The Observer view on Labour’s economic strategy: Europe is key to growth | Observer editorial

Economic growth will be the linchpin of Labour’s strategy for government if it wins the election, as it is comfortably expected to do in two weeks. Rachel Reeves, Labour’s shadow chancellor, has ruled out raising those taxes that are the big revenue raisers, and has committed Labour to effectively adopting Jeremy Hunt’s fiscal rule that debt should be forecast to fall as a share of GDP in five years’ time. So if a future Labour government wants to invest in significantly improving financial support for children in poverty or in public services, it is vital it finds ways to grow the economy.

Labour says its approach is centred around delivering greater stability in order to encourage higher levels of private investment. But many economists think it will also take higher levels of public investment to achieve anything like the business investment needed to generate growth. Yet after it scaled back its proposals to invest £28bn a year in the green transition, levels of planned public investment under Labour would only be marginally higher than under Conservative plans.

There is, however, one obvious place Labour can look to generate growth: in reducing the trade barriers with our closest and biggest trading bloc that were erected as a result of Brexit. Labour has made noises about building a more positive trading relationship with Europe: Keir Starmer has said he will repair “the bridges the Tories have burnt” with the EU, and party figures have talked of “deepening the relationship” alongside an effort to improve security cooperation with Europe. The Labour manifesto, however, clearly rules out rejoining the EU customs union, as well as the single market. Instead, the stated ambitions are far more modest: to negotiate a veterinary agreement to prevent unnecessary border checks; cooperation to support touring artists; and securing a mutual recognition agreement for professional qualifications in the service industries.

The truth is that these incremental steps may help build positive relationships but are unlikely to do much to boost growth in the context of the 2-4% by which Brexit is likely to depress long-run GDP. Brexit created significant non-tariff trade barriers for exports and imports to the EU. New trade deals with Japan, Australia and New Zealand are projected to increase GDP by relatively tiny amounts in comparison. In fact, the proportion of total UK trade that takes place with the EU is at its highest level since 2008, partly because de-integration from European supply chains has also made trade with the rest of the world more difficult]. Brexit is likely to have reduced the UK’s already low level of business investment even further, hampering growth. UK in a Changing Europe describes it as a “slow puncture, exacerbating other economic problems and resulting in the UK underperforming compared with similar-sized economies”. Boris Johnson’s promised economic nirvana of growth driven by regulatory divergence from the EU simply has not materialised; little wonder when you consider this would be delivered at the price of even greater non-tariff barriers with the EU.

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It all raises the question: what was the point? The overall salience of Brexit has declined sharply since Britain left the EU; just 13% of voters cite it in their top three issues facing the country today compared with 73% in September 2019. New polling for the Observer this weekend highlights that 56% think Brexit has had a bad effect on the economy, and only 12% a good effect; almost six in 10 voters say they would prefer to have a closer relationship with the EU. Last year only 15% of voters said that if Keir Starmer proposed to renegotiate the Brexit agreement it would make them less likely to vote for the party.

This gives Labour breathing room to use its initial efforts to negotiate greater economic cooperation in specific areas as a testing ground for more substantial agreement. Rejoining the customs union is not a simple proposition; it would take considerable negotiating effort and good faith on both sides. Politicians across the EU would undoubtedly take convincing that it would be worth the effort given the other issues, from Ukraine to immigration, that are consuming their attention. Joining the customs union would also require renegotiating the deals the UK has agreed with Australia and New Zealand. However, it could ultimately deliver significant returns in economic growth by reducing the friction created by trade barriers.

The political appetite for something this significant is unlikely to be there in the first couple of years after a general election, given Labour has ruled out rejoining the customs union in its manifesto, and its nervousness about handing opposition parties an attack line even in the context of a very large majority. But as always, there will be trade-offs: easing trade barriers with huge trading block neighbours would in normal circumstances be a reliable go-to for countries looking to improve their sluggish productivity.

Boris Johnson’s decision to pursue a hard Brexit that had no real democratic mandate – it was never put to voters in the wake of a referendum campaign that promised them that a vague proposal to leave the EU would magically solve all the UK’s long-term structural issues – has come at a huge economic cost the UK can ill afford in the context of poor productivity growth and low levels of business investment. There is little enthusiasm in Labour for a more substantive economic alignment with the EU. But if the UK’s economic outlook remains unfavourable, Starmer may eventually come to the conclusion he has few other options when it comes to generating the tax revenues he will need to deliver the rest of his governing agenda.

The Guardian