Welcome to power, Keir Starmer. Now fix Britain’s economic mess

Analysis by Hanna Ziady, CNN

London (CNN) — British voters have handed the Labour Party its first election victory in almost two decades, hoping that a new center-left government will revive Britain’s ailing economy and fix collapsing public services.

The landmark moment draws the curtain on 14 years of tumultuous rule by the Conservative Party — defined by austerity, Brexit and a disastrous tax-cutting gamble — during which time incomes stagnated, living standards deteriorated and business investment dried up.

The win is a triumph for Keir Starmer, a former chief prosecutor who only entered parliament in 2015. He was appointed prime minister on Friday, succeeding Rishi Sunak who resigned in the wake of the historic defeat for the Conservatives.

“Change begins now,” Starmer said earlier in a victory speech to party workers. “It feels good, I have to be honest.”

But Labour’s jubilation may soon give way to trepidation given the economic challenges ahead.

From bankrupt local governments, crumbling infrastructure and a chronic housing shortage, to rising homelessness and a National Health Service in a state of crisis, the list of problems is long.

Out of a working age population (16 to 64 years) of roughly 42.4 million, more than 2.8 million are unemployed because of chronic ill health. Some 6.7 million people are on Universal Credit in England, Scotland and Wales, a handout to help with living costs. That number includes many workers.

Brits are unsurprisingly desperate for change. But the new government’s capacity to fix these issues will be severely constrained by a debt burden now bigger than the size of the economy, which means tax hikes or spending cuts are inevitable.

Making these problems even harder to solve: stubbornly low economic growth.

The UK economy barely grew last year. Incomes are also stuck in a rut. Adjusted for inflation, pay has increased very little since 2010, which means people aren’t substantially better-off.

“The story (of Britain’s economy) remains one of stagnation since the (global) financial crisis,” the Resolution Foundation think tank wrote in a report last month.

Ending stagnation will require a major uplift in investment by businesses and the government to boost productivity, a measure of economic efficiency that has been exceptionally weak for more than a decade.

Higher investment would deliver “the infrastructure, the equipment and the research and development that make workers more efficient,” Gregory Thwaites, a research director at the Resolution Foundation, told CNN. “If you have higher productivity growth, then you will have higher (growth in gross domestic product) and higher wages.”

‘Tiny, going on trivial’

The good news is that Labour has made kickstarting economic growth — through higher public investment, a new industrial strategy, and policy reforms — its top priority.

The less good news is that it has also committed to reducing sky-high government debt while largely ignoring the tough choices on tax and spending needed to achieve that goal.

To some extent, the government is likely hoping economic growth will be stronger than forecast and help with both goals.

“Yes, growth could surprise on the upside and, if it does, then the fiscal arithmetic would be easier,” said Paul Johnson, director at the non-partisan Institute for Fiscal Studies (IFS) think tank. “But if it doesn’t — and it hasn’t tended to in recent years — then either we will get those cuts (to spending), or the fiscal targets will be fudged, or taxes will rise.”

Labour, meanwhile, insists its growth-boosting policies are “fully costed.” Among its more eye-catching plans is a £7.3 billion ($9.3 billion) National Wealth Fund for investing in infrastructure and the green energy transition as part of a broader industrial strategy.

A new publicly owned energy company, Great British Energy, will aim to decarbonize the United Kingdom’s energy grid by 2030. It will cost £8.3 billion ($10.6 billion) to set up, partly paid for through a windfall tax on oil and gas companies.

Also a key priority for Labour: reforming Britain’s planning laws, which it hopes will unlock a construction boom that delivers 1.5 million homes over the next five years, helping to make housing more affordable.

While many have welcomed Labour’s focus on growth, there is no shortage of skepticism over whether its thinly detailed plans will in fact achieve their goals. Apart from the substantial rise in investment for green projects, all other areas of investment will be frozen in cash terms over the next five years, the IFS points out.

And planned spending increases on crumbling public services such as health and education are “tiny, going on trivial,” according to Johnson.

“Delivering genuine change will almost certainly also require putting actual resources on the table. And Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance this,” he said in a statement.

Seizing opportunities

Ultimately, the government will need an uplift in investment by businesses — which has languished since the Brexit referendum in 2016 — to achieve its plans.

One way Labour could help spur that investment is by setting clear and consistent green energy policies with better tax incentives, according to the Confederation of Business Industry, a business lobby group.

“Net zero is a big focus for many businesses,” the CBI’s chief economist Louise Hellem told CNN. “It’s really important for a government to set overall ambitions and targets… The big thing here is around certainty.”

Under the Conservative government, a ban on the sale of new gasoline and diesel cars, announced in 2020, was then abruptly delayed last September by five years till 2035, infuriating some automakers. Labour has said it will reverse the move “to give certainty to manufacturers.”

It is also determined to “get Britain building again,” with Labour’s Rachel Reeves, likely the next finance minister, describing the country’s stringent planning regime as “the single greatest obstacle to our economic success.”

While the focus on policy certainty and planning reform is encouraging, Labour is decidedly less ambitious when it comes to a third area crucial to reviving economic growth: Britain’s all-important relationship with the European Union, still its single biggest trading partner.

Labour’s timid plans to improve that relationship will do little to reduce the economic costs of Brexit, which has hurt UK goods trade and delivered an estimated hit to GDP of between 2% and 4% since the 2016 referendum, according to UK in a Changing Europe.

The party’s proposals are largely “technical,” such as cutting red tape on food trade, the think tank said in a report last month. “Any gains from technical improvements will be relatively minimal: useful in reducing trade frictions but not enough to really address the continuing economic impacts of Brexit.”

Brexit has also damaged business investment and is expected to reduce national output by 4% over the long run compared with what it would have been if Britain had remained in the EU, according to the Office for Budget Responsibility, which produces economic forecasts for the government. Trade is projected to be around 15% lower.

But in spite of Brexit, there are some bright spots on trade. For example, Britain’s services exports have grown faster than the G7 average since 2021.

According to the Resolution Foundation, the UK is now the world’s second-largest exporter of services — a category that includes finance, law, education, architecture and the arts — behind only the United States.

It has other strengths too, from strong institutions and the rule of law to world-class universities, innovative companies and a highly skilled workforce.

Starmer and his new government will need to build on these strengths, and develop new ones, to create an environment ripe for growth and revive Britain’s fortunes.

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