By William Schomberg
LONDON (Reuters) – Britain’s incoming prime minister, Keir Starmer, spent the election campaign blaming Rishi Sunak’s Conservatives for “14 years of economic failure”, but there is no obvious quick fix to pull the country out of its sluggish growth malaise.
Living standards have stagnated since the Conservatives took power in 2010, and the UK’s pace of recovery from the COVID-19 pandemic has been the weakest of huge, wealthy nations, behind only Germany.
Starmer will be under pressure to employ Labour’s huge majority in Parliament to end the crisis, which has been caused by crumbling public services, inflation-hit personal finances, a housing shortage and faint business investment.
However, with national debt now at almost 100% of gross domestic product and taxes at their highest since just after World War II, Starmer insists it will take time to turn things around.
“We’re going to have to do really tough things to move this country forward,” he told voters days before the election. “There’s no magic wand.”
Unlike in 1997, when Tony Blair’s Labour Party ousted the Conservatives and the economy grew by almost 5% this year, Starmer may struggle to push annual UK growth above 2% for the foreseeable future, as has been the case across much of sluggish Europe.
The UK economy is expected to grow by less than 1% this year.
The global financial crisis of 2007-08, which hit the UK particularly solid, cuts in many areas of public spending, and the shocks of Brexit, COVID-19 and rising energy prices have all combined to negatively impact the world’s sixth-largest economy.
But Starmer and his likely nominee for Chancellor Rachel Reeves say they have no intention of borrowing to fund growth, with memories of the bond market crash in 2022 under former Conservative prime minister Liz Truss still fresh in their minds.
They also promised not to introduce major tax increases, which will mean the recent government will have little money in the budget.
“The fiscal succession will be difficult and there will be many challenges to overcome,” said Lizzy Galbraith, a political economist at investment firm abrdn.
Unlike in 1997, when Labour surprised financial markets by granting operational independence to the Bank of England, its first move on economic policy is likely to be minor.
He plans to rapidly reform Britain’s archaic planning system to speed up investment in housing and infrastructure, part of a plan to improve the country’s low productivity, support economic growth and generate more tax revenue to invest in healthcare and other struggling public services.
The Conservatives did not want to upset die-hard supporters in the suburbs, where more housing growth is likely to occur.
Starmer promises to take decisive steps to break down barriers to growth, but the challenge will be massive.
“We’ve been through this before, with a new government promising planning reform and then that promise being watered down,” said Galbraith of abrdn.
Jack Paris, chief executive of InfraRed, an international infrastructure asset manager, expects Labour to turn to private investment in green energy and accelerate transport projects.
“The new UK government should provide greater transparency and visibility for investors, and the long-term infrastructure strategy should be the catalyst to make the UK once again one of the most attractive destinations for long-term investors,” he said.
GREAT BRITAIN THAT FELL AWAY
Starmer’s to-do list also includes reversing the post-pandemic trend of people leaving the job market due to illness, something other luxurious economies have already done.
Boston Consulting Group and the NHS Confederation, which represent much of the health service, estimate that bringing back into work three-quarters of those who have left work since 2020 could raise tax revenues by up to £57 billion over the next five years.
By comparison, the UK spends around £11 billion a year maintaining its justice system.
Starmer’s growth plan also includes lowering some barriers to trade with the European Union. However, he has ruled out a major rewrite of the UK’s Brexit deal.
Economists say Labour’s current policies are unlikely to deliver much change, much less meet Starmer’s goal of making the UK the Group of Seven leader in sustainable economic growth, something it has not achieved since World War II.
Higher public investment would boost economic growth, but Labour’s promises to cut immigration could backfire.
Goldman Sachs analysts say Labour’s reforms would boost UK economic growth by just 0.1 percentage points a year in 2025 and 2026.
Economists polled by Reuters last month had forecast economic growth of 1.2% in 2025 and 1.4% in 2026, half the pace of the 10 years to 2007.
Yet in a sense Labour inherits an economy that is recovering, something that Sunak has tried unsuccessfully to convince voters of.
The post-2023 recession recovery is underway and high inflation has subsided, allowing the Bank of England to start cutting interest rates, possibly as early as next month. Business and consumer confidence is rising.
Starmer believes – and many business leaders agree – that political stability will aid attract investment to the UK after eight turbulent years during which the country has been governed by five different Conservative prime ministers.
Investors are already starting to heated up to the UK’s lower risk profile amid rising populism in France and the US.
Laura Foll, a portfolio manager at Janus Henderson Investors, linked the recent outperformance of British shares to this change in perception. “Relatively speaking, the UK, from a political point of view, looks a lot better,” she said.
