UK’s Starmer seeks confidence boost as economy poised to expand by 2% in 2025
Economists agree that the PM must fulfil his election promise to win over a fickle electorate
[LONDON] With the UK set to increase public spending by £70 billion (S$120.1 billion) a year over the next five years, there is expectation in many quarters that the economy will see faster growth in 2025.
Many economists agree that Prime Minister Keir Starmer must fulfil his election promise of delivering a stronger economy in order to win over a fickle electorate that’s still warming to his government’s policies.
The latest polls show that the ruling Labour party’s lead over the Conservative-led opposition has shrunk to just two percentage points, from nine percentage points at the general election in July.
The government’s Office of Budget Responsibility has forecast that the UK economy will expand by 2 per cent in 2025, before slowing to 1.8 per cent in 2026 and 1.5 per cent in 2027.
The 2025 forecast is slightly more optimistic than what many others think.
Earlier this month, the Paris-based Organisation for Economic Co-operation and Development raised its 2025 forecast to 1.7 per cent, from 1.2 per cent previously. It cut its expectation for this year to 0.9 per cent, from 1.1 per cent.
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The International Monetary Fund, meanwhile, has left its forecast for the UK’s gross domestic product growth in 2025 unchanged at 1.5 per cent. It recently raised its 2024 forecast to 1.1 per cent, from 0.7 per cent.
The Bank of England expects growth to come in at 1.5 per cent in 2025 due to a short-term boost from the increased government spending. However, it reduced its 2024 forecast to 1 per cent, from 1.25 per cent.
With 2024 drawing to a close, some surveys have found that Labour’s first Budget – delivered on Oct 30 by Chancellor of the Exchequer Rachel Reeves – has caused business confidence to slide to its lowest point in two years.
More than half of the £70 billion increase in public spending – £40 billion, to be precise – will come from tax rises, the largest such increase in nearly three decades.
The Bank of England recently indicated that higher than expected inflation will delay interest rate cuts. The UK Recruitment and Employment Confederation said there has been an increase in redundancies and a sharp fall in job vacancies.
“(Starmer) has squandered his early months, but it’s not too late to change Britain for the better,” said Fraser Nelson, a former editor of the Spectator, a magazine that covers UK politics.
He noted that some six million people currently receive out-of-work benefits, but surveys show that three-quarters of them would like to return to full-time employment. If these 4.5 million people are somehow encouraged to do so, this would lead to greater consumption and investment, said Nelson.
Six key targets
Starmer has outlined six milestones that he wants voters to use in order to hold his government to account during this first term.
These are to raise living standards; build 1.5 million homes; reduce waiting times at public hospitals; hiring more police officers; improving the standard of education; and achieving at least 95 per cent clean power by 2030.
In October, the government published a “Green Paper” that spelt out Britain’s economic weaknesses. These include weak labour productivity, low investment, falling business dynamism and uneven workforce skills.
“Addressing these challenges will be necessary to build on Britain’s strengths and boost economic growth,” said James Smith, the research director of the Resolution Foundation.
The Green Paper identifies eight potential high-growth sectors – advanced manufacturing; clean energy; creative industries; defence, digital and technologies; financial services; life sciences; and professional and business services.
Smith noted that these sectors are more prominent in the wealthier areas of the UK, such as inner London, Berkshire, Buckinghamshire and Oxfordshire.
Rather than just turbocharging existing areas of economic success, he said the government should encourage more activity in lower-productivity cities such as Manchester and Birmingham that have considerable growth potential.
The National Institute of Economic and Social Research (NIESR) said it is “relatively optimistic” as it predicts “strong wage growth” in the UK next year. Consumption should rise as better real inflation adjusted wages will raise workers’ standard of living, it added.
If inflation falls hovers around the Bank of England’s target of 2 per cent, the central bank will continue to cut interest rates. Such moves will reduce mortgage costs and boost the property market, analysts said.
The Centre for Economics and Business Research noted that UK economic activity will be supported by greater consumer spending over the medium term. Strong wage growth will lead to an improvement in consumer confidence, it said in a report.
“The fiscal and broader economic environment is laced with traps. Some of those traps are simply beyond (the government’s) control. But one big thing isn’t, (and that is) confidence,” said NIESR senior economist Max Mosley.
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