The likely new government hopes to solve Britain’s problems through more economic growth. But where will that come from? Would Labour dare to move closer to the EU?
When the Labour Party held its congress in Liverpool last autumn, business representatives travelled there in droves. The overwhelming interest was also the result of a charm offensive by party leader Keir Starmer and his shadow finance minister Rachel Reeves. In recent months, the two have met almost all of the CEOs of the 350 largest British companies. “Labour is the natural business party,” Reeves likes to say, pointing to her experience as an economist at the Bank of England. “At least they know what we want to hear,” a bank representative from the City of London recently explained in a confidential conversation.
Stability instead of turbulence
Starmer and Reeves are also adopting a pro-business tone in the campaign before the general election on July 4, which the Labour Party is likely to win by a wide margin according to the polls. Starmer is distancing himself from his predecessor Jeremy Corbyn at every opportunity. Five years ago, Corbyn wanted to implement his socialist-inspired nationalisation and redistribution plans with higher taxes, debt and market interventions. Starmer, on the other hand, is pragmatic. “I want to be prime minister, not a ringmaster,” he countered the accusation that his programme was boring.
But the boredom is almost part of the program. The Conservatives brought the Brexit turmoil to the country during their fourteen-year rule and changed the prime minister four times in the last five years alone. Corporate investment has never recovered from the slump after the Brexit vote. The hesitation culminated in the 45-day term of Liz Truss, who provoked a crisis on the financial markets in autumn 2022 with her plans for uncovered tax cuts.
Now Starmer is counting on more political stability to improve the economic climate. He promises to
Corporate profit tax will remain at the current 25 percent for the duration of the next legislative period. However, Labour’s plans to regulate the flexible labour market are causing concern in business circles. It remains to be seen how far the reforms will go, but the introduction of collective agreements is to be limited to the area of care for the elderly and disabled.
Difficult legacy
One thing is certain: Starmer will be taking on a difficult legacy if he is elected Prime Minister on July 4. In the first quarter of the current year, economic growth was just 0.6 percent compared to the same period last year. Meanwhile, the tax burden is higher than it has been since the end of the Second World War, and national debt is expected to rise to 97.9 percent of economic output this year. At the same time, the need for investment is enormous: the sewerage systems and schools are outdated, several municipalities are facing bankruptcy, and waiting lists for the National Health Service (NHS) are breaking all records.
Compared to these problems, Labour’s specific election promises seem modest. The party wants to increase VAT on private school fees, tighten tax obligations for non-resident foreigners and impose a special tax on the profits of energy companies. The party wants to use the 8.5 billion pounds (9.6 billion Swiss francs) raised in this way to reduce NHS waiting lists and employ new teachers. Starmer also wants to take on 3.5 billion pounds of new debt per year to set up a public company to promote renewable energy.
Compared to the total government spending of £1,100 billion, these are all minor details. The financial scope for manoeuvre is very limited. On the one hand, Starmer and Reeves have ruled out increases in income tax, VAT and wage contributions. On the other hand, Labour wants to stick to the budget rules. They limit annual new borrowing to 3 percent of economic output and state that national debt must decrease within five years. More debt is hardly an option for Starmer, even politically, as the British are still feeling the shock of the market reaction to Liz Truss’s budget plans.
In order to reduce the huge mountain of debt, the future government will have to introduce significant austerity measures in practically all ministries from 2025 due to the budget rules. The renowned Institute for Fiscal Studies therefore accuses both Labour and the Conservatives of concealing the consequences of these impending budget cuts in their election manifestos.
Planning reform aims to promote growth
Starmer has repeatedly asserted that there will be no return to austerity under his leadership. Without austerity measures, additional debt or tax increases, his only hope is that an economic recovery will quickly bring more money into the state coffers.
But where will this growth come from? In addition to the belief that political stability will improve the investment climate, Starmer is banking on a reform of the planning system. In fact, the thicket of regulations and options for appeal makes the implementation of large-scale projects such as the now massively reduced construction of the HS2 high-speed rail line more difficult and more expensive. The planning laws also protect the interests of property owners who torpedo the urgently needed construction of more houses in their area.
Because Labour’s electorate is younger and more urban than that of the Tories, a Labour government would be more likely to be able to take on homeowners. Since Social Democratic voters are also much more pro-EU than Conservative voters, Starmer would probably also have the political leeway to put relations with the EU on a new footing three years after Brexit was implemented.
Reducing the trade barriers created by Brexit would also be a way for Labour to boost growth. In a recent study, the investment bank Goldman Sachs concluded that the UK had grown 5 percentage points less than comparable economies over the past eight years because of Brexit.
Fear of Brexit correction
The British Chamber of Commerce is therefore calling on the future government to end the “Brexit egg dance” and enter into closer trade relations with Brussels. But Starmer has done his best to avoid a new edition of the Brexit debate during the election campaign. Although he promises a new beginning in terms of atmosphere, he only wants to negotiate minor issues with the EU, such as a veterinary agreement or a treaty on the mutual recognition of professional diplomas.
A substantial reduction in trade barriers would be possible by joining the customs union or the EU internal market. But shadow business minister Jonathan Reynolds once again categorically ruled this out on Thursday. Because a too radical correction of Brexit would reopen the wounds of the past and undermine Labour’s primary goal of stability, he explained.
It is conceivable that Labour’s suffering and thus its level of ambition will increase in the coming years. Tax increases and austerity measures are also likely to quickly come up if hopes of a growth spurt are dashed. In recent months, Starmer has contented himself with criticising the Conservative government’s dismal record and offering as few opportunities for attack as possible. When he moves into the government headquarters at 10 Downing Street next week, he will no longer be able to avoid difficult decisions and trade-offs.