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Few disagree that a Labor government would soon be overwhelmed by economic forces. A stagnant British economy, weak public finances, strained public services and a volatile electorate certainly represent a difficult legacy.
I did the case myself. But it’s important to think about what might go right for Keir Starmer and Rachel Reeves – or even for Rishi Sunak and Jeremy Hunt – in the unlikely event that the Prime Minister and Chancellor manage to turn public opinion around and secure a Conservative victory to achieve.
Provided Labor secures a comfortable parliamentary majority in this year’s election, the UK will suddenly have a stable government that can prioritize economic progress. This will be a welcome change from the last five years. Stability and more constructive relations with Britain’s friends in the EU are prerequisites for the higher business investment that the economy requires. It would build on Hunt’s corporate tax reforms over the past 18 months.
A Labor government should also be able to capitalize on the improving economic situation we have already seen. After a terrible shock to trading conditions in 2022 when UK energy supplies surged, the balance between export and import prices has returned to pre-pandemic levels. This provides much-needed breathing space.
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Under these circumstances, the real wage increases that households begin to experience need not be inflationary. In addition to a sharp decline in the coming April headline inflation rate towards the government’s 2 percent target, high private and public sector pay demands will be harder to justify when inflation is close to 2 percent. Then the Bank of England will feel able to start cutting interest rates. Lower government borrowing costs improve public finances by almost £15 billion (about 0.5 percent of national income) over five years for every percentage point of reduction. This would create scope for relief in the public service.
However, none of this would be transformative. Real progress would come from the prospects for economic growth. So where does the growth come from?
In the short term, through higher consumption as incomes recover. Then it’s a matter of removing barriers to private and public investment and ensuring that homes are built where people want to live. Thirdly, it is about improving labor force participation, bringing the employment rate back to pre-pandemic levels. None of this is easy, but not impossible.
For all of Hunt and Sunak’s talk of tax cuts, the truth is that the Conservative government was one of the largest tax rise governments in UK history. According to the Office for Budget Responsibility, it increased the tax burden from 33.1 percent of gross domestic product in 2019-20 to 36.5 percent in 2024-25, with further increases planned, bringing it to 37.1 percent by 2028-29 percent should increase. That’s far more than the 1.7 percentage points of GDP the Institute for Financial Studies said in 2019 was necessary to deal with an aging population and underscores the urgent need for economic growth.
The taxes already raised mean that if Labor can combine rapid economic reforms with a bit of luck, a new government can create a virtuous circle between higher growth and improved public finances and services.
The Tories have presided over a miserable few years in British economic history. They placed a significant burden on business with Brexit and undermined their reputation for sound economic management with the Liz Truss debacle. However, the biggest pain was caused by the external shocks of the Covid and energy crises. It was more bad luck than bad management.
The next five years start bleakly, but could be far better. None of this is guaranteed, but Labor should not be afraid of the future. With good economic policies and better luck, 2024 could be a good choice to win.