Britain’s newly elected Labour government has committed to immediate measures for economic growth following a decisive election victory over the Conservatives. However, their efforts could be complicated by the state’s finances, which have been stretched thin due to extensive Covid-19 spending.
The centre-left Labour party, led by Prime Minister Keir Starmer, has promised to invest in critical sectors like health and education while emphasizing the importance of fiscal responsibility. This comes after additional strains on government finances caused by subsidies for energy bills following Russia’s invasion of Ukraine, which drove oil and gas prices up.
Stability
Starmer aims to avoid a repeat of October 2022 when the Conservative government’s unfunded tax cuts unnerved markets and devalued the pound, leading to the downfall of Liz Truss’s short-lived premiership. Truss was succeeded by Rishi Sunak and subsequently lost her seat in Thursday’s election.
The British economy is currently more stable, having emerged from a mild recession with inflation normalizing. Labour is expected to benefit from this recovery, according to Ashley Webb, UK economist at Capital Economics. Nonetheless, eight years post-Brexit, businesses continue to experience the economic repercussions of leaving the European Union, with little expectation of imminent change. Starmer has ruled out rejoining the EU single market or customs union and reinstating the free movement of EU nationals.
Safe Haven
Labour finance spokesperson Rachel Reeves, speaking before the election, expressed a desire for investors to see Britain as a secure investment destination in a world leaning toward populist politics. She emphasized that changes would be grounded in strict financial discipline.
Britain’s public debt has recently approached levels near 100% of its gross domestic product, a situation not seen since the 1960s. James Wood, a senior teaching associate in political economy at the University of Cambridge, attributed Starmer’s popularity to his cautious approach, likening him to “a Conservative in a red tie.”
Leading up to the election, Labour gained support from business leaders and major UK publications, such as the Financial Times, who trust the party’s capability to manage the economy effectively. Post-election, business leaders have urged Starmer to prioritize economic growth. The Confederation of British Industry and MakeUK have highlighted the need for immediate measures to stimulate growth and enhance infrastructure investment.
The City of London Corporation, representing the capital’s financial district, has called on Starmer to make the financial sector a central part of Labour’s growth strategy.
Spend and Tax
Labour’s spending plans include the establishment of a publicly-owned Great British Energy company to reduce energy bills as many Britons continue to face high living costs. The party also intends to increase defense spending to 2.5% of GDP from the current level of around 2%.
Daniel Sopher, senior partner at tax specialists Sopher + Co, predicts an increase in taxes to fund public services, noting that there is a limit to how much debt can be raised. With Labour’s substantial majority, there might be internal pressure to relax budget rules, according to analysts.
Jonathan Portes, an economist at King’s College London, mentioned that while the fiscal rules are likely to change, the key concern is how they will change and whether these changes will be sensible.