Good morning from New Economy Brief.
The government suffered a bruising set of local election results last week, losing almost 1,500 council seats across England. Welsh Labour lost control of the Senedd – with leader Eluned Morgan losing her own seat – and Scottish Labour lost ground at Holyrood too.
Labour's 2024 coalition is fragmenting in multiple directions. As the dust settles, the party's economic approach is under growing scrutiny – including from its own MPs. This week, two backbench groups, Tribune and the Labour Growth Group, set out their proposals for a new strategy. Meanwhile the embattled Prime Minister laid out his vision in an address on Monday, followed by the King's Speech two days later.
Huge local election losses provoke debate about policy change
In what many saw as a last-chance pitch for survival, Keir Starmer's speech on Monday argued the government needs a "bigger response" on "growth, defence, Europe and energy" than anticipated in 2024. Policy announcements were limited but included bringing forward legislation to allow "full national ownership of British Steel" and a "more ambitious" youth mobility scheme with Europe. He promised a "complete break" from previous responses to crises which he suggested would be reflected in Wednesday’s King’s Speech – but the Guardian noted "few surprises" there, the BBC's Faisal Islam called it "emblematic of Starmerism", and many MPs remain unconvinced.
Since the elections, MPs have openly questioned Starmer's future while backbenchers have advanced alternative economic agendas. The most prominent interventions so far have come from the Tribune Group and Labour Growth Group (LGG), whose proposals overlap significantly despite factional differences.
Tribune – associated with figures close to Andy Burnham, Angela Rayner and Ed Miliband – published an essay collection featuring MPs Louise Haigh, Yuan Yang, Jeevun Sandher and others. LGG - previously strong supporters of Starmer’s agenda - released their own proposals. Though media coverage has framed these as ‘competing visions’, there is substantial common ground – as Haigh and LGG co-chair Chris Curtis signalled at a recent Good Growth Foundation event, where they said they were working towards a programme that could unite Labour's wings.
A pro-growth turn in fiscal policy?
Both documents include pro-growth tax reforms that would begin to bring taxes on assets closer to taxes on work. Haigh proposes replacing Stamp Duty with a national property and land tax, as well as reforming business rates, closing inheritance tax loopholes, and raising capital gains tax closer to income tax. The LGG similarly supports capital gains tax equalisation – protecting investment through allowances – using the revenue this brings in to fund cuts to employee National Insurance.
On fiscal frameworks, Haigh proposes allowing the National Wealth Fund and other development corporations to borrow for themselves without bringing the government closer to breaching its fiscal rules to turbocharge investment, similar to what Labour Together has recommended in the Oxford-Cambridge arc.
She also suggests the fiscal rules should look at the benefits of investment over a longer time horizon, reducing the current system's bias against borrowing to invest. But crucially, only after achieving a budget surplus to build credibility with bond markets. This nuance has been widely overlooked: as ex-IFS economist Ben Zaranko noted, ‘the "Tribune position" isn’t quite so fiscally expansionary’ as coverage has suggested, and aligns with IFS recommendations to wait for a "position of strength" before making changes.
Likewise, the LGG notes that "capability and infrastructure investment would be separately prioritised within the capital framework, with the Treasury required to score the cost of inaction as well as the cost of action." Both groups also back fiscal devolution – giving mayors and local leaders real control over economic levers, including business rates and borrowing for investment.
Reshaping the state
The groups share the view – subject to growing cross-party consensus – that the UK state needs fundamental rewiring, beginning at the centre. Haigh proposes removing the growth mandate from the Treasury, creating an economic development ministry to coordinate across Whitehall, and passing the public budgeting function to a strengthened Number 10. While such ideas have been debated since the 1960s, they are gaining momentum – including a recent endorsement from the Liberal Democrats.
The LGG takes a similar line on diluting ‘Treasury brain’. It recommends breaking up the Cabinet Office and building a "real Department of the Prime Minister" as a "command centre for the Government's core priorities." As author Mark McVitie puts it: "A government that promises transformation cannot run from a No. 10 built for firefighting, a Cabinet Office built for coordination, and a Treasury not built to find solutions."
One area of divergence is the LGG's stronger emphasis on removing barriers to growth through planning reform. McVitie proposes fast-tracking nationally significant infrastructure – national grid, reservoirs, transport, energy, defence production – to prevent major projects being "slowly strangled by overlapping consents, tactical litigation and institutional vetoes." A note of caution: recent governments have often blamed the "blob" for economic underperformance, with mixed results.
And what about the public’s number one issue?
Both groups identify tackling the cost of living as critical – and both focus on structural drivers, not just symptoms.
Reducing costs for households. Tribune’s Yuan Yang focuses on fiscally (or close to) neutral policies which could start making life cheaper within months. She advocates for a rising block tariff for energy, in which everyone would be guaranteed a certain amount of cheap energy but buying more would become increasingly expensive. Yang also calls for capping bus fares, childcare costs and property service charges – also noting that the cost of some essential items, such as food, are contributing to the UK’s persistently high inflation. Similarly, the LGG names “bringing down the cost of essentials” as one of its ‘five hard rules’ for government.
Utilities and regulation. Both groups single out the privatised water sector – and Thames Water in particular – as emblematic of the economy's broader failures. They blame high bills and pollution on under-regulation and massive investor dividends at the expense of investment in infrastructure. Yang criticises the toothless regulation of the water industry; McVitie argues Thames Water should be allowed to fail. The LGG goes further, proposing an "essential services accountability regime" to curb rent extraction across water, care and other public-good sectors.
This shared focus on regulation is notable for several reasons. It taps into widespread public anger that the economy is rigged and consumers aren't being protected from excessive corporate profiteering. It runs counter to Chancellor Rachel Reeves's framing of regulation as "a boot on the neck" of business (which we covered last summer). And it reflects a growing body of evidence that strong regulation is actually good for economic performance.
It all comes back to macro. Several Tribune essays touch on fiscal policy's role in tackling inflation. Haigh recommends improving coordination between monetary and fiscal policy, examining the Bank of England's mandate to stop it working at cross-purposes to the Treasury – a recommendation also made last week by Gita Gopinath, the IMF's former chief economist. Yang also noted that “governments need to step up and take an active role in price stabilisation”. (For example, IPPR’s recent research shows how capping energy prices could reduce inflation, interest rates and borrowing costs whilst remaining fiscally neutral.) Jeevun Sandher advocates a "whole-economy approach to affordability", arguing that pro-growth, anti-inflation investments in clean energy and social housing – alongside windfall tax-funded affordability payments – can both improve living standards and reduce the debt burden.
A shift in economic strategy?
Whatever happens to Starmer's leadership, many Labour MPs are now openly arguing for a substantial change in economic direction. A broad consensus is emerging across the backbenches around a more interventionist model: using the state to shape markets, curbing extraction in essential services, taxing wealth more fairly, empowering No. 10 over the Treasury, prioritising public investment, and reducing essential household costs – while recognising the constraints that high borrowing costs pose in the near term.
Capping energy costs can lower inflation, interest rates and bond yields. New modelling from IPPR shows that protecting the UK economy by temporarily capping energy costs can lower inflation, interest rates, protect growth and be fiscally neutral. Crucially, Carsten Jung explained: “There is of course a risk of bond markets react negatively. But, our key point is this will *lower* expected Bank Rate. And lower, not raise, yields.“
Interest rates can’t control today’s inflation. Economist Carolina Alves writes for Project Syndicate outlining why central banks are relying on old tools to manage inflation that cannot address its underlying causes: “geopolitical turmoil, surging energy prices, and fragile supply chains rather than excess demand”.
Wealth tax unlikely to lead to capital flight. Contrary to most media coverage, new polling from Patriotic Millionaires UK finds: 88% of UK millionaires are proud to live here; 43% are concerned about doctors leaving the UK whereas only 9% think millionaires leaving is a concern; 75% are willing to pay more tax to ensure the UK is a place they are proud to live in and 79% would be willing to pay more tax to create opportunities for young people.
Embracing the “Four Horsemen of Heterodoxy”. In a recent article for the FT, Gita Gopinath, the IMF’s former deputy director and chief economist, argued that more “coordinated fiscal and monetary policy so they do not work at cross-purposes” should be in a “new playbook for crisis support that is both fiscally sustainable and supportive of long-term growth”. Going further, Adam Tooze argues the current energy crisis is a moment for policymakers to consider more heterodox economic ideas like price controls, targeted nationalisation and financial repression.
