Next UK government faces tough road ahead to stabilise economy after Jul 4 election
[LONDON] As the UK heads towards the Jul 4 general election, the next government – very likely to be a Labour Party administration, if the polls are to be believed – will have to contend with economic stagnation, high living costs, low productivity and debt.
Various surveys over the past year have consistently placed the opposition Labour in the lead by some 20 points ahead of the Conservatives, which means Prime Minister Rishi Sunak’s time at 10 Downing Street is almost surely coming to an end.
Rachel Reeves – the Shadow Chancellor of the Exchequer and the frontrunner to become the new Finance Minister under Keir Starmer if Labour wins the election – summed up the challenges at a recent conference in London.
“Considering the economic inheritance we are going to get, we won’t be able to spend our way to better public services,” she said. “We have got to grow the economy and reform the public services to ensure they deliver for the people.”
As things stand, Sunak and his team are doing their best to persuade disgruntled voters that the British economy is on the right path.
The UK has already emerged from last year’s shallow recession, but the annual growth rate is a stagnant 0.2 per cent. Inflation has fallen to 2.3 per cent in the year to April, the lowest for nearly three years and down sharply from a high of 11.1 per cent in October 2022.
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The cost of living, however, has soared by 23 per cent since the Conservatives won the last election in 2019. The Covid-19 pandemic and Russia’s invasion of Ukraine were outside causes and beyond the government’s control, but critics complained that both fiscal and monetary policies have been lax.
According to the London-based Institute for Fiscal Studies (IFS), an independent economics research body, public spending is exceeding taxation, even though it has risen to 37 per cent of gross domestic product (GDP). Brexit has not helped, and the UK has a budget and current account deficit.
Britain’s debt to GDP has grown to 98 per cent today. The interest on this debt has risen to almost £120 billion (S$206.3 billion) and now accounts for a sizeable proportion of the annual budget.
Analysts have noted that these massive payments reduce the government’s ability to spend more on healthcare, education, security, defence and infrastructure.
“Growth is unlikely to improve during the next parliament. Government repayments to investors are likely to remain high,” said IFS director Paul Johnson. “This will constrain any Chancellor of the Exchequer after the election.”
British educator and political historian Anthony Seldon pointed out that since 2010, the five Conservative prime ministers have only managed “modest success”.
“Measured against four other periods of one-party dominance, the (Conservatives’) record is distinctly underwhelming. Historians will look back on 14 years of lost opportunities,” he added.
The big question is whether a Labour administration under Starmer, who has been the Leader of the Opposition since 2020, would fare any better.
“The choice on Jul 4 will be between two parties with remarkably similar proposals,” wrote Matthew Parris, a former member of parliament in a column published in The Times on May 25.
He said that both parties believe in a “substantial safety net” provided by welfare and funded by “substantial taxation”. Neither believes in open borders for immigrants, and both believe in a similar level of defence spending, he added.
On its part, the Labour Party has promised tighter green legislation and to set up a national pension fund, similar to what is seen in Singapore and Norway. The party has also proposed imposing a value-added tax on fees at private schools, and to reduce the legal voting age from 18 to 16 years.
As campaigning goes into full swing, business leaders in the UK are lobbying for several key reforms that they hope the incoming government will implement in the months after the election.
Companies in the UK, both the smaller players and the multinationals, have called for better relations with the European Union in this post-Brexit era. Officials in the City of London hope that the next government will do more to attract more listings on the London Stock Exchange.
The Federation for Small Businesses, which represents small and medium-sized enterprises in the UK, has said it would like to see lower business rates and legislation to tackle the pressing problem of late payments.
The Confederation of British Industry wants more tax incentives to train workers and deal with the issue of a shortage of skilled labour.
The Labour Party has pledged to roll out an industrial strategy to maximise the UK’s strengths in areas such as life sciences, clean power, automotive, aerospace, and financial services.
Unless voter sentiment changes dramatically in the next five weeks before the big vote, it seems all but certain that Starmer and the Labour Party will get their chance to make good on their promises.
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