By William Schomberg
LONDON (Reuters) – Britain’s incoming prime minister Keir Starmer has spent the election campaign accusing Rishi Sunak’s Conservatives of “14 years of economic failure” but has no obvious quick fix to lift the country out of its slow-growth doldrums.
Living standards have stagnated since the Conservatives took power in 2010 and Britain’s recovery from the COVID pandemic has been the weakest among big rich nations after Germany.
Starmer will be under pressure to use Labour’s huge majority in parliament to end the sense of decay, which ranges from poor public services and inflation-hit personal finances to housing shortages and weak business investment.
But with public debt at almost 100% of gross domestic product and taxes at their highest level since just after the Second World War, Starmer stresses that recovery will take time.
“We’re going to have to do some really difficult things to get the country ahead,” he told voters days before the election. “There’s no magic wand.”
Unlike in 1997, when Tony Blair’s Labour Party ousted the Conservatives with the economy expanding by almost 5% that year, Starmer may struggle to get British annual growth above 2% for the foreseeable future, in line with much of sluggish Europe.
The British economy is expected to grow by less than 1% this year.
The 2007-08 global financial crisis, which hit Britain particularly hard, cuts in many areas of public spending and the shocks of Brexit, COVID and rising energy prices have combined to weigh on the world’s sixth-largest economy.
But Starmer and his likely choice for finance minister, Rachel Reeves, say they will not embark on a borrowing spree to fund a growth boost, with memories of the 2022 bond market crash under former Conservative prime minister Liz Truss still fresh.
Nor have they promised any major tax increases, leaving the new government with little room to budget.
“The fiscal legacy will be difficult and there are many challenges to address,” said Lizzy Galbraith, 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 economic policy move is likely to be low-key.
He plans to move quickly to overhaul Britain’s archaic planning system to speed up investment in housing and infrastructure, part of a plan to improve the country’s weak productivity, support growth and generate more tax revenue to invest in overstretched health and other public services.
The Conservatives have been reluctant to upset their core supporters in suburban areas, where much of the increase in residential construction is likely to occur.
Starmer promises to be firm in his aim to break down barriers to growth, but the challenge will be great.
“We have been in this situation before, with an incoming government promising planning reform and then watering it down once in power,” Galbraith said in April.
Jack Paris, chief executive of InfraRed, an international infrastructure asset manager, expects Labour to rely more on private investment in green energy and accelerate transport projects.
“The new UK government should provide greater clarity and visibility to investors with a long-term infrastructure strategy that represents a catalyst to make the UK once again one of the most attractive destinations for long-term investors,” he said.
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Also on Starmer’s to-do list is reversing the post-pandemic surge in people leaving the workforce due to illness, something other rich economies have already done.
The Boston Consulting Group and the NHS Confederation, which represent much of the health service, estimate that getting three-quarters of workers who have left their jobs since 2020 back into the workforce could boost tax revenues by up to £57bn in total over the next five years.
To put this into context, Britain spends around £11 billion a year on running its justice system.
Starmer’s growth plan also includes lowering some trade barriers with the European Union, but he has ruled out a major overhaul of Britain’s Brexit deal.
Economists say Labour’s policies so far are unlikely to make much of a difference, let alone meet Starmer’s goal of making Britain the Group of Seven leader in sustainable economic growth, something it has barely achieved since the Second World War.
More public investment would be good for growth, but Labour’s promises to reduce immigration could have the opposite effect.
Goldman Sachs analysts say Labour’s reforms will boost Britain’s economic growth in 2025 and 2026 by just 0.1 percentage points each year.
Economists polled by Reuters last month expected the economy to grow 1.2% in 2025 and 1.4% in 2026, less than half its pace in the 10 years to 2007.
But in a sense Labour is inheriting an improving economy, something Sunak tried in vain to sell to voters.
After a recession in 2023, the recovery is underway and high inflation has already subsided, allowing the Bank of England to start cutting interest rates possibly as early as next month. Business and consumer confidence is on the rise.
Starmer says – and many business leaders agree – that political stability will help attract investment to Britain after eight turbulent years in which the country was governed by five different Conservative prime ministers.
Investors are already beginning to appreciate the UK’s lower risk profile in light of rising populism in France and the US.
Laura Foll, a portfolio manager at Janus Henderson Investors, linked the recent outperformance of British stocks to that shift in perception. “Relatively, the UK, from a political point of view, seems to be in much better shape,” she said.