Big win for Labour and deal on Europe could produce UK rebound

Starmer, with room for cautious radicalism, can manage left-wing expectations

Britain is only weeks from a general election. A victory for the Labour party, after 14 years in opposition, looks near-certain, but several developments could upset that outcome. A Labour win, a steady course for economic policy and a fillip to growth and investment through effective rapprochement with the European Union could produce a rebound for UK financial markets and sterling. The chances that these three factors will coalesce are less than 50%, but the upside prospects for the UK are real and cannot be ignored.

With Keir Starmer, the opposition leader, benefitting from a consistent Labour party opinion poll advantage over the Conservatives of 20 percentage points and more, the election is his to lose. In football terms, Starmer has an open goal in front of him and plenty of games to spare.

The perils for Starmer are two-fold, but both can be managed. An incoming Labour government tends to incite unfulfillable expectations from the Left, which in turn raises fears of a business and financial markets backlash. Starmer and his formidable team are sensibly advocating caution – especially (for the moment) over Europe – and business-friendliness, taking a lesson from Tony Blair and New Labour in 1997. Given party discipline so far, a wide Labour victory margin – which seems probable – is not likely to trigger undue left-wing demands.

The other danger in the run-up to the election comes from backlash against the war in Gaza. This stems from left-wing factions (whether formally in the Labour party or not) close to former leader Jeremy Corbyn, and from voters in up to 25 Muslim-influenced constituencies. The Hamas-Israel war will cast a shadow over the next year, if not longer. However, the tougher US line of arms sales to Israel may help both the Conservatives and Labour to put distance between themselves and the government of Prime Minister Benjamin Netanyahu.

After disastrous results in the 2 May local and regional elections, a series of tawdry scandals centred on Conservative MPs and constant signs of disarray and ineptness, the Conservatives are suffering a nervous breakdown. While Prime Minister Rishi Sunak could say that he has fulfilled part of his promises to reduce inflation and illegal immigration, fulfilling the latter goal depends on a debatable and costly scheme to send asylum seekers to Rwanda, which has further diminished Britain’s international reputation.

Sunak’s legacy  

Sunak has chosen not to limp on until the end of the year. He will endure the opprobrium of defeat. But at least he will have remained in office seven times as long as his predecessor Liz Truss, who lasted 49 days after building spectacularly quickly an enduring reputation for incompetence.

Like David Cameron, his predecessor in 2010-16, now a febrile but ineffective foreign secretary, Sunak had a lot of political luck until he moved to 10 Downing Street. He was chancellor of the exchequer when the Covid-19 pandemic broke out and opportunities for public spending were practically unlimited. The charming but near-criminally negligent Boris Johnson, in office before Sunak, fell foul to the venom of an off-the-rails adviser who thought he could run the country better than any MP. Sunak is more of a techno-economist than a politician, better suited to running Goldman Sachs than a country. However, no one can take away his accomplishment of becoming the first, so far only, Indian-origin prime minister.

Starmer faces a 1945-like challenge of rebuilding the economy – whose problems were already apparent since before the 2008 financial crisis. The UK has suffered from particular low productivity growth as well as a steady labour force withdrawal of middle-aged workers. Much has been made of opportunities from artificial intelligence but that is a highly competitive game in which US and China are already far ahead.

Reinvigorating Tory idea of ‘levelling up’

How to revive growth is the biggest challenge. The obvious step is to reinvigorate the Tory idea of ‘levelling up’ growth and living standards between different regions of the UK. This requires more serious management and more money on infrastructure led by better rail links.

Rachel Reeves, Starmer’s chancellor of the exchequer-in-waiting, likely to become the first female in the job, has not surprisingly promised to spend money wisely. So, unoriginally, the problem will be to find resources to produce the improvement in public services that the electorate desires. One of the legacies of spending cuts under George Osborne, Cameron’s chancellor, is that a huge deficit is plaguing the health, social and other public goods services.

The tax system has been distorted by Conservative tinkering to protect high-earners. Labour will have to shift the system without lowering the overall tax to gross domestic product ratio. One way forward would be to change real estate taxation. Capital gains on sales of principal residences are generally not taxed, unlike profits from stock market and other productive investments. Thus, the economy over-invests in bricks and mortar. Upgrading this system – as well as the framework for council tax, basing levies on current capital value rather than purchase price – would considerably benefit the public coffers.

The biggest headache will be the National Health Service. Britain has to abandon nostalgia and take a risky but propitious mixed finance path, combining public and private funding – making explicit the current de facto set-up. The NHS may have become Britain’s state religion. But God does not look after those who do not look after themselves.

Another area for cautious Labour radicalism is to revisit ‘basic income’. The Conservatives’ universal credit scheme has been a failure. Child poverty and demand for food banks have risen. The Labour party has prepared a basic income guarantee scheme building on work by John McDonnell, Corbyn’s shadow chancellor. It would be worth considering a basic income scheme for £5200 a year. This would alleviate child poverty and help hard-up families where women carry out unpaid domestic work.

Many more important dossiers are piling up: defence procurement co-operation with Nato countries, interaction between the Treasury and Bank of England and spending on industrial development. The cliché holds. If growth returns, public spending worries start to fade. Elections are looming, too, in the EU and the US. The UK can do its bit. But the overall policy-making environment for Starmer and Reeves depends on matters well beyond Britain’s control.

Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Political Science, Chair of the OMFIF Advisory Council and Crossbench Peer in the House of Lords and David Marsh is Chairman of OMFIF.

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