Labour inherited a mess. The UK economy has endured 15 years of low growth, living standards have fallen, and public services have suffered years of austerity. Turning around the UK economy was never going to be achieved within a matter of months. Even with the best domestic stewardship and stable global conditions, it would take several years.
As growth forecasts fall, the pound drops and bond yields rise, the Chancellor looks set for a tough 2025 – and that’s before the Trump presidency becomes a reality with all the turmoil that creates, from trade tariffs to further geopolitical instability.
But the economic problems are not all down to inheritance. Some have been self-inflicted, like their double hike of employers’ national insurance, arising from their refusal to raise certain taxes.
It’s worth noting that a few headlines in the last few days have drawn false parallels with the disastrous mini-Budget of Liz Truss and Kwasi Kwarteng. While the interest paid on Government borrowing has crept up to levels last seen in the late 1990s, they have not increased by 50 per cent as they did in the wake of the 2022 mini-Budget – and, unlike then, there’s been no effect on mortgage rates.
But still, the Budget is only two months away, the economic outlook is weak, bond markets are jittery, people and public services still struggling, so how can Rachel Reeves square the circle?
One of the biggest economic problems is also political – it’s the lack of a feelgood factor. People do not trust politicians to make their lives better, and the evidence of the last 15 years is that their distrust is justified. Like business confidence, consumer confidence is fragile – as a result of both hard-pressed household finances and the gloomy outlook.
A cost-free way for Reeves to improve household finances would be to cap costs on consumers. This could be done by a number of means. One big way would be to impose a multi-year rent freeze on landlords, based on rents in January 2025 (to avoid a rush to hike rents or evict tenants before a rent freeze coming in).
In recent years, private sector rents, in particular, have rocketed above inflation – average UK private rents increased by 9.1 per cent in the last year. Research published this week by the Resolution Foundation shows the UK is an outlier with UK housing costs “44 per cent above the average across advanced economies in the OECD”.
The high cost of housing leaves people with less disposable income to spend in local economies – in job-creating sectors like retail, hospitality and leisure. Capping rental costs would not only benefit hard-pressed tenants, but also many of those businesses hit by rising employment costs from the national insurance rise that takes effect in April.
Labour has also written to regulators (including Ofwat, Ofgem, and the Financial Conduct Authority) for ideas to boost growth, with the inference that regulation inhibits growth and stripping away undue restrictions on business increases it.
The obvious idea to boost growth would be to cap energy and water bill rises. Labour could have come into office and promptly done this, but has sat on its hands as energy companies hiked bills by 10 per cent in October and by a further 1.2 per cent this month. Similarly, water companies have been allowed to increase bills by 36 per cent above inflation over the next five years.
Capping costs would be politically popular – a majority of Conservative and Reform voters back the public ownership of water and energy, which is itself a reflection of public frustration at rip-off utility bills post-privatisation.
The rise in bond yields means it is more expensive for governments to borrow (and this is affecting governments around the world, not just in the UK). But there are other options: during the Covid pandemic, the Bank of England’s Andrew Bailey assured the Government and the markets that: “We can help to spread over time the cost of this thing to society and that to me is important. We have choices there and we need to exercise those choices”. This translated into the Bank buying Government debt and charging a lower interest rate than prevailing market conditions.
Whether the Bank would be amenable to such a step in the face of market turbulence may depend on whether the recent jitters turn into a full-blown global economic crisis – and that may be dependent on the early decisions of the incoming Trump presidency.
Labour could also raise funds through a windfall tax on those sectors that have enjoyed bumper profits in recent years. The banking sector would be an obvious candidate given it posted record profits last year. The revenue generated from these one-off taxes could be used to reduce the need for additional borrowing.
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Read MoreThe assessment of the Office for Budget Responsibility was that in the long run, Brexit will reduce our overall output by around 4 per cent compared to had we remained in the EU. Given the precarity of the UK economy, joining a customs union with the EU (as Turkiye has) and/or the single market (as non-EU members Switzerland and Norway have) would provide an immediate boost.
Even Reform’s leader said, in making his case pre-referendum, “would it be so bad if we were like Switzerland and Norway?” (i.e. outside the EU’s political structures but inside the single market with freedom of movement).
Labour has to confront some tough choices in the months ahead. There is no capacity for further cuts to public services – they have been slashed to the bone already, and there are huge backlogs and staff shortages. And there is no fat to be trimmed on people’s living standards, with record numbers of families homeless and poverty rising. The electoral consequences of a new round of austerity would be terminal for Labour. The backlash from the cut to winter fuel payments show there is no appetite for that.
Labour will have to get a lot more creative than the deliberately uninspiring technocratic managerialism that they offered in opposition. They face a crisis and overcoming it will require economic creativity and political skill. No wonder the forecasts are gloomy.
Andrew Fisher is a former executive director of policy for the Labour Party
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