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Few would dispute the view that a Labor government will soon be overwhelmed by economic forces. Britain's stagnant economy, weak government finances, strained public services and unstable electorate are certainly creating a difficult legacy.
I claimed it myself. But if by any chance the Prime Minister and Chancellor were able to reverse public attitudes and usher in a Conservative victory, what could be the right direction for Keir Starmer and Rachel Reeves, or indeed Rishi Sunak and Jeremy Hunt? It is important to think about where you are going.
If Labor secures a parliamentary majority in this year's general election, Britain will suddenly have a stable government that can prioritize economic development. This will be a welcome change from the past five years. Stability, along with more constructive relations with the UK's friends in the EU, is a precondition for the higher business investment the economy requires. The move builds on Hunt's corporate tax reforms over the past year and a half.
A Labor government should also be able to take advantage of the improved economic fortunes we have already seen. After the horrific terms of trade shock in 2022, when UK energy supply prices soared, the balance between export and import prices has returned to pre-pandemic levels. This will give you the breathing space you need.
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The real wage increases that households are beginning to enjoy need not be inflationary in these circumstances. In addition to the headline inflation rate to be announced in April, which will fall significantly towards the government's 2% target, it will be difficult to justify high wage demands in the private and public sectors if the inflation rate approaches 2%. It will be. The Bank of England will then feel able to start cutting interest rates. Every percentage point of lower government borrowing costs improves public finances by almost £15 billion (about 0.5% of national income) over five years. This would provide scope to ease pressure on public services.
However, none of this is transformative. Real progress will come from prospects for economic growth. So where does growth come from?
In the short term, this will come from an increase in consumption as incomes recover. Next, we need to remove barriers to private and public investment and ensure that homes are built where people want to live. Third, labor force participation rates will improve and employment rates will return to their pre-pandemic trajectory. None of this is easy, but it's not impossible.
Mr Hunt and Mr Sunak talk about tax cuts, but the truth is that the Conservative government is one of the biggest tax increase governments in British history. According to the Budget Office, the tax burden will increase from 33.1% of gross domestic product in 2019-20 to 36.5% in 2024-25, with further increases planned to 37.1% by 2028-29. It is said that it will become. This is far higher than the 1.7 percentage points of GDP that the Institute for Fiscal Studies deemed necessary in 2019 to address population aging, highlighting the urgent need for economic growth.
Tax increases already in place mean that if Labor can combine rapid economic reform with good fortune, the new government could create a virtuous cycle between higher growth and improved public finances and services. are doing.
The Conservative Party has presided over several disastrous years of British economic history. They imposed huge costs on business with Brexit and tarnished their reputation for sound economic management with the failure of Liz Truss. But most of the pain was caused by external shocks from COVID-19 and the energy crisis. Rather than bad management, it was just bad luck.
The next five years start off in a dark place, but they can get a lot better. None of this is guaranteed, but Labor should not fear the future. With good economic policies and some luck, 2024 could be a winnable election.
chris.giles@ft.com
