British Prime Minister Keir Starmer reacts as he meets with Defense Secretary John Healey and House of Lords MP George Robertson at 10 Downing Street on July 16, 2024 in London, England.
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Economic news from the UK over the past few weeks has focused primarily on the state of the country’s finances and its impact on the UK public and economic growth prospects.
There has been a trade of accusations and denials between Labor and the Conservatives over the national budget deficit, particularly between current and former finance ministers Rachel Reeves and Jeremy Hunt.
Whatever the UK’s current fiscal position, it is clear that the current fiscal deficit has been built up over many years and is likely to have consequences that will last for years to come. The ultimate dilemma Labor now faces is that without sustained economic growth the country cannot generate enough revenue to cover systemic shortfalls, but it also cannot create economic growth without real investment from the public and private sectors.
In many ways, the current fiscal situation harkens back to the 2008 financial crisis, when the country’s economy was unable to recover quickly enough to make up for the budget shortfall that arose at the time.
When UK incomes failed to recover, the then-Conservative government chose to implement austerity measures, temporarily cutting public investment in everything from infrastructure to public health and social services.
The problem is that these measures sold as short-term solutions remain in place, and the cost of the UK’s continuing aging population, the burden of Brexit on everyone from small business exporters to the financial sector, and continued sluggish economic growth mean that the current Labor Party The government’s options remain limited.
One thing the UK government clearly cannot do, unlike countries such as the US, China or Japan, is run a large deficit through increased spending or further tax cuts. Borrowing stood at £64.1bn in the financial year to August ($85 billion), the country’s debt reaches 100% of GDP.
For decades, the UK has been considered one of the world’s reserve currencies, but despite all the benefits it brings, recent events have confirmed that this is no longer the case. The bond market’s reaction to then-Premier Liz Truss’s proposed 2022 budget suggested that the private sector would not support any major deficit spending, especially tax cuts.
At the same time, both Labor and Conservative leaders are acutely aware of the limited financial resources currently available to fund public programmes. A well-known argument in favor of Brexit is that money sent to the EU could be used to restore funding to the ailing NHS.
Concerns about a new round of austerity have become widespread in recent days ahead of the Labor conference, which opens on Monday, and the new Labor government’s first budget next month. Recent reports that winter fuel benefits for UK pensioners may be cut and a recent House of Lords report that the current budget deficit is unsustainable have only further fueled concerns.
Reeves’ keynote speech on Monday afternoon stressed that the new Labor government was taking pains not to impose further austerity on public services.
The key question, then, not just for the party conference but for Labour’s plans for the future, is how to address the need for greater investment in the public sector, particularly in services and infrastructure, while attracting more private sector investment into the country to help Address shortages of income and economic opportunity.
One sign of a possible solution comes from the government’s aim to use private development funding to help complete the HS2 rail line, upgrading it to London Euston Station. Any such partnership would need to find ways to benefit both investors and the public to avoid a repeat of poorly executed privatizations, such as those of Rail Track and Thames Water.
Other possibilities could center on further post-Brexit efforts to remove red tape and make trade with the continent more efficient. Several global businesses have expressed frustration at maintaining supply chains amid border delays and unclear enforcement of rules.
A final possibility is to raise taxes, but this has so far been dismissed by the new government. Businesses and markets are likely to tolerate tax increases if they see value for money spent on improving services and business infrastructure.
Ultimately, the private sector will seek clear long-term execution plans, both in terms of tax and fiscal policy and in securing and establishing long-term public-private partnerships. If Labor can deliver on this, it will go a long way toward building stronger public confidence in its economic plans for the coming years.
Kevin Klowden is chief global strategist at the Milken Institute.
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