UK election-winner Starmer inherits weak economy with ‘no magic wand’ By Reuters

By William Schomberg

LONDON (Reuters) – Britain’s incoming prime minister, Keir Starmer, has spent his election campaign accusing Rishi Sunak’s Conservative Party of “14 years of economic failure” but has no clear quick fix to pull the country out of its slow growth rut.

Living standards have stagnated since the Conservatives came to power in 2010, and Britain’s recovery from the Covid-19 pandemic has been the weakest of any major rich nation after Germany.

Starmer will be under pressure to use Labour’s huge majority in parliament to end a sense of decline, from crumbling public services and inflation-hit personal finances to housing shortages and weak business investment.

But with public debt soaring to nearly 100% of GDP and taxes at their highest levels since just after World War II, Starmer stressed that the turnaround would take time.

“We will have to take very difficult measures to move the country forward. There is no magic wand,” he told voters days before the election.

In contrast to 1997, when Tony Blair’s Labour Party ousted the Conservatives as the economy expanded by about 5% that year, Starmer may struggle to lift British annual growth above 2% for the foreseeable future, in line with much of a slowing Europe.

The UK economy is expected to grow by less than 1% this year.

The global financial crisis of 2007-08, which hit Britain particularly hard, cuts in many areas of public spending, the shocks of Brexit, Covid-19 and rising energy prices have combined to weigh on the world’s sixth-largest economy.

But Starmer and his likely choice of finance minister Rachel Reeves say they will not rush to borrow to fund a growth boost, with memories still fresh of the 2022 bond market rout under former Conservative prime minister Liz Truss.

They also promised not to impose major tax increases, leaving the new government with little room in the budget.

“The financial legacy will be difficult and there are a lot of challenges to address,” said Lizzie Galbraith, political economist at investment firm Aberdeen.

In contrast to 1997, when Labour surprised financial markets by handing operational independence to the Bank of England, its first step on economic policy is likely to be modest.

The government plans to move quickly to overhaul Britain’s outdated planning system to speed up investment in housing and infrastructure, as part of a plan to improve the country’s weak productivity, support growth and generate more tax revenue to invest in health and other strained public services.

The Conservatives have refrained from angering core supporters in suburban areas where much of the increase in residential construction is likely to occur.

Starmer has promised to be tough on removing barriers to growth, but the challenge will be huge.

“We have been through this before with a new government promising to reform planning, only for those promises to be watered down in power,” said Galbraith, from Aberdeen.

Jack Paris, chief executive of InfraRed, an international infrastructure asset management company, expects Labour to push more towards private investment in green energy and accelerate transport projects.

“The new UK government must provide greater clarity and vision for investors through a long-term infrastructure strategy that will act as a catalyst to make the UK once again one of the most attractive destinations for long-term investors,” he said.

Britain withdraws

Starmer’s to-do list also includes reversing the post-pandemic surge in the number of people leaving the labour market due to illness, something other rich economies have already done.

The Boston Consulting Group and the NHS Confederation, which represent a large part of the health service, estimate that bringing three-quarters of those who have left the workforce since 2020 back into the workforce could boost tax revenues by up to £57bn in total over the next five years.

In a related context, Britain spends about 11 billion pounds annually to run its judicial system.

Starmer’s proposed growth plan also includes lowering some barriers to trade with the European Union, but he has ruled out major changes to the Brexit deal.

Economists say Labour’s policies so far are unlikely to make much difference, let alone meet Starmer’s goal of turning Britain into the G7 leader in sustainable economic growth, something it has barely managed since World War II.

Increasing public investment would be positive for growth, but Labour’s pledges to cut immigration could have the opposite effect.

Analysts at Goldman Sachs say Labour’s reforms will boost Britain’s economic growth in 2025 and 2026 by just 0.1 percentage points a year.

Economists polled by Reuters last month forecast the economy would grow 1.2% in 2025 and 1.4% in 2026, less than half its pace in the decade before 2007.

But in some ways, Labour is inheriting a transformed economy, a point Sunak has tried in vain to sell to voters.

After a recession in 2023, recovery is beginning to emerge, with high inflation rates easing, allowing the Bank of England to start cutting interest rates as early as next month. Business and consumer confidence are also rising.

Starmer says – and many business leaders agree – that political stability will help attract investment to Britain after eight turbulent years in which the country has been ruled by five different Conservative prime ministers.

Investors are already becoming interested in the UK’s lower risk profile in light of rising populism in France and the US.

Laura Foll, portfolio manager at Janus Henderson Investments, linked the recent outperformance of UK stocks to this shift in perceptions. “Politically, the UK looks relatively much better off,” she said.

EconomyelectionwinnerinheritsMagicReutersStarmerwandweak
Comments (0)
Add Comment