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An optimist’s guide to the next Labour government

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Few dissent from the view that a Labour government would soon be overwhelmed by economic forces. A stagnating UK economy, feeble government finances, stressed public services and a volatile electorate certainly make for a challenging inheritance.

I have made the case myself. But it is important to think what could go right for Keir Starmer and Rachel Reeves — or indeed Rishi Sunak and Jeremy Hunt in the unlikely event that the prime minister and chancellor are able to reverse public attitudes and pull a Conservative victory out of the bag.

Assuming Labour secures a comfortable parliamentary majority in this year’s election, the UK will suddenly have a stable government that can prioritise economic progress. This will be a welcome change from the past five years. Stability, along with more constructive relations with Britain’s friends in the EU, are prerequisites for the higher business investment the economy requires. It would build on Hunt’s corporate tax reforms of the past 18 months.

A Labour government should also be able to exploit the improvement in economic fortunes we’ve already seen. Following a horrible terms-of-trade shock in 2022 when the UK’s energy supplies surged in price, the balance between export and import prices has returned to the pre-pandemic level. This provides much needed breathing space.

The real wage rises households are beginning to enjoy need not be inflationary in these circumstances. Alongside a sharp fall in April’s coming headline inflation rate towards the government’s 2 per cent target, high private and public sector pay claims will be harder to justify when inflation is close to 2 per cent. Then the Bank of England will feel able to start cutting interest rates. Lower government borrowing costs improve the public finances five years ahead by almost £15bn (about 0.5 per cent of national income) for every percentage point reduction. This would give scope to ease pressure in public services.

None of this would be transformational, however. Real progress would come from the outlook for economic growth. So where will growth come from?

In the short term, from higher consumption as incomes recover. Then there is a need to remove barriers to private and public investment and ensure homes are built where people want to live. Third is improved labour force participation, bringing the employment rate back to the path it was on before the pandemic. None of these are easy, but they are not impossible.

For all Hunt and Sunak’s talk of tax cuts, the truth is the Conservative government has been one of the biggest tax-raising administrations in UK history. It has increased the tax burden from 33.1 per cent of gross domestic product in 2019-20 to 36.5 per cent in 2024-25 with further rises planned, taking it to 37.1 per cent by 2028-29, according to the Office for Budget Responsibility. This is far more than the 1.7 percentage points of GDP the Institute for Fiscal Studies thought necessary in 2019 to deal with an ageing population and highlights the urgent need for economic growth.

The taxes already raised mean that if Labour can marry rapid economic reforms with some good fortune, a new government can create a virtuous circle between higher growth and improved public finances and services.

The Tories have presided over a miserable few years of UK economic history. They imposed significant costs on business with Brexit and undermined their reputation for sound economic management with the Liz Truss debacle. But most of the pain was caused by the external shocks of the Covid and energy crises. Bad luck rather than bad management prevailed.

The next five years will start from a dark place, but could be far better. None of this is guaranteed, yet Labour should not fear the future. With good economic policies and better luck, 2024 could be a good election to win.

chris.giles@ft.com

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