy marked by market concentration and rentier incumbents.

Fourth, it must redesign the corporation – a fundamental institution of capitalism – from an engine of extraction to a vehicle for generative enterprise. The governance of the corporate form varies considerably between economies to critical effect, shaping both production (how corporations operate and innovate) and distribution (how corporate income is used). In the UK, we are a clear outlier, coming third from the bottom in the European Participation Index, a measure of how far workers have participation rights in the governance of their firm. This not only makes the company a zone of non-democracy, with political rights monopolised by external investors. The prioritisation of shareholder interests and voice is also inseparable from our economic malaise. For example, dividends grew six times faster than real wages between 2000 and 2019, while the percentage of corporate income distributed to shareholders has risen steadily since the 1980s even as business investment has stagnated. Any serious agenda to create an investment-rich economy delivering rising wages and productivity gains must then reorient the corporation away from its goal of maximising shareholder wealth toward the production of sustainable value. Key to that is economic democracy: giving labour a genuine stake in the governance of the firm, ensuring they have a meaningful say in corporate decision-making and the allocation of the economic surplus workers themself help produce. It is also about making business purposeful by design, embedding social goals and environmental guardrails into its operation. 

Finally, working life must be organised through institutions of genuine partnership. Work simply isn’t working for many: the architecture that governs work is defined by unequal power. This is unsurprising. Policymakers have created a hostile environment for workers. The weakening of trade union and employment rights have made insecurity and bad pay commonplace, with work fissured and fragmented by outsourcing and franchising. This is not the foundation on which to create an egalitarian and dynamic economy. The goal of reform should be decent, secure, safe and fair work, in which all workers receive the full share of the wealth they create and the dignity they deserve. Unless there is a fundamental reset of employment relations, this will not be realised. Labour’s New Deal for Working People is a movement in the right direction. The widespread roll out of sectoral collective bargaining is key to improving wages and conditions, backed by a new and higher legal floor of workplace rights from day one. So too are  stronger consultation and negotiation rights to ensure labour shapes the changing nature of work on its own terms. These must be expanded and broadened in ambition, not weakened and shrunk. Nor is this just an agenda for waged labour. As we have set out, a recognition of the fundamental and foundational role of care work – in all its dimensions – requires strategies that can support unwaged carers with both direct resources and wider forms of social support and recognition. Only by building a society where resource distribution and voice are not only distributed through waged work and asset ownership, but rather reflect the rich and overlapping ways in which through differing arrangements of work we all produce and contribute, can we build a future of dignity and security for all.

A strategy for governing in hard times

The agenda is prudent because it is bold. Labour’s biggest risk in government will be a programme of self-defeating moderation that proves unable to improve the conditions of everyday life, ultimately generating political backlash. One can readily imagine a scenario where existing commitments are steadily diluted, or the demands of navigating the UK’s role in an unstable world dominates, and, as a result, the core tenets of Labour’s domestic agenda underwhelm: the reset of employment rights is too narrow, green investment is too slow, and the increase in public service investment too small. The result: people will not feel substantially better off as the decade approaches its end. A Conservative Party drifting deeper into conspiracy and paranoia might provide initial breathing room, but if reform fails to deliver meaningful improvement, the electoral reality of managing stagnation will quickly bite those in office. Avoiding this fate will require a combination of restless urgency to attend to address voters’ concerns matched to strategic patience given the scale of the challenge. This will be a difficult balancing act, so we conclude by offering some reflections on what could form the strategic backbone of a reforming government in terms of priorities, antagonisms, coalitions, and vision.

Labour’s priority must be to visibly and decisively ease the burden of unaffordability many are facing. Sympathetic words unmatched by meaningful action is a recipe for the rapid onset of disillusionment and political vulnerability. Action will require front-loading measures that can quickly and clearly put more money in peoples’ pockets and more resources into frontline services. This should not be seen as the opposite of structural reform, but rather its necessary corollary. By showing that the Labour government is on the  side of ordinary voters, this would  open up space and build momentum for the task of institutional reconstruction. That same logic of a clear and visible line from political intent to material benefit should inform the wider agenda. It means Great British Energy should invest in mature technologies so the public can see the benefits quickly, rather than just support unproven ventures that won’t come online and cut bills until the mid-2030s. It also requires an employment relations programme with enough teeth to put more money into pockets by the end of the Parliament; and it means giving the devolved parliaments and local government and combined authorities the powers to quickly begin rebuilding and upgrading public infrastructure, from transport to housing, in a way that is visible, meaningful, and able to reverse the UK’s stark national and regional inequalities. 

Beyond this, a critical task in government will be building collective institutions around which durable political identities can grow. Whether that is through reviving the trade union movement, strengthening social provision such as public pensions, transport, or social housing, or policies of broad benefit such as a minimum income guarantee or new energy tariffs, it should prioritise reforms that are collective in their design. This is not just because such institutions help build cross-class coalitions around the defence and extension of shared benefits, and can revive cultures of solidarity. It is also about a politics of deeper individual freedom. The political story behind this needs to emphasise a society where everyone has the time, resources, and respect they need to be the authors of their own lives, to have autonomy and dignity guaranteed not through unequal market entitlement or the lottery of wealth but because as a society we ensure everyone has the means and support to participate and flourish as genuinely free agents. 

Finally, every successful political project must have a narrative and agenda that can persuasively explain how we got here, what went wrong, what will be needed for  meaningful change to occur, and what a better future would look like. That narrative must be able to articulate shared interests out of difference, capable of speaking in multiple registers, at once modern and modernising while attentive to the concerns and conservatism that is the contradictory mood of contemporary life. The best route for Labour to develop that political frame is by expanding the party’s existing narrative of security. This is fertile ground for Labour. Whichever party can recognise and address the insecurities that so many people now endure is likely to dominate the next decade. This will be difficult for the Conservatives. Insecurity is political. It has worsened not by chance, but by choice. Nor do the Conservatives have an answer beyond intensifying a politics of punishment. This punitive agenda cannot address the problems of an insecure society. For Labour, the challenge is to expand the focus of their narrative. An emphasis on economic resilience is welcome. The commitment to a green industrial strategy reflects the wider international turn toward green industrial strategy . And a focus on national security is expected given the wider environmental and geopolitical backdrop. But security viewed solely through these prisms falls short of the frame’s potential.

This “security” frame should mean a politics that can guarantee everyone has access to the goods and services we all need to live well, that they have more money in their pockets and more time to enjoy life, that their dignity and autonomy is recognised and protected. The countervailing ‘villain’ must be an economic model – its symbolic stakeholders and its political authors – that has rendered insecurities of resources and agency endemic. A refined narrative would stress that real security is founded not just on the absence of coercion or domination, but by the positive ability for all of us to participate as equals in shaping the terms of our existence, to be co-architects in how society’s resources, activities, and relations are organised and on what terms. 

That means an agenda that does not just advance the productive frontier, but attends to the everyday economy, anchoring economic policy in a new set of rights and obligations, collective and public in nature, rather than market entitlement and provision. It would tell a story about macro reform as the route to resource stability in an unstable world. And it would recognise that economic security rests on a pace, scale and fairness of decarbonisation that market coordination is unable to deliver alone. Instead, this narrative would connect why building a genuinely mixed and democratic economy is essential to the meeting of economic and social needs which is itself the bedrock of security. This agenda is at once rooted in the challenges ordinary people face in the UK today, and yet opens up a vista for a better future that remains within reach.

Even if there is a change in government, the pain from recent years will cast a long shadow in the coming decade. But if that inheritance leads to a politics of false constraints, of a government trapped by the scale of the challenge rather than energised by the necessity of reform, then that shadow will only lengthen. The sunlit uplands we were promised are further away than ever, but the first movement of the journey must be to step out of the shade.

Mathew Lawrence is the founder and director of Common Wealth, and Alfie Stirling is chief economist and associate director for analysis and insight at the Joseph Rowntree Foundation


  1. According to JRF analysis of HBAI micro data. ↩︎