The United Kingdom recently had its Parliament elections. It was a crucial affair, given the fact that the European country’s unfortunate tryst with skyrocketing inflation, stalled GDP growth and an unbearable cost-of-living crisis crippled British society by leaps and bounds.
From 2019 to 2022, the Conservative Party had to change its Prime Minister twice: first by replacing Boris Johnson with Liz Truss and then by substituting her again with Rishi Sunak. Talking about Truss’ 50-day reign between September-October 2022, her disastrous “Mini Budget” earned infamy by proposing significant tax cuts, apart from abolishing the 45% rate of income tax and the proposed Health and Social Care Levy, cutting stamp duty and the basic rate of income tax and cancelling rises in National Insurance contributions and corporation tax.
The government became massively unpopular and when the polling day arrived, the huge anti-incumbency unseated the 15-year Conservative rule. Keir Starmer, leader of the centre-left Labour, took over as the country’s next Prime Minister, with Rachel Reeves becoming the first-ever woman Chancellor of the Exchequer.
How are things now?
In good news for the new British government, the UK economy grew by 0.4% in May 2024, after exiting a shallow recession in the first quarter of the year. The nation’s dominant services sector continues to grow further, as output in both production and construction rebounded from losses.
Price rises in the UK have cooled from a 41-year high of 11.1% in October 2022, all the way down to the Bank of England’s 2% target in May 2024. The performance has raised expectations for a coming interest rate cut from the Bank of England (BOE).
However, the BOE continued to strike a cautious tone at its June meeting even after its peers at the European Central Bank (ECB) began their own path of interest rate cuts, warning that key indicators of inflation persistence in the UK “remained elevated.” Markets remain roughly evenly split on the prospect of a cut at its August 2024 meeting.
Even though there has been a broad-based increase in economic output, no way we can conclude that the UK is completely out of the woods. Labour has set itself the aim of achieving the fastest growth among the Group of Seven (G7) advanced economies on a sustained basis. The longer-run picture remains weak, with the economy only 2.7% larger than its pre-pandemic level of late 2019.
Over the three months to May 2024, the economy expanded by 0.9%, the strongest reading since the three months to January 2022, compared with the consensus forecast for a 0.7% expansion. The BoE expected the economy to grow by 0.5% over the 2024 Q2, something as per the analysts, looks likely to prove too low.
Britain’s overall trade deficit, excluding precious metals, narrowed to 3.2 billion pounds ($4.1 billion) in May from 4.7 billion pounds in April. However, goods exports to the European Union fell to their lowest since January 2022, when Brexit customs checks were introduced, and consistent with levels seen during the late 1990s. Keir Starmer wants to reduce trade frictions with the EU but he will not agree to join the bloc’s single market.
Since the COVID-19 pandemic, Britain’s economy has been the second-weakest among the G7 countries after Germany, adding to the drag on incomes that, adjusted for inflation, have struggled to gain since the 2007-2009 financial crises. Slow growth may also limit the Labour government’s ability to offer quick progress on fixing the country’s strained health system and other public services, given Starmer’s promise to voters not to raise the main forms of taxation.
Keir Starmer wants to get Britain back to its 2.5% growth pace of the early 2000s with a combination of reforms to the restrictive planning system that has thwarted home-building and new infrastructure, support for strategic sectors and providing the political stability needed for attracting investors. However, his government is at the mercy of the short-term outlook for the economy as of now and the short-term results look promising. That immediate outlook appears to be brightening.
The government’s hopes of getting more room in the budget to invest in Britain’s struggling health service or fix the many other problems in the public sector lie with the longer-term forecasts of the country’s budget watchdog, the Office for Budget Responsibility, which will publish its next assessment of the European country’s growth prospects when Rachel Reeves delivers her first budget statement, somewhere in October or November.
The Starmer-Reves duo may need to focus further on reducing service sector inflation. The IMF’s economic counsellor, Pierre-Olivier Gourinchas, told the Guardian that the UK’s situation was similar to the United States in having “somewhat persistent services inflation.” His comments matched the tune of the Bank of England policymakers about the risks of service sector inflation becoming embedded. Since 2024 beginning, the headline rate of UK inflation has halved to 2% while service sector inflation has fallen from 6.5% to 5.7%.
A herculean effort needed
Polling data suggests frustration with the state of the economy indeed emerged as a major reason behind the Conservative’s defeat. According to the Pew Research Centre, just 22% of potential voters thought that the British economy was in good shape. Talking about the Conservative Party supporters, in 2017, around 75% of them were positive about the economy. That figure, in the lead-up to the polling day, went down to as low as 27%.
The UK economy came out of recession in the first quarter of 2024, with a better-than-expected growth of 0.7%. Inflation started falling to the Bank of England’s target of 2% for the first time in three years. While both Conservative and Labour argued over various issues in the lead-up to the elections, their focus points on the economy were more or less the same, be it boosting productivity and GDP growth. However, what Liz Truss’ disastrous 49-day reign did was bring to the table highly unorthodox economic policies, lacking both logic and vision. That wrecked the Conservatives’ self-image as a party known for economic competence.
Rachel Reeves holds broadly similar positions to Hunt on taxation and the government’s fiscal rules, which will be crucial when it comes to public spending policy.
However, Creon Butler from the British think tank Chatham House believes a fundamental economic shift may be coming, while mentioning that the Labour Party differs fundamentally from the Conservative Party in three areas of economic policy: the role of the public sector, regulation, and attitude to the European Union.
Butler says Labour have less “baggage” than the Conservatives with regards to the EU, and that while they don’t necessarily want to reopen negotiations around, for example, re-joining the Customs Union, they will be keen to develop more cordial and productive EU-UK relations than have been the case for the past few years.
A major issue for the Starmer government will be public investment. A recent study from the Institute for Fiscal Studies, a United Kingdom-based economic research institute, predicts that public sector investment, as a percentage of GDP, will decline from an estimated 2.4% of GDP in 2024 to as low as 1.8% of GDP by 2028.
Keir Starmer has inherited a British economy that has somehow escaped recession. He also needs to rebuild the British healthcare apparatus that was stressed by the COVID-19 pandemic. He has ruled out any hikes in income tax, national insurance welfare contributions, and value-added tax (VAT). However, as per the AFP, senior Labour leaders have not ruled out hiking other taxes which would be rather limited in scope but needed to boost public spending.
Once famed the world over, the British National Health Service (NHS) has been struggling big time amid strikes, budget crunch, and personnel shortages. The condition is such that the waiting list of patients is more than 7 million. The Labour Party has promised it would pay the staff extra to work in the evenings and on weekends and would use the spare capacity in private healthcare facilities to deliver two million more NHS appointments a year to clear the backlog.
Keir Starmer has also proposed a “Great British Energy” plan with the dual objectives of insulating the UK from international energy shocks as seen from the Ukraine War in the past two years and meeting the UK’s climate targets. He has further set 2030 as the target for decarbonising the British electricity grid. The wind has emerged as a key engine of change for Labour, which believes it will help the UK economy grow. The new government has promised big steps: doubling onshore and quadrupling offshore turbines by 2030. By removing the ban on onshore wind in England just a few days into power, Labour wants to show this is a key priority.
Labour will rework the process of calculating the minimum wages by factoring in the cost of living. It will likely further make flexible working “the default” and ban “zero-hour contracts,” under which employers are not obliged to provide any minimum working hours and the worker is not obliged to accept any work offered. The government also wants to tackle the crisis of the rising levels of unemployment through the creation of new national jobs and career services. It will be based in job centres but with local areas able to tailor the scheme depending on their own employment needs.
Rachel Reeves era begins
In her first speech as Chancellor of the Exchequer, Rachel Reeves vowed to “get Britain building again”, to boost economic growth. At the core of her plans remain compulsory housebuilding targets, which were ditched by the Rishi Sunak regime, with Reeves further committing that her administration was willing to take an “interventionist approach” to achieve the targets.
As stated in Labour’s manifesto, the Starmer government wants 1.5 million homes built in England in five years. That’s a daily average of 822 homes, or roughly a new housing estate, every day. But a target is one thing, and delivering a level of housebuilding not seen since the 1960s is another.
“The plans will rely significantly on private housebuilders. While they may have the capacity, the market conditions and commercial justification will have to suit them. Questions have already been raised about whether a sufficiently skilled workforce is available. And strap yourselves in for some battles at a local level when council planning committees face potentially stiff opposition from residents,” explained BBC.
Analysts are expecting Reeves to unleash tens of billions of pounds of investment in green industry and housebuilding. As per her playbook, planning decisions for major infrastructure projects in Britain will be made nationally rather than locally in an attempt to stop important projects from becoming tied up in years of red tape.
The transport and energy secretaries will prioritise decisions on infrastructure projects that have been “sitting unresolved for far too long,” while additional planning officers will be recruited to speed up the planning process. Talking about Labour’s housing sector plans, the “right mix” of affordable housing and homes for social rent will be built.
Labour will also overturn rules brought in by the Tories in 2015 which effectively meant that a very small number of objections could block new onshore wind projects. The course correction will result in the hundreds of new turbines being built in quick times, giving the country a much-needed alternative source of 24/7 power supply (and in the long run, cutting down its dependence on Russian gas).
While the proponents of compulsory housebuilding targets say these plans are necessary to make sure councils build the number of houses required, opponents say the mandatory approach has been tried unsuccessfully for decades and it risks forcing development on greenfield sites (land which has not been developed) against the wishes of locals.
The Conservative government under Boris Johnson had set targets for housebuilding in 2019, but these were ditched when Rishi Sunak took over the reins. This time around, the Starmer-Reeves duo will need the private sector to deliver the Labour’s homebuilding plans.
Trade group the Home Builders Federation has called for more support for people to get on to the housing sector ladder, including the return of a government support scheme for first-time buyers. In short, government support is required (in the form of subsidies) to ensure that people are in the position to splurge money and buy their first homes, propelling up the demand in the process.
David Barnes, head of policy and public affairs at the Chartered Institute of Building, while interacting with the BBC, also said that the Starmer administration needs to be realistic about the significant lack of skilled workers the construction industry is currently facing.
Will Reeves be the gamechanger?
In the words of BBC’s economic editor Faisal Islam, Reeves believes in the philosophy of “opening up the chess board for later in the game, as the moves become particularly good when one wants to go on the attack.”
She will be now applying the mathematics of constantly changing trade-offs to running the British economy.
“As she told me at her general election count, four hours after the exit poll had dropped, there’s not a huge amount of money there and therefore she was willing to have a fight on ripping up red tape holding back the private sector from building new homes and rebuilding Britain’s infrastructure,” Islam remarked.
Immediately after Reeves’ election victory, Treasury officials worked through the weekend to put together Labour’s planning shake-up as part of a big bang announcement to communicate directly to business leaders. It was designed to show total commitment to the growth agenda. Two green-belt data centres that had been blocked by local councils were given planning permission. Two house-building projects were unlocked as well.
Reeves wants the Treasury to go above its tax and spend duties and become the “growth department,” with the peer Spencer Livermore, now effectively her deputy for growth, alongside the Chief Secretary Darren Jones, who will focus on tax. The plan is to project the country as an area of optimism for investors.
More than accepting the difficult situation of borrowing, tax and spending, Reeves wants her office to “improve the trade-offs” too. The more confident investors get about Labour’s plans, the more money will pour in, and the more tangible improvements in the economy will be.
She will publish details on the state of the public finances, which will help set early parameters for big tax and spending numbers in the autumn. She will be tough on adhering to rules designed to limit borrowing for daily spending. She may need to potentially cut spending on councils, prisons and courts and raise some taxes to do this.
When asked about delivering policy changes to housebuilding, infrastructure and energy investment, while the Starmer government continues cuts to public investment planned by the Conservatives, Reeves told the media, “We need the private sector to build homes; we are not going to be in the business of constructing homes ourselves.”
She will bring her chess skills to the play by fixing the foundations first, then rebuilding Britain, and then making every part of the country better off. Given the thunderous nature of the Labour’s victory (411 seats out of 650), Reeves has the much-needed stability to play a rather long game.
Reeves has pulled off another potential masterstroke by launching a £7.3 billion National Wealth Fund (NWF), to attract billions of pounds of private sector cash for big infrastructure projects across the United Kingdom. The NWF will help projects such as ports, gigafactories, hydrogen and steel projects to attract a mix of investment, aiming for roughly £3 of private funds for every £1 of taxpayer cash.
Reeves said the fund would essentially operate as a “concierge service for investors and businesses that want to invest in Britain, so they know where to go.”
The investments will then be managed by the existing UK Infrastructure Bank, headed by the former HSBC chief executive John Flint, with support from a revamped British Business Bank, best known for running the COVID-19 business loan schemes. Reeves has also formed a taskforce, spearheaded by the noted senior officials from banking giants like Aviva, NatWest and Barclays, along with the former Bank of England governor Mark Carney.
Labour has also proposed GB Energy, another publicly owned company that will focus on the “production of clean, low carbon energy”. The investment made via the NWF will seek to deploy £1.8 billion to ports, £1.5 billion for gigafactories including the ones for electric vehicles, £2.5 billion to clean steel, £1 billion for carbon capture and £500 million to green hydrogen.
Jonathan Reynolds, the business and trade secretary, during his meeting with more than 170 senior leaders from businesses and trade associations around the UK, set out his key priorities: delivering an industrial strategy, which will be the cornerstone of the Labour government’s growth mission; supporting small businesses, described as the “beating heart” of high streets, communities and economy; resetting trade relations and championing British exports; and making work pay.
Reynolds told business leaders that he was aware that a key challenge for businesses is connectivity and the grid, and promised a cross-government focus on tackling this. He also promised to be “the most accessible” business secretary.
The new government is showing signs of making the British economy grand and competitive once again, but the journey will be long and treacherous. The opening few days have been great, with the Starmer-Reeves duo setting out their priorities clear. However, they have inherited an economy whose growth ratio has been worse than below par. The Labour’s massive victory margin has given it the breathing space to comfortably play the long game of fixing the basics. At the same point in time, the new government has sent the message among the investors that it will be a “Pro-Business” one.
Will the “Good Old British Economy” make a comeback soon? Only time will tell.