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Britain’s two main parties rely on Bidenomics

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You might not believe it looking at their weekly tournament sessions in the House of Commons, but Prime Minister Rishi Sunak and Labor leader Keir Starmer have a great deal in common. Both advertised to UK companies this week and the similarities were far easier to spot than the differences.

Like Sunak, Starmer advocates controlled immigration, investment in infrastructure, incentives to innovate and policies for a better skilled workforce. Despite media talk of a more permissive “Swiss-style” trade deal with the European Union, Starmer made no attempt to provoke Brexit again (Sunak also dismissed the idea). So far no rolling paper between the two.

In a way, this marks a new economic consensus in British politics. Borrowing from the Tony Blair era, Starmer positioned his party squarely in the political center. “My Labor government will deal with increasing productivity everywhere the same way – must deal with it as we have in the past with redistribution,” Starmer said at the annual meeting of the Confederation of British Industry.

And yet none of this answers the key question UK Plc and struggling SMEs are asking: what is the growth strategy? With ambitious plans ruled out, the response from both sides of Britain’s political divide appears to be some form of bidenomics.

As economist Barry Eichengreen described it in 2021, bidenomics essentially dictates an expanded role for government in a country that has long been wary of government solutions but needs more of them to maintain its competitiveness and address longstanding racial inequalities. Its mechanisms of implementation consist primarily of investing in infrastructure, improving America’s flimsy welfare network, protecting the environment, and raising taxes on the wealthiest.

That sounds tempting to British ears. But the starting point is very different in the UK, where households are experiencing the biggest drop in living standards since records began in 1956. It is projected to have the slowest growth among advanced economies (excluding Russia), have the highest inflation in the G7, and have chronically low labor productivity.

Both Sunak and Starmer accept that the central fact of economic life is a large and growing state: taxes are at their highest level since World War II and the public sector is on track to consume over 43% of GDP. As my colleague Martin Ivens recently wrote, if Labor were elected in the next general election (which could still be held in January 2025), Starmer would likely face empty coffers and the spending cuts Sunak has introduced with delayed effect.

In his CBI speech, Starmer cited Janet Yellen’s theory of “modern supply-side economics”. Speaking ahead of the World Economic Forum in Davos in January, Yellen explained that significant tax cuts on capital and deregulation that have characterized traditional supply-side orthodoxy have failed to deliver promised growth. Its “new” version aims to increase labor supply and unleash supply-side forces by making improvements in infrastructure, education and R&D spending. Critics see it as Keynesianism rebranded, but you can see its appeal in a country where there is little room for maneuver on the tax side and where the public demands high levels of taxpayer-funded services.

In fact, by Yellen’s standards, Sunak and Starmer could both be considered modern supply providers. Both are keen to show they can master the details of the delivery, a weakness for the Conservatives in recent years and an area where the public has not trusted Labor for some time. After the Tories abandoned Liz Truss’ tax cut agenda – which I think overcompensates for their mistakes – competition between the two has turned to how government can work smarter to boost growth.

The Tory fight here is a 12-year record in office that will be difficult to defend, although personally Sunak scores well on his competence. But while Sunak may have worked at Goldman Sachs Group Inc., Starmer has brought in former Goldman Sachs chief economist Jim O’Neill – a Treasury Secretary in two Conservative governments and now a collegial colleague in the House of Lords – to advise on how business conditions improved can become.

It is noteworthy that both Sunak and Starmer operate under two political constraints that limit their flexibility in implementing growth strategies. The first is Brexit. The costs of leaving the EU – in the form of lost growth and productivity, increased trade tensions, reduced scientific collaboration and reduced investor confidence – are obvious to all but the most deluded of Brexiteers. Talk of an eventual renegotiation of trade terms between the UK and the EU will be nowhere so soon after Brexit, but it’s not going away either. The latest YouGov poll found that a clear majority – 56% versus 32% – think the UK was wrong to leave the EU. One in five who voted for Brexit now think it was the wrong decision, and a further 11% don’t know.

The other major limitation is the National Health Service. The NHS is the largest single item of public spending – after pensions and social security benefits – and will continue to consume more and more resources as the population ages and healthcare becomes more expensive. Across Europe there are other models of universal healthcare that are not in constant crisis and are providing excellent services. But challenging the NHS’s fundamental model of a taxpayer-funded service, free at the point of entry, remains sacrilegious in UK policy so far, leaving even conservative growth plans to take into account high and growing health and social care spending.

Without a major change in the UK’s approach to next-neighbor trade, immigration or the way the health system works, the field of solutions to Britain’s slow growth problem has narrowed, and both leaders know it. “It’s not about size of the state; it’s about what the state does, how it supports companies to innovate and grow,” Starmer told the CBI. It also means delivering robust, sustained growth will take more time and more consistent policies than the UK has had in some time, which investors will believe when they see it.

However, once the medium-term fundamentals of economic policy have been determined, the only question left to voters is who they trust more.

More from the Bloomberg Opinion:

• Sunak wins over markets. Voters are a different story: Martin Ivens

• Will Sunak test the love of Britain’s top 1%?: Therese Raphael

• The Fall and Rise of Jeremy Hunt: Adrian Wooldridge

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Therese Raphael is a columnist for Bloomberg Opinion covering healthcare and UK politics. She was previously a contributing editor to the Wall Street Journal Europe.

For more stories like this, visit bloomberg.com/opinion

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