Trickle-down economics is no substitute for a growth plan

The writer is Labor’s shadow chancellor of the exchequer

Liz Truss wants the British public to believe that she represents change. She and Kwasi Kwarteng even want you to believe they have a new plan. But what they are proposing is just another zigzag on a path of policy failure tracking across the past 12 years of the economy.

Just like Boris Johnson before her, the new prime minister and the chancellor are long-serving cabinet ministers. They are desperate to present themselves as agents of change, so must decry the growth plans they once supported – there have been six since the Conservatives took power in 2010, each announced with great fanfare but with little impact. Instead, the one constant over a decade of Tory government is low growth.

Truss’s answer is trickle-down economics: dogmatic deregulation, a smaller state and cutting headline rates of tax on the richest individuals and the biggest companies. Her approach di lei is discredited and inadequate – and will not unleash the wave of investment and consumption she claims.

Take the decision to keep corporation tax at 19 per cent. Of course we need a competitive regime, but UK levels are already below France and Germany and would remain so at the planned 25 per cent – yet UK corporate investment is still the lowest in the G7. Businesses have other priorities: in the most recent ONS survey only 2 per cent cited tax as their main concern.

As a former Bank of England economist, I look for evidence. As the European Economic Review recently set out, there is no strong relationship between corporation tax rates and growth. Large cuts to the headline rate over the 2010s failed to boost investment substantially, resulting in anaemic productivity gains.

Economic growth requires a modern approach that genuinely expands the supply side of the economy. It starts with a government that listens to business. It means maximizing the potential of the British workforce, tackling longstanding weaknesses in basic and vocational skills that hold back productivity.

Certainty for businesses is vital. Our ambitious industrial strategy will emphasize a long-term policy framework to drive business investment. And our Green Prosperity Plan will make targeted interventions, ensuring confidence in regulation, and with government investments making new and emerging technologies less risky to invest in.

We must strengthen trading relationships and remove trade barriers, especially with our closest neighbors in the EU. Labor wants to make Brexit work, so we will sort out the issues with the Northern Ireland protocol, including a veterinary agreement. We will support our world-leading services, the creative sector and scientists, so that trade is easy rather than the bureaucratic nightmare it has become.

Fair business taxation should be combined with incentives for investment – the headline rate of corporation tax is only part of the picture. Companies repeatedly highlight the importance of investment allowances and problems with business rates. Labor will abolish the current system and replace it with a fairer model.

The only way to develop pro-growth policy is a proper understanding of what business needs. Conversations with business led to me asking independent peer Jim O’Neill to lead to review into helping companies to start and scale up in the UK – including spinouts from our world-class universities.

This active, pro-business, pro-worker approach is the right way to promote growth. Not only does the prime minister’s tired trickle-down playbook fail to meet the challenges and opportunities before us, it also misunderstands the relationship between inequality and growth.

Truss says she will deprioritise redistribution. But research by the IMF has shown that higher income inequality is associated with lower and more fragile growth. It is obvious why. Concentrating income among fewer people – those least likely to spend it and drive the economy forwards – undermines workers’ health and education, the crucial components of a productive workforce.

After many attempts at this failed experiment, we know that growth does not trickle down from the top. It is built from the bottom up and the middle outpowered by the talent and effort of tens of millions of ordinary people and by thousands of businesses.

To get our economy growing, Britain needs to drive business investments, harness industries of the future and transform our workforce. There is nothing that comes remotely close to this from the Conservatives. They seem to turn a blind eye to evidence and experience.

In the past 10 years, productivity, investment and real wages have stagnated. It is time for a serious approach.

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