Labour focused on the economy in its election campaign, promising to restore growth after years of virtual stagnation, but how confident are the experts that the new government can pull this off?
With two seats left to declare, the Labour party has won 410 compared with 121 for the Conservatives, 71 for the Liberal Democrats, nine for the Scottish National Party and four each for Reforms and the Greens. This leaves the party with the largest majority government in 25 years.
But although Labour leader Keir Starmer’s majority of around 170 seats is almost as large as Tony Blair’s 1997 landslide (when Blair claimed 418 seats with majority of 179), he captured only 33.8% of the popular vote.
Labour won a large majority with a relatively low vote share
Source: Pantheon Macroeconomics
Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “Normally a majority as large as Labour’s would guarantee more than one term as government.
“But Mr Starmer's majority is not as secure as normal given the voting dynamics. The Labour party will likely need to move fast with policy changes to demonstrate they can deliver their promised changes.”
What are Labour’s economic pledges?
Labour’s manifesto placed economic stability at its core, with 83 mentions of the economy among its 136 pages compared with just 50 from the Conservatives. Given the fallout of the short-lived Liz Truss administration’s disastrous mini-Budget, Labour has been careful not to pledge any changes to spending or fiscal rules that could spark a negative reaction.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Labour is determined to keep a tight ship and the manifesto makes it clear that ministers intend to steer the economy in a ‘steady as she goes’ fashion, with a keen eye trained on stimulating long-term growth, rather than immediate boosts to consumer spending power.”
Starmer has promised to follow tough spending rules to ensure that government debt falls as a share of GDP in five years’ time. At the same time, he has argued that the UK needs better public services, better infrastructure, new energy systems and support high-growth sectors as part of a long-term plan for the economy.
Labour said: “We will embrace a new approach to economic management – securonomics – that understands sustainable growth relies on a broad base and resilient foundations. Our approach will depend on a dynamic and strategic state.”
Among the policies floated by Labour are a new industrial strategy, capping corporation tax at 25%, a National Wealth Fund to invest in “the industries for the future” and the establishment of Great British Energy to accelerate the transition to clean power.
Labour has also proposed to reform planning rules, implement a 10-year infrastructure plan, build 1.5 million homes, overhaul the immigration and skills system, improve the jobs market, launch a New Deal for Working People, introduce a new childcare offer and support those with physical and mental health challenges.
How likely are these to succeed?
Pantheon Macroeconomics’ Wood said: “Keir Starmer’s majority is large enough to allow him to plot a stable policy course, which should boost business investment and attract greater foreign investment. He has a good chance of making major supply-side reforms like cutting planning regulations.
“But that will all take time to fully implement and impact the economy. For now, we assume a change in government offers a modest upside risk — 0.25 percentage points — to our 1.5% year-over-year estimate of UK potential growth.”
Julian Howard, chief multi-asset investment strategist at GAM Investments, said the economic challenges facing the incoming government are significant, citing a recent Bloomberg survey of economists that forecast UK growth to be just 0.7% for 2024. The US, meanwhile, is tipped for a 2.3% growth rate while even France is expected to grow 0.9%.
“The primary challenge will be around growth and productivity, both of which have been lacklustre since the global financial crisis,” he said. “Keir Starmer repeatedly emphasised the ‘number one priority’ of growth during the election campaign but remains constrained in how this might realistically be brought about.”
Hargreaves Lansdown’s Streeter said it might prove challenging for the Labour government to stick with its cautious spending pledges while finding money to pay for its long-term ideas for the economy against the current backdrop of lacklustre growth and high debt payments.
“So, to avoid a big bazooka of investment misfiring further down the line, it may mean the fiscal rules will have to be tinkered with in the future and further tax rises can’t be ruled out,” she added.
Wood expects the Labour administration to implement its proposed changes to planning regulations and infrastructure plans relatively quickly. New chancellor Rachel Reeves is expected to borrow more in the near term to shore up “creaking” public services.
“Taxes will have to be raised in the medium term given the mess the public finances are in, but Labour will find it harder to break promises to leave most major taxes unchanged given their vote share,” he added.
“They will be hoping for stronger growth, and help from lower interest rates, rather than quickly pushing large tax hikes, we suspect. We see a good chance of a stimulatory Budget in the Autumn.”