UK’s relative stability amid storm-tossed seas

Huge array of priorities in new prime minister’s in-tray

Britain is set for a period of relative political and economic calm under Prime Minister Keir Starmer, but it cannot avoid turbulent crosscurrents from the rest of Europe and the wider world.

The hitherto opposition Labour party looks ready for a possible decade in power over two consecutive terms. Its landslide election win on 4 July saw the ruling Conservatives heavily punished for a badly managed withdrawal from the European Union and a string of further policy failures. However, the euphoria that surrounded the party’s last big electoral breakthrough, when Tony Blair took power in 1997, is noticeably absent this time.

A pre-electoral OMFIF seminar in London on 3 July on the state of the nation, supported by the Chartered Institute for Securities and Investment, produced a bleak assessment of the political and economic environment. Headaches include balancing spending commitments and strained public finances, instability in France and Germany, the uncertain outcome of wars in Ukraine and the Middle East and the possible return of Donald Trump as US president next year.

The problems facing Labour, and the array of priorities for Starmer, are enormous. The party will have to give up its reticence over raising taxes and plan a 10-year strategy for reviving the economy. Greening the economy will require massive investment. Financing the restructuring of the National Health Service, ‘levelling up’ neglected regions (a task signalled but left unfinished by the Conservatives) and reskilling the workforce for new jobs in updated technology sectors are all urgent tasks

A drastic one-off wealth levy may frighten some parts of the electorate but has to be contemplated to find resources, not least for the NHS. The UK faces a labour shortage because of changes in participation rates – raising the need for a more constructive and forward-thinking approach to immigration.

Cloudy landscape takes shine off victory margin

The cloudy landscape takes the shine off Labour’s victory margin of close to 170 seats, second highest since the second world war. The Conservatives slumped to their lowest ever election score. Tactical voting in individual constituencies under Britain’s first-past-the-post system resulted in the Tories losing two thirds of their previous seats. Their poor result was heavily influenced by the radical populist Reform party and resurgent Liberal Democrats, who won their highest number of seats since 1923.

Starmer, becoming Britain’s sixth prime minister since the EU referendum in 2016, said in a sober accession speech on 5 July that the country needed a ‘reset’ amid the ‘weariness’ caused by disappointment over politics and public services. Winning a landslide with a mere 34% of the votes, only 10 points ahead of the Conservatives and a low point for a party in power, Starmer knows he has little leeway for error. ‘The work of change begins immediately,’ he said. ‘Brick by brick we will rebuild the infrastructure of opportunity.’

Outgoing incumbent Rishi Sunak, who announced he would step down as Conservative leader, took responsibility for the defeat. But it is difficult unduly to blame Sunak for the debacle afflicting a party apparently suffering a collective death wish. He inherited a leaking boat from Liz Truss, hit in autumn 2022 by adverse financial market reaction to her attempt to free the British economy, who took over from her now-disgraced predecessor, over-promiser Boris Johnson.

Sunak, with a strong record of previous jobs in finance, was exposed as lacking in political skills. His haste in calling a surprise July election was widely criticised within his own party. Some will now allege that, had he waited until the autumn and an incipient economic upturn, the gap with Labour would have narrowed further.

Hoyer: Europe’s inward-focused orientation ‘worries me a lot’.

Britain is hoping for a relatively stable passage through storm-tossed seas. At the OMFIF-CISI seminar, Werner Hoyer, former president of the European Investment Bank, said Europe’s inward-focused orientation ‘worries me a lot’. Winding down international development activities, neglect of the global South and insufficient focus on plugging the continent’s investment gap would eventually rebound against Europe.

Ivan Rogers, Britain’s former permanent representative to the EU, castigated ‘naïve’ European and German policies building dependence on Russian energy. He agreed with John Redwood, a long-time free market Conservative MP who announced in May he was not standing again in his Wokingham constituency, on the pointlessness of any attempt to enter the EU single market or customs union. In a drastic pre-election statement, Starmer ruled out these steps during his lifetime.

Rogers said Europe was built as a ‘regulatory superstate’ to resolve enmity between Germany and France. ‘It was not built for a world where there is increased state intervention and diminished globalisation.’ Rogers cast doubt on Europe’s desire for a ‘strategic role’, saying it was ‘not a strategic player’.

Whoever wins the US presidential election will cajole Europe to play a role against China, Rogers said. ‘There will be overwhelming American pressure. It will be brutal.’ David Manning, former UK ambassador to the US and a former foreign policy adviser to Blair, said: for the next UK government, the ‘world will crowd in on them’.

Ksenia Kirkham, a war studies expert from of King’s College London, said, ‘The UK’s image as a global leader for democracy and rule of law needs to be restored’, affirming that ‘Russia is becoming more solid in tolerating sanctions.’

Deanne Julius, senior fellow at Chatham House and a former member of the Bank of England monetary policy committee, recalled that, since 2016, the UK had grown at 1.3% annually, compared with 1.0% in Germany and 1.1% in France. ‘Hence we are all in the same boat.’ Vicky Pryce of the Centre for Economic and Business Research pointed to post-Brexit UK industrial difficulties due to rising costs (particularly construction) and loss of skills. Labour had tied itself to relatively constraining public finance manifesto commitments but could ‘borrow to invest’ in longer-term growth-enhancing projects.

Iain Begg of the London School of Economics called on the new government to address decade-long failings in productivity growth and in infrastructure, which was ‘just about managing’. These are just a small selection from the priorities in Starmer’s bulging in-tray.

Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Political Science, Chair of the OMFIF Advisory Council, Crossbench Peer in the House of Lords and was Chairman of the Labour Party in 1986-92. David Marsh is Chairman of OMFIF. Nikhil Sanghani is Managing Director of OMFIF’s Economic and Monetary Policy Institute.

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