The Economically Illiterate Labour MP’s Strange New World Has Got It Precisely the Wrong Way Round
There are moments in politics when a single argument reveals just how differently politicians and ordinary people can see the economy.
A Labour MP’s recent intervention has triggered precisely that kind of reaction.
The argument sounds attractive on the surface. Britain needs a different economic model. Government should intervene more aggressively. Wealth should be redistributed. Public services should receive greater funding. Workers should have more protection. Businesses, particularly large corporations, should contribute more.
None of those objectives is inherently unreasonable.
The problem begins when political ambition is confused with economic reality.
And that is where the argument falls apart.
Britain cannot simply decide that money will appear because politicians have announced a new spending programme. It cannot create prosperity by increasing the number of government departments, raising taxes indefinitely or assuming that businesses will absorb every additional cost without changing their behaviour.
The economy is not a machine controlled entirely from Westminster.
It is an enormous network of households, businesses, workers, investors, consumers and entrepreneurs making millions of decisions every day.
Ignore those decisions and the consequences eventually arrive.
The strange new world
The most striking feature of this new Labour economic thinking is its apparent reversal of cause and effect.
In this version of politics, government spending creates prosperity.
Higher taxes are presented as a way of creating economic fairness.
More regulation is treated as automatically beneficial for workers.
Greater state intervention is assumed to produce better outcomes.
And businesses are frequently treated less as creators of wealth than as sources of money waiting to be collected.
That is the wrong way round.
A government cannot redistribute wealth indefinitely unless somebody first creates it.
Before a state can spend money, somebody must earn it.
Before government can tax profits, businesses must make profits.
Before wages can rise sustainably, companies need to generate enough productivity and revenue to afford higher wages.
Before public services can be expanded permanently, the economy must produce the tax revenues required to pay for them.
This is not an ideological argument.
It is basic economics.
Spending is not growth
One of the easiest political mistakes is to confuse spending with growth.
A government can announce a huge investment programme and claim that the economy is being transformed.
But government spending is not automatically productive investment.
Building infrastructure that improves transport, energy or communications can increase productivity.
Funding research can generate future industries.
Improving education can increase the skills of the workforce.
But simply increasing expenditure does not guarantee any of those outcomes.
The crucial question is what the money actually produces.
If £10 billion is spent inefficiently, Britain is not £10 billion richer simply because the Treasury spent it.
The country may instead have higher taxes, greater borrowing or fewer resources available elsewhere.
That distinction appears to be missing from some of the more enthusiastic arguments coming from the Labour left.
The tax illusion
Taxation provides another example.
There is nothing inherently wrong with taxation.
Modern economies require taxes to fund healthcare, education, defence, policing, infrastructure and other public services.
The question is not whether Britain should have taxes.
It is how high they should be, who should pay them and what economic behaviour those taxes encourage or discourage.
If taxes become excessively burdensome, people and companies adapt.
Businesses may reduce investment.
Entrepreneurs may reconsider expansion.
Workers may decide that additional hours are no longer worth the additional tax.
International companies may choose to invest elsewhere.
None of this means that every tax increase destroys economic growth.
It means that taxation has consequences.
A serious government has to consider those consequences before celebrating a tax rise as though it were free money.
The business problem
Perhaps the biggest weakness in the argument is the treatment of business.
There is a tendency in parts of Labour politics to speak about companies as though they exist separately from society.
They do not.
Businesses employ people.
They purchase goods and services.
They invest.
They develop new products.
They pay taxes.
They create supply chains.
And, crucially, they take risks.
A successful business can generate enormous wealth.
But a business can also fail.
That risk is part of capitalism.
If government continually increases the cost of employing people, operating premises, complying with regulations and investing in Britain, companies will respond.
They may increase prices.
They may reduce recruitment.
They may automate.
They may move investment.
Or they may simply decide not to expand.
The costs do not disappear.
They move.
And ultimately, ordinary people often pay part of the bill through higher prices, lower wages or fewer employment opportunities.
Workers need a growing economy
This is where the argument becomes particularly ironic.
Labour exists, at least in part, to represent working people.
But working people ultimately benefit from an economy capable of creating productive, well-paid jobs.
A stagnant economy cannot provide permanently rising living standards.
A government can increase statutory wages.
It can increase benefits.
It can introduce employment protections.
It can redistribute existing income.
But if productivity does not rise, the amount of real wealth available to society remains constrained.
That is why productivity matters so much.
A worker who produces more economic value can ultimately earn more.
A company that becomes more productive can afford to pay more.
A country that becomes more productive can sustain better public services without constantly increasing taxation.
Productivity is not exciting politics.
There is no dramatic headline attached to it.
But it is one of the foundations of rising living standards.
The fantasy of unlimited government
Perhaps the most dangerous assumption in modern politics is that government can solve every problem.
Housing is expensive?
Government should intervene.
Wages are too low?
Government should intervene.
Businesses are struggling?
Government should intervene.
Healthcare is under pressure?
Government should spend more.
Growth is weak?
Government should borrow and spend.
The problem is that every intervention has a cost.
Government has no independent supply of wealth.
It receives money primarily through taxation and borrowing.
Borrowing, in turn, must eventually be serviced.
That means today’s spending decisions can become tomorrow’s tax burden.
There is nothing wrong with borrowing for genuinely productive investment.
But borrowing simply to maintain permanently higher consumption is a different proposition.
At some point, the bill arrives.
The British state already has enormous responsibilities
Britain is not a minimalist state.
The government already manages one of the largest public sectors in the economy.
It funds the National Health Service.
It provides pensions and welfare.
It runs schools.
It funds universities.
It maintains the armed forces.
It supports transport infrastructure.
It collects taxes and regulates almost every major part of economic life.
The question facing Britain is therefore not whether government matters.
Of course it does.
The question is whether government can do what it already promises effectively before promising even more.
That is where Labour’s economic debate should begin.
Reforming the state instead of endlessly expanding it
There is a major difference between spending more money and reforming the way money is spent.
If a public service is inefficient, simply giving it more money may not solve the underlying problem.
If a bureaucracy has become excessively complicated, adding another layer of administration may make it worse.
If housing supply is restricted by planning rules, increasing subsidies without increasing construction can push prices higher.
If businesses cannot invest because of uncertainty, simply announcing another government programme may not restore confidence.
The serious economic question is therefore not:
“How much more can government spend?”
It is:
“What produces the greatest improvement for every pound taxpayers provide?”
That is a much harder question.
It is also the question politicians should be answering.
Britain needs growth, not economic theatre
The country does not need another ideological experiment.
It needs growth.
That means encouraging investment.
It means building more homes.
It means improving infrastructure.
It means increasing productivity.
It means making it easier for successful companies to expand.
It means developing skills.
It means supporting innovation.
It means ensuring that taxes raise the revenue government needs without destroying the incentives required to create that revenue.
And it means reforming public services so that additional money produces additional results.
None of this is particularly glamorous.
But economics is not supposed to be glamorous.
It is supposed to work.
The danger for Labour
This presents a serious political challenge for Labour.
The party can continue promising voters that government can provide more of everything.
Or it can acknowledge that resources are limited and explain honestly how difficult choices must be made.
The first option may be politically attractive in the short term.
The second is much harder.
But eventually voters notice.
They notice when taxes rise.
They notice when prices increase.
They notice when public services fail to improve despite enormous spending.
They notice when businesses stop investing.
And they notice when politicians make promises that reality prevents them from delivering.
That is when the political backlash begins.
The economy does not care about slogans
Perhaps the greatest lesson is that economies do not respond to political rhetoric.
A minister can declare that a policy will create prosperity.
An MP can insist that businesses should simply pay more.
A government can announce another spending programme.
But households and companies still respond to incentives.
People decide whether to work, save, spend, invest or start businesses.
Companies decide whether to hire, expand, automate or leave.
Investors decide where to put their capital.
These decisions determine economic outcomes far more powerfully than political speeches.
That is why the Labour MP’s “strange new world” risks getting the entire process precisely backwards.
Wealth does not appear because government demands it.
Government has resources because society creates wealth.
The real choice
Britain does need change.
It needs better public services.
It needs greater economic opportunity.
It needs higher productivity.
It needs more affordable housing.
It needs stronger infrastructure.
And it needs an economy capable of supporting decent wages and living standards.
But none of those goals requires abandoning economic reality.
Indeed, they require embracing it.
The state should create the conditions in which people and businesses can prosper.
It should invest where investment produces long-term benefits.
It should regulate where regulation genuinely protects the public.
It should tax fairly.
And it should spend carefully.
Most importantly, it should understand the difference between redistributing wealth and creating it.
That distinction is not a technical detail.
It is the foundation of the entire debate.
Because Britain cannot tax, borrow and redistribute its way to prosperity forever.
At some point, someone has to produce the wealth.
Someone has to build the company.
Someone has to invent the product.
Someone has to employ the worker.
Someone has to make the investment.
Someone has to take the risk.
And if Labour forgets that basic reality, its promised economic transformation could become something very different.
Not a new economic miracle.
But another expensive lesson in the fact that you cannot spend your way out of a productivity problem, and you cannot redistribute wealth that the economy has stopped creating.
That is the real danger behind Labour’s strange new economic world.
It is not simply that the policy may be too radical.
It is that the logic may be precisely the wrong way round.
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