On 22 May, UK Prime Minister Rishi Sunak called snap elections for 4 July. Polls suggest that the opposition Labour Party—led by the centrist MP Keir Starmer—will sweep to victory, putting an end to 14 years of Conservative leadership. But what are Keir Starmer’s economic policies? Thus far, Starmer has focused on small-scale policy pledges, such as hiring extra teachers, cutting hospital waiting times, and improving border security—a cautious approach to policymaking that contrasts with the large challenges the country faces.
Sluggish economic growth
One key challenge for Starmer will be improving Britain’s economy. After easily and consistently outperforming the Euro area economy in the years prior to the 2016 Brexit vote, the UK has underperformed since. This is despite the tailwind of a population which has boomed by around 2.5 million in the intervening years on surging immigration from outside the EU. Our panelists forecast UK GDP growth to roughly track Euro area GDP growth over our forecast horizon to 2028. Given higher population growth in the UK, this means the UK’s GDP per capita growth will actually lag behind that of the Euro area. Starmer has pledged to make the UK the G7’s top-performing economy; our panelists see little chance of this happening. That said, the labor market will be one saving grace: The unemployment rate is hovering close to 4% and should remain there in the coming years, which would be below the G7 average.
Strained public finances
Government finances are likely to present Starmer with further difficulties. Weak growth, together with rising spending pressure from an aging population and the Covid-19 pandemic, has translated into a large budget deficit and stubbornly high public debt in recent years. And public debt is set to stay above 100% of GDP over our forecast horizon. This will likely tie Starmer’s hands and prevent lavish new spending commitments—particularly given the still-fresh memory of the ill-fated attempt by former PM Liz Truss to play fast and loose with fiscal discipline, which resulted in a sharp spike in market interest rates.
Damaged cross-Channel trade ties
Finally, Starmer will have to grapple with the UK-EU relations. The UK-EU trade deal has led to a raft of non-tariff barriers on both goods and services trade with Europe which have hampered both UK exports and investment into the country. And while Sunak has succeeded in making ties with Brussels more cordial following persistent political frictions under the premiership of Boris Johnson, the trade deal remains threadbare. A Labour government would likely look to work more closely with the bloc in certain economic sectors, but has pledged not to region the EU, the Single Market, or the customs union, which will continue to hamper exports and investment ahead.
Insight from our panelists:
EIU analysts commented on the Labour Party’s prospects:
“Much will depend on the size of Labour’s potential majority: a comfortable majority would make some of the party’s policies, such as overhauling the labour market, realistic and actionable. However, few of the Labour members of parliament (MPs) that will end up in government as junior ministers have experience in government. Labour will face significant challenges, given that many of the major issues facing the next administration will require large amounts of money to fix (including the National Health Service). Its period in office is therefore likely to be challenging.”
On the economic situation, Berenberg’s Holger Schmieding said:
“The UK economy has underperformed the US and the Eurozone since the start of the pandemic. The slump in 2020 was deeper and the subsequent recovery levelled off in 2022 even more so than in the Eurozone in the wake of the surge in energy and food prices. The strong Q1 GDP data partly correct an unexpectedly weak finish to 2023. The sharp 2.3% drop in imports, which boosted the net trade component in Q1, was probably a one-off. However, the data also suggest that the UK economy may have started to make up some of the lost ground.”
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