Burnham’s cheerfulness could turn the economy around
Confidence is an elusive but essential determinant of the course of the economy ignored by the doomsterism of Rachel Reeves. Andy Burnham could change that, writes Paul Ormerod
The UK economy has the potential to resume, for the first time this decade, a decent rate of growth.
This is not some nostalgic tribute to the policies of Rachel Reeves. Indeed, her whole approach as Chancellor has hindered rather than helped growth.
The key point is that the financial balance sheet of the private sector is in much better shape than it has been for 25 years. Both companies and households have been repaying debt. So they are in a position, if they had sufficient confidence about the future, to spend.
Private sector debt was an important driver of the economy when Gordon Brown was Chancellor. In 1997, when Brown came to power, it was around 110 per cent of GDP. This soared to 180 per cent by the time of the financial crisis in the late 2000s.
Brown of course boasted of having solved the problem of “Tory boom and bust”. But the high levels of private debt which he allowed to build were the major cause of the financial crisis, an event which rather vitiated his assertion.
Both individuals and companies then reined back, and by the onset of the pandemic it had fallen to some 155 per cent.
The economic distortions of lockdown pushed the figure back up to 170 per cent. But since then the private sector has saved with a vengeance, and the debt to GDP ratio now stands at just 130 per cent, lower than it has been since 2000.
But what the private sector needs above all before it goes on a spending spree is confidence, an elusive but essential determinant of the course of the economy.
The importance of confidence
This idea in economics goes back at least as far as Keynes in the 1930s. Since then, he has become associated with the idea that public spending is needed to revive an economy which is in a recession.
He did indeed make this argument. But he was a much more subtle economist than most of his modern day followers.
In a short but crucial passage of his major work, the General Theory, he argued that the positive boost would be undermined if the increase in public borrowing which it entailed had an adverse effect on “confidence”.
Many so-called Keynesians have of course never read the General Theory itself and so are simply unaware of the importance which Keynes attached to this point.
He conjured up the memorable phrase “animal spirits” to describe why, for example, entrepreneurs undertook ventures even though it is well known that most of them fail. He wrote of the “uncontrollable and disobedient psychology of the business world”. The text of his book is in fact littered with the words: “psychology” and “psychological”.
Nobel Laureate Robert Shiller is perhaps the most prominent modern economist to embrace the idea that positive narratives are needed to get the economy moving. But it is a view which is gaining increasing traction within economics with the Bank of England, for example, having published work on this.
Burnham must be more cheerful
For all her bravura claims to be an economist, Rachel Reeves has never shown the slightest understanding of the importance of confidence to the economy.
After winning a huge majority in July 2024, she acted as if the election were still being fought, going on and on about the “black hole” in the public finances allegedly created by the Conservatives. The overall message from both the Chancellor and the Prime Minister was one of doom and gloom.
So far, the markets have reacted with equanimity to the prospect of the Andy Burnham premiership. Yields on gilts are slightly down.
Burnham is transparently a more cheerful and optimistic figure than Starmer. He needs luck, but if confidence holds up the economy could power ahead.
Paul Ormerod is an honorary professor at the Alliance Business School at the University of Manchester. You can follow him on Instagram @profpaulormerod