UK election-winner Keir Starmer inherits weak economy with 'no magic wand'
![UK election-winner Keir Starmer inherits weak economy with 'no magic wand' UK election-winner Keir Starmer inherits weak economy with 'no magic wand'](https://citizentv.obs.af-south-1.myhuaweicloud.com/128081/conversions/Starmer-og_image.webp)
Keir Starmer, leader of Britain's Labour party, reacts as he speaks at a reception to celebrate his win in the election, at Tate Modern, in London, Britain, July 5, 2024. REUTERS/Suzanne Plunkett/File Photo
Britain's next prime minister Keir Starmer
spent the election campaign accusing Rishi Sunak's
Conservatives of "14 years of economic failure", but he has no
obvious quick fix to lift the country out of its slow-growth rut.
Living standards have stagnated since
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
decline, from creaking public services and inflation-hit personal finances to a
shortage of housing and weak business investment.
But with public debt at almost 100% of gross
domestic product and taxes at their highest since just after World War Two,
Starmer stresses the turnaround will take time.
"We're going to have to do really tough
things to move the country forward," he told voters days before the
election. "There is no magic wand."
Unlike in 1997, when Labour under Tony Blair
ousted the Conservatives with the economy expanding by almost 5% that year,
Starmer might struggle to get British annual growth above 2% in the foreseeable
future, in line with much of a sluggish Europe.
Britain's economy is expected to grow by less
than 1% this year.
The 2007-08 global financial crisis which hit
Britain particularly hard, cuts to many areas of public spending and the shocks
of Brexit, COVID and surging energy prices have combined to weigh on the
world's sixth-biggest economy.
But Starmer and his likely choice of finance
minister Rachel Reeves say they will not go on a borrowing binge to fund a
growth push, with memories still fresh of the 2022 bond market rout under
former Conservative prime minister Liz Truss.
They have also promised no major tax
increases, leaving the new government with little room in the budget.
"The fiscal inheritance will be a
difficult one and there are a lot of challenges to address," Lizzy
Galbraith, a political economist with investment firm abrdn, said.
Unlike in 1997, when Labour stunned financial
markets by handing operational independence to the Bank of England, its first
economic policy move is likely to be low key.
It plans to move
quickly to reform Britain's archaic planning system to speed up investment in
house-building and infrastructure, part of a plan to improve the country's weak
productivity, support growth and generate more tax revenues to invest in health
and other strained public services.
The Conservatives balked at upsetting core
supporters in suburban areas where much of any surge in residential
construction is likely to happen.
Starmer promises to be hard-headed about
breaking down the barriers to growth, but the challenge will be big.
"We've been here before with an incoming
government promising planning reform and it gets watered down in office,"
Galbraith at abrdn said.
Jack Paris, chief executive of InfraRed, an
international infrastructure asset manager, expects Labour will turn more to
private investment for green energy and speed up transportation projects.
"The new UK government should provide
increased clarity and visibility to investors with a long-term infrastructure
strategy representing a catalyst to making the UK again one of the most
attractive destinations for long-term investors," he said.
Also on Starmer's to-do list is reversing the
post-pandemic rise in people dropping out of the jobs market due to sickness,
something other rich economies have already done.
The Boston Consulting Group and the NHS
Confederation, representing much of the health service, estimate that getting
three-quarters of workforce dropouts since 2020 back into the jobs market could
boost tax revenues by as much as 57 billion pounds in total over the next five
years.
For context, Britain spends around 11 billion
pounds a year running its justice system.
Starmer's growth plan also includes lowering
some of the barriers to trade with the European Union. But he has ruled out a
major reworking of Britain's Brexit deal.
Economists say Labour's policies to date are
unlikely to make a big difference, much less meet Starmer's goal of turning
Britain into the Group of Seven leader for sustainable economic growth,
something it has barely managed since World War Two.
Higher public investment would be
growth-positive but Labour 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 point each year.
Economists polled by Reuters last month
expected the economy would grow by 1.2% in 2025 and 1.4% in 2026, less than
half its pace in the 10 years before 2007.
But in some ways Labour is inheriting an
economy that is turning a corner, a point Sunak tried in vain to sell to
voters.
After a recession in 2023, a recovery is
under way and high inflation has now abated, allowing the Bank of England to
start cutting interest rates possibly as soon as next month. Business and
consumer confidence are on the rise.
Starmer says - and many business leaders
agree - that political stability will help attract investment to Britain after
a turbulent eight years in which the country was run by five different
Conservative prime ministers.
Investors are already warming to the UK's
lower risk profile in the light of rising populism in France and the United
States.
Laura Foll, a portfolio manager at Janus
Henderson Investors, linked a recent out-performance of UK shares to that shift
in perception. "Relatively, the UK, from a political standpoint, is
looking in far better shape," she said.
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