After 14 years in the shadows, Britain’s Labour Party is back in government. And the country’s first female Chancellor of the Exchequer, Rachel Reeves, faces the daunting task of restoring Britain’s economic growth prospects and ending a decade and a half of stagnation.
For inspiration, she turns to another glass-ceiling-breaking woman on the other side of the Atlantic: U.S. Treasury Secretary Janet L. Yellen.
Ms Reeves was appointed chancellor on Friday after the Labour Party won a majority in Thursday's general election. Now in charge of Britain's budget, she is expected to pursue an economic agenda influenced by Ms Yellen, whose policies have led to job creation and a boom in manufacturing investment in the United States.
Ms. Yellen’s “modern supply-side economics” aims to boost economic growth by expanding the workforce and raising productivity, while reducing inequality. In practice, this means giving companies incentives, through subsidies and tax cuts, to invest in the United States and create jobs at home, particularly in emerging green sectors.
Ms Reeves, 45, calls her version “securonomics”, a catch-all term for ensuring “resilience for our national economy and security for working people”, she said in March. It is also likely to mean a more activist government. The Labour Party has drawn up an industrial strategy and plans for a national wealth fund and a state-owned energy company.
“Much of my approach to securonomics has its roots in Yellen's modern supply-side economics,” Ms. Reeves wrote in a book published last year.
She is also influenced by Harvard economist Dani Rodrik, who advocates “productivism,” a partnership between governments and businesses to create more productive jobs across the economy.
Since 2010, Britain has been governed by the Conservative Party, whose instincts have been for a smaller state and free markets. Ms Reeves has argued for a greater role for government, while working with business.
For Ms Reeves, the United States justifies this approach, even though many Americans have a poor view of the current economy. While Britain has experienced sluggish growth, the United States recovered quickly from the pandemic and has continued to grow strongly. The economy is almost 9 per cent larger than its pre-pandemic size and has created almost 16 million jobs since President Biden took office, more than offsetting the losses suffered during the pandemic.
The shift in economic policy in Washington has led other countries to reevaluate their approaches, said Carys Roberts, executive director of the Institute for Public Policy Research. “It has really inspired the Labor Party to be stronger in its approach.”
Ms. Reeves has already followed Ms. Yellen in one respect: Ms. Yellen is also the first woman to lead her country's treasury. But following her economic agenda may prove more difficult.
Ms. Yellen’s policies have a lot of money behind them. The Inflation Reduction Act, with its incentives for manufacturers to build factories with solar panels or wind turbines and for consumers to buy electric vehicles, is expected to cost more than $800 billion over the next decade.
But no one, least of all the Labour Party, thinks Britain has the money to do something so bold. The national debt is at its highest level since the early 1960s and interest payments have soared. Taxes are also at historic highs. Current spending plans suggest a squeeze on many public services amid urgent demands for more health spending and promises to increase military spending.
“There's not that big of a sum of money there,” Ms Reeves told the BBC on Friday.
In a sense, Ms Reeves has extended her constraints by promising not to raise Britain's three main taxes and to maintain her predecessor's “fiscal rule” of reducing the debt in five years. To prevent austerity from deepening, Labour is banking on economic growth to improve the public finances, and is dependent on a wave of private sector investment.
Ms Reeves is betting that stability can create the conditions for growth, investment and better-paying jobs. She did not respond to requests for comment on her policy plans.
In the current “age of uncertainty,” as she called it, with rising geopolitical tensions and climate change, Ms. Reeves expects to be a manifestation of that stability. After five finance ministers in five years, she is expected to serve a full five-year term. She has also said she will strengthen Britain’s institutions, such as the Office for Budget Responsibility, a watchdog.
Otherwise, Ms Reeves is expected to focus on changing policies that do not require major spending, notably overhauling the development planning system to make it easier to build homes and upgrade the energy grid.
But for some, those constraints define Ms Reeves more than her ambition. Labour this year abandoned a pledge to spend £28 billion (about $35 billion) a year on green investment that Ms Reeves announced two and a half years earlier.
The Biden administration “broke the rules and went big,” and Labor must do the same, said Danny Sriskandarajah, director of the New Economics Foundation, a British think tank.
“If you want to move the needle on poverty, inequality, green investments or crumbling public services, you either have to find new money or redistribute the money in much more ambitious ways,” he said.
But the Labour Party, led by Keir Starmer, is cautious about making big bets or appearing too ideologically driven.
Instead of ideology, Labour promotes pragmatism. Ms Reeves, an economist by training, often refers to the six years she spent at the Bank of England after graduating, including a stint at the British Embassy in Washington.
Ms Reeves returned to Washington last year, where she met with officials including Ms Yellen. In a speech there, she laid out her vision of how the world was changing but Britain was lagging behind.
“Globalization as we once knew it is dead,” she said in a speech. In its place is emerging a “new multilateralism” with partnerships between countries with shared values and interests.
Ms Reeves’ condemnation of globalisation is inspired by Mr Rodrik, who has said that the era of “hyperglobalisation” is over and that instead a new economic order must prioritise domestic social, economic and environmental goals. That could lead to a new, “thinner” globalisation, in which government focuses on creating productive jobs.
Some economists fear that such policies, which emphasize security and revitalizing industrial policy, could escalate and slide into unbridled protectionism.
According to Mr. Rodrik, this could be avoided if only a small number of critical technologies were protected. As the Biden administration has indicated, the rules are not intended to weaken China economically.
“I see no problem if Britain chooses to follow these principles as well,” Mr Rodrik said in an email exchange.
And Ms Reeves seems determined to follow the United States' lead.
“A new Washington consensus is taking shape,” Ms. Reeves said in a speech in March. “I believe it is in our interest to embrace that consensus,” which will depend on a more active state, she said.
