Rachel Reeves says UK government finances are in a sorry state – but here’s why I’m cautiously optimistic | Larry Elliott

a A Labour government coming to power after a long period of unbroken Tory rule. A sense in the country that something has gone seriously wrong with the economy and that change is needed. A backdrop of rapid technological change. For 2024, read 1964. For Sir Keir Starmer, read Harold Wilson.

Wilson came to power with a national plan to grow the economy by 25% by the end of the 1960s. Starmer has a national mission to make the UK the fastest growing economy in the G7. We’ve been here before, but there is a chance – no more than that – that things will turn out better for Starmer than for Wilson.

The Labour government of 1964 was hampered from the start by Wilson’s determination to defend the overvalued pound – a decision that ultimately led to devaluation, austerity and defeat at the 1970 election.

Last week, financial markets welcomed Labour’s landslide victory with a big yawnThe pound remained steady, stocks rose and there was absolutely no sign of international investors retreating.

In her first press conference as chancellor, Rachel Reeves said she had gone through the books over the weekend and found the public finances were as much of a mess as she had assumed when she was in opposition. Labour had the worst legacy of any government since the Second World War, she insisted.

Let’s be clear, Reeves has not been left in the best of hands, but the pound can find its own level on the currency markets, the national debt is not out of control and interest payments on government borrowing are falling now that inflation has fallen to 2%. All this talk of money shortages is just a way of blaming the Tories for the tough measures that new finance ministers usually announce in the first budget after an election. Rightly so. That’s politics.

Much more interesting was what Reeves had to say about Labour’s economic strategy, which is unashamedly focused on pursuing faster economic growth. There is a green tinge to Labour’s approach, but nothing more. The government’s mantra is simple: growth is good.

The free market think tanks love all this deregulation stuff, Reeves prices for the courage the Tories lacked in tackling the growth blockers. Those who question the quest for ever-increasing gross domestic product and worry that plans to build on parts of the green belt will result in urban sprawl will struggle to be heard.

A degree of scepticism is warranted. No government in living memory has managed to build 300,000 new homes a year, let alone the 1.5 million in a single parliament that Labour is aiming for. There is a tension between nationally mandated housing targets and plans to devolve more power to local authorities. Attempts to push through development will be challenged in the courts. Any boost to growth through changes to planning rules is likely to be more modest and slower than Reeves hopes.

The new national wealth fund is unlikely to be a game-changer either. The idea is good enough: providing extra funding for the national infrastructure bank, so that it can catalyse private sector investment in the growth areas of the future. But even assuming that the public money is well-targeted, the amount Reeves is pumping in – £7.3bn – is too small to make a real difference.

That said, there are still reasons to expect the UK’s economic performance to improve in the coming years. The first is that after 15 years of low investment, lacklustre increases in living standards and the worst productivity growth since the early Industrial Revolution, the only way is up.

Secondly, Labour is focused on improving the supply side of the economy. Wes Streeting, the Health Secretary, says his department should no longer be seen as a public service department, but as a department for economic growthand it makes sense. The number of people in work in the UK is lower than it was before the pandemic, partly due to the direct effects of Covid-19 on mental and physical health, and partly due to longer NHS waiting lists. A fitter country is a happier, more productive country.

Finally, growth will be boosted by structural changes taking place in the economy, the most important of which are the rapid progress of AIFor the past 15 years, the UK (and other developed countries) have been battling a headwind: AI is a potential tailwind – and would be regardless of which party is in power.

“AI is coming,” says Erik Britton of economics consultancy Fathom. “It’s weird and scary and has the potential to change our lives, for better or worse. It will boost productivity along the way, and for good reason.”

The UK is reasonably well positioned to realise the benefits of AI, third lying in the global race to develop the technology after the US and China. Conservative governments in the 1980s were the lucky beneficiaries of peak oil and gas revenues from the North Sea (and managed to squander most of the windfall) and the new Labour government was able to reap the rewards of the AI ​​revolution.

If all this is cause for optimism, a word of caution is in order. Wilson thought that harnessing technology would be the catalyst for faster growth, but it didn’t happen. The benefits of AI may not be as great as they seem. It’s worth repeating: we’ve been here before.