When Andy Burnham stood on the steps of Downing St on his first day as Prime Minister, he pledged to build ‘a new economic model’ for the UK. But if John Healey’s first speech as Chancellor of the Exchequer last week is anything to go by - a finely calibrated exercise in Continuity Rachel Reeves - we should not be holding our breath that next month’s Budget will usher the new model in.
It was a bold thing for Burnham to say: not just that he wanted different outcomes from the economy (lower cost of living, higher productivity; more growth, less regional inequality), but that this required a different kind of economy altogether.
No Labour Prime Minister since Harold Wilson has promised that. For Blair and Brown the goal was not a new economic model, just reaping plentiful tax revenues from the old one to spend on public services and reducing poverty (which worked well until it didn’t, after the financial crash of 2008). Keir Starmer hoped that removing planning restrictions and raising public investment levels would improve the performance of an otherwise acceptable system. Burnham wants more fundamental change.
In the academic literature, the term of art to describe how different countries’ economies are structured and function is that of a ‘growth model’. Drawing on the macroeconomic theories of John Maynard Keynes and his less well known contemporary Michal Kalecki, the ‘post-Keynesian’ economists Marc Lavoie and Engelbert Stockhammer argued in a seminal 2013 paper that economies needed to be understood in terms of their ‘growth drivers’: the structures and dynamics that generated and distributed their economic expansion. In 2016, political economists Lucio Baccaro and Jonas Pontusson sought to categorise the different growth models used by different European countries.
Examining economic data from the period from 1994 to 2007, Baccaro and Pontusson showed how Germany’s growth model was ‘export-led’, dominated by large industrial manufacturers serving global markets, with domestic wages and consumption suppressed through collective wage bargaining. The UK’s growth model, by contrast, was ‘consumption-led’, with inflows of foreign capital and house price inflation boosting household spending. Sweden, the authors noted, had something of a hybrid model between these two, while Italy’s weak economic performance barely qualified to be any kind of model at all.
Bacarro and Pontusson argued that the field of ‘comparative political economy’ needed to understand, not just a country’s economic structure – its principal forms of demand, its largest sectors, the relative share of national income going to labour and to capital – but the economic and political institutions which allowed these to flourish, and the coalitions of business interests and voters which kept them in place. In the case of Britain this tied into a familiar critique of the subjugation of manufacturing industry by the financial interests of the City of London, an analysis whose most famous expression was the ‘Alternative Economic Strategy’ associated with Tony Benn and the Labour left in the 1980s.
There is something a little absurd about describing the UK’s current ‘growth model’, since for the last decade and a half it has been generating so little growth, but the key dynamics of the UK economy are easily outlined. The financial sector remains dominant, not just in terms of its contribution to GDP (in which it is the third largest sector, after retail and manufacturing, the latter in reality made up of many different industrial sectors) but in its impact on the rest of the economy. Unlike their counterparts in other European countries, British financial businesses primarily serve the rest of the world rather than the domestic market. They are responsible for the huge capital inflows which enable the UK to cover its otherwise unsustainable imbalance between exports and imports: in terms of traded products, the UK runs a massive deficit. But this is circular: those capital inflows keep the value of the pound unnaturally high, thus damaging other exporters, particularly in manufacturing. So the UK’s manufacturing sector, at 8% of national income, is smaller than those of comparator countries (Switzerland 19%, Germany 18%, Italy 15%, the Netherlands 10%, France 9%).
Notoriously, British banks invest much more in land and property – now over 54% of all lending – than they do in productive output, and the proportion has been rising since 2010. Pension funds are equally uninvested in British businesses: UK equities now make up less than 5% of their total assets (down from over 50% in 1997), dwarfed by overseas shares (31%) and bonds (47%). This has two effects. It combines with the UK’s corporate governance model, in which shareholders have legal primacy over other stakeholders, to make British firms more ‘short-termist’ than their counterparts in Europe (where workers generally sit on company boards, and companies have legal responsibilities to employees, customers and their wider communities). The kind of ‘patient capital’ that builds long-term business growth is much harder to access in the UK than on the continent. And it pushes up land and property values.
One of the peculiarities of the British economic model is the way in which household debt – principally mortgages – drives growth via rising asset values. House prices in the UK as a whole haverisen from four times average earnings in 1995 to eight times now – and in London, fifteen times. While it is well known that this has made life incredibly difficult for young people trying to get on the housing ladder, it has also driven a huge amount of consumption, as property owners turn their greater wealth into confidence to spend, particularly on household goods and renovations. The structure of the housing market has changed, too. Only a fifth of private rented homes are owned by single-property landlords. Around half (49%) are owned by professional property companies with five or more.
This has contributed to another development in the character of the British economy, its increasing ‘rentierisation’. A rentier is an individual or firm whose income derives from the ownership of assets which, due to natural or created monopolies, are able to make supernormal profits. Such businesses, which include property companies, banks, the privatised utilities, digital platforms and private equity (which now dominates sectors such as social care, children’s nurseries and vets as well as business services and tech), not only hoard wealth for their owners and shareholders; they create powerful business lobbies to entrench their interests in policy making. The extraordinary share of public contracts won by the major outsourcing companies (Capita, Serco, Atos and G4S between them took over £4bn worth last year) has been matched by their ability to shape government policy in their image.
A final key feature of Britain’s economic model is its unusually flexible labour market. It is estimated that around one-third of British workers in full or part-time employment are now given less than a week’s notice of their shifts. This includes over 1.2 million workers who are on zero hours contracts (up more than sevenfold since 2010). 4.5 million workers are now self-employed, over 13% of the total workforce, with many of these on ‘bogus self-employment’ contracts imposed by firms wishing to escape the legal and financial obligations of employers. All these figures are proportionately much higher than in almost every other European economy.
Put together, these characteristics of the British economy have generated a very particular kind of economic failure. The UK has for many years ranked among the lowest of its peers on almost every metric of economic performance – growth, productivity, business investment, public investment, real wages, the balance of trade, regional inequality. Only in its employment levels has the UK generally performed well – but even this record has been undermined since Covid by our much higher economic inactivity rates (the proportion of working age adults not in work or looking for it) than in many other European countries.
So it is understandable that Andy Burnham wants to build a new economic model that generates better results. What is perhaps more interesting is that we know, broadly speaking, what that model needs to look like. Resting on a broadly agreed analysis of why the British economy has performed so poorly, alternative approaches have been extensively explored over the last decade by a range of think tanks and academic institutes, notably the IPPR Centre (originally Commission) on Economic Justice, the New Economics Foundation, Common Wealth, the Resolution Foundation, The Purposeful Company and the UCL Institute for Innovation and Public Purpose.
A new (progressive) model would have five key characteristics.
First, the British growth model needs to shift from being consumption-led to being investment-led. Only by raising the rate of investment (both public and private) as a proportion of GDP can the economy’s key challenges be addressed: the transition to clean energy, the development of sustainable water infrastructure and affordable housing, the renewal of defence systems and the expansion of the UK’s advanced export sectors, along with the improvement in economy-wide productivity (and therefore earnings) that will enable the UK to thrive when its labour force is much smaller relative to its ageing population.
Raising the rate of public investment from its currently projected 2.8% in 2027-28 to the OECD average of 3.7% will require a determined Chancellor over several budget cycles. Much of that can be found by borrowing off the government’s balance sheet, using public development corporations of the kind that were used to build Britain’s new towns after the second world war. But some will have to come from reining in consumption, which means increases in tax. There are taxes on the wealthy readily available (equalising capital gains tax rates with those of income tax; replacing council tax and stamp duty with a proportional property tax); but at some point the bullet of tax rises on middle incomes – still much lower in the UK than in most of our European counterparts - may have to be bitten.
To raise the rate of business investment it seems pretty clear that the dominant model of British business needs to be changed. That means ending shareholder primacy, with companies legally required to adopt specific long-term purposes and duties to all their stakeholders. Company boards need to include workers representatives (workers stay at companies on average much longer than shareholders do, so are much more interested in long-term growth), and executive bonuses should be withheld till long-term improvement has been achieved. Britain’s public investment banks, the British Business Bank and National Wealth Fund, need to have the scale to co-invest with the private sector to build new world-leading companies, with a particular focus on key sectors, including clean energy, defence, life sciences and AI.
(Some critics complain that such a strategy is simply providing public subsidy for private capital; but since private capital is where most of the money is, it is better seen as harnessing it for long-term good.)
Second, as Gordon Brown has been arguing this week, the UK needs to build an innovation system that better turns the extraordinary scientific advances developed at that our universities into world-class companies. We are good at the science, universities are now good at spinning out innovative start-up firms, and we have a thriving venture capital market to finance them. But before those companies can become properly global, they are almost all bought out by mainly US rivals. Over the ten years from 2011 to 2021 it is estimated that 1200 British start-ups were sold to overseas buyers, with a cumulative loss to the UK economy running into the tens of billions of pounds. Reversing this will mean a much larger role for the UK’s state investment institutions to provide UK scale-up businesses with long-term finance, including equity; consolidating pension funds and requiring them to invest more in UK businesses, and stronger competition policy to make overseas takeovers harder.
Third, mechanisms will be required to enable workers, rather than capital, to gain a rising share of national income. On the one hand this needs a continuing push on the national minimum wage and workers’ rights; on the other a new system of sectoral collective bargaining, in which the productivity gains from automation and AI feed into workers’ wages and salaries, alongside new training and employment opportunities, rather than just business profits. Given the concentration of capital, it will also require new kinds of stakes in company ownership – both employee shareholdings and profit shares, and public ones. A Citizens’ Wealth Fund, built up by governments taking gradually rising numbers of company shares, and distributing the dividends to citizens, is one option.
Fourth, as Burnham has argued, key sectors of the economy which provide the essentials of life need to be put into public ownership or regulated much more tightly in the public interest. These include the water and energy sectors, public transport, social care and childcare, and rented housing. In the latter case a combination of rent controls in the private rented sector, the raising of capital gains tax and the creation of a national housing corporation to buy properties from private landlords who wish to sell out, can bring the rented sector back largely into social ownership.
Fifth, as Mariana Mazzucato argues, a new role and structure for the economic state is needed. Economic development cannot be left solely to the private sector: it is too driven by its own returns and not enough by the collective purposes of society at large, which today must include the transition to a zero emissions, zero waste economy and advanced health and social care for an ageing population. The state, which represents the whole community, needs both to guide private capital into long-term investment, and to be a larger and more active player itself. It needs to shape markets and not just correct their failures (though it must do that too). That will require devolved governance, since the longstanding over-centralisation of the British state has enabled its capture by sectional economic interests, and Whitehall cannot respond to local needs and opportunities. And it requires much more entrepreneurial and innovative government institutions, less silo-ed and better coordinated.
If this is what Andy Burnham means by a new economic model, it is obvious how difficult it will be to achieve.
For one thing, it cannot be built quickly. Many different policy reforms are needed, affecting many different economic interest groups. And most of these will resist it. The banks, multinational corporations, private equity firms and shareholders will not meekly acquiesce in their fate. As the originators of the ‘growth model’ idea pointed out, the beneficiaries of each national model use their economic muscle and political influence to keep it in place. And they have always used the threat of capital flight – if you don’t do what we want, we will shift our business and jobs overseas – to keep government ambitions in check.
After the second world war, a British Labour government did build a new economic model. Clement Attlee nationalised the UK’s major industries, established a universal welfare state to underpin rising consumption, and created a new planning system to build homes and infrastructure and protect the countryside. Today the economic goals of a new Labour government are not that different: world-leading firms paying the country’s way in the world, higher investment and productivity leading to higher wages and employment for all who want it, right across the country; a decent safety net for those unable to work (as Burnham responded to Kemi Badenoch last week, “social security as well as national security”); all underpinned by (global) environmental sustainability.
Cynics will say that it cannot be done; it is all just shooting for the moon. But Burnham may wish to take comfort from another revered leader. As John F Kennedy said in 1962: “we choose to go to the moon in this decade, and do the other things, not because they are easy, but because they are hard.”
This article was first published in the New Statesman on 12 September 2026
I would be interested to hear what metrics should be used to measure the success of this new model. A combination of national and regional models and performance tracking would go a long way to turn speeches into a formulated plan.