David Cowan: Who owns the supply-side agenda?

Meaningful reform depends on tackling vested interests

The Labour leadership is smacking its lips at the tantalising thought of returning to office. Message discipline is enforced. Left-wing policies are watered down or scrapped. They promise that Tory spending plans will be followed. But Starmer and Reeves are not trying to be heirs to Sunak. They have their eyes on a more unlikely Tory PM for inspiration: Liz Truss. There are many aspects of our shortest-serving Prime Minister that will be pored over for years to come. But Starmer has chosen to learn specific lessons from Trussonomics.

Sunak and Hunt have spent the past year focused on clearing up the mess left behind and no Conservative wants a rerun of the mini-budget. That being said, there is clearly a reason why Truss was able to win the leadership in the first place. She understood the frustration that people are feeling towards our low growth, low productivity economy. Truss’s fiscal experiment was clearly not the answer. Where Trussonomics held greater promise was in supply-side reform outside of fiscal policy. It is this agenda that Starmer is trying to capture.

As cringeworthy as the slogan “Anti-Growth Coalition” might have been, it expressed a fundamental truth about the modern economy. Britain’s productive capacity is being held back by a range of vested interests who consistently block measures that might improve the nation’s economic performance. Trade unions, NIMBY homeowners, environmental activists, corporate lobbyists, civil servants, among others, have opposed reform in vital areas such as planning, energy, childcare, and finance. Truss was right to want to take on these challenges, but she mistakenly chose to pursue drastic fiscal loosening first.

This boils down to the misunderstanding of supply-side reform on the Right. Both advocates and detractors believe that supply-side reform is about repeating the tax cuts of Reagan’s America and Thatcher’s Britain. Putting to one side the supposed merits of the Laffer Curve, the times have changed significantly since then. Tax rates were at eye wateringly high levels at the beginning of the 1980s. While the tax burden is currently at its highest level since the 1970s, it is not because of skyrocketing rates but because our economy is smaller than it should be. Although tax reform remains a highly desirable objective, our fiscal firepower is limited.

While Sunak and Hunt have followed the right lessons on fiscal responsibility, there has not been a meaningful engagement with supply-side reform more generally. This has left the ground wide open for Labour to try seizing the initiative. By promising to build on the Green Belt and turbo-charge infrastructure and housing development, Starmer is talking the right talk but that’s easy to do in opposition and a potential Labour government would face the same array of vested interests against reform of any kind. When fiscal consolidation is ongoing, it makes sense to look at regulatory reforms that are cost-free to the Treasury and can unlock significant growth and productivity gains. But supply-side reform still involves hard cash.

Supply-side reform more broadly is already becoming a major policy plank for the Left in the United States. Writers like Ezra Klein and Matthew Yglesias have championed “supply-side progressivism” as the answer to economic malaise. Instead of tax cuts, they argue that the state should increase direct investment in technology, healthcare, housing, education, and childcare, and other areas where productivity bottlenecks exist to improve affordability. Deregulatory measures in planning and licensing are championed alongside more robust antitrust policy to make markets more competitive. This agenda has been taken up by the Niskanen Center and Institute for Progress, influencing debate in Washington.

President Biden’s industrial policy legislation has taken these lessons to heart, unleashing major investment in semiconductors and green technologies to make them more affordable and accessible. This has been a major deviation from the old school progressivism of Bernie Sanders and other so-called democratic socialists in the United States who once heralded a more populist future for the Democratic Party. Starmer wants to follow this example to help him bury the legacy of Corbynism for good and put the Labour Party on a path towards a credible and effective economic policy.

Labour can try as hard as it wants to take over this agenda, but the Conservatives are still able to do something about it. Fiscal discipline and monetary stability (important preconditions for growth and productivity) should not restrict the government’s ability to experiment with regulation and investment. There have already been some very encouraging moves such as Michael Gove’s housing speech and the changes to nutrient neutrality rules that have held up as many as 100,000 new homes a year. There are, however, also policies that are still too focused on the demand side of the economy, including the £4 billion childcare commitment which does not address the shortage of childcare providers.

The Conservatives need to shed their old conception of supply-side reform and refocus policy around a more comprehensive and well-rounded understanding. Instead of across-the-board cuts to tax rates, targeted reforms of the structure of taxation can deliver strong results without breaking the bank, such as correcting the imbalance between earned and unearned income. Rather than sweeping away all regulations, smarter regulation can unleash productivity in the planning system and hold utility companies to account. It also involves investment in essential goods and services to increase affordability. At party conference and the autumn statement, the government has an opportunity to set out this new agenda and explain why the Conservatives are the best party to deliver it.

David Cowan is co-editor of The Conservative Reader.