New UK government faces tough economic challenge

Britain's Labour Party leader Keir Starmer delivers a speech during a victory rally at the Tate Modern in London early on July 5, 2024. [AFP]

Britain's new Labour government has pledged immediate action to grow the economy after clinching a landslide election victory to oust the Conservatives, but its task could be hampered by strained state finances following huge Covid expenditures.

The center-left Labour administration led by Prime Minister Keir Starmer has promised investment in key areas such as health and education but also stresses the need to balance the books.

This is after government coffers were further hit by subsidies for energy bills after Russia's invasion of Ukraine sent oil and gas prices rocketing.

Stability

Starmer will want to avoid a repeat of October 2022, when the then-Conservative government's proposed unfunded tax cuts spooked markets and tanked the pound.

It also sank the chaotic premiership of Liz Truss, who lasted just 49 days before she was replaced by Rishi Sunak.

Truss then lost her seat in Thursday's election.

Britain's economy is currently on a more stable footing after exiting a mild recession as inflation returns to normal.

Labour "will benefit from the economic recovery", noted Ashley Webb, UK economist at Capital Economics research group.

However, eight years after Britain voted for Brexit, businesses still lament economic fallout caused by the country's departure from the European Union, with little prospect of change in the near future.

Starmer has ruled out returning Britain to the European single market, customs union, or bringing back free movement of EU nationals.

 'Safe haven'

"I want investors to look at Britain and say it is a safe haven in a turbulent world, a place where I can invest with confidence in a world where perhaps other countries are tilting to more populist politics," Labour finance spokesperson Rachel Reeves said ahead of Thursday's UK vote.

She has also said that "change will be achieved only on the basis of iron discipline".

British public debt has flirted with a level totalling 100 percent of gross domestic product in recent months -- a situation not seen since the 1960s.

"The reason for Starmer's popularity (is) because he offered a changeless change," said James Wood, senior teaching associate in political economy at the University of Cambridge.

"He basically is a Conservative in a red tie," Wood said in reference to the colour associated with the Labour party and Starmer's prudence around spending.

Ahead of the election, Labour increasingly won support of company bosses and key UK publications -- including the Financial Times --  who believe the party can successfully manage the economy.

Following Labour's landslide, business chiefs on Friday urged Starmer to prioritise economic growth.

The Confederation of British Industry declared that "now is the moment to get behind growth", while manufacturers' organisation MakeUK said Labour "faced an "urgent need to kick start the UK's anaemic growth levels of recent years and boost investment in our infrastructure".

The City of London Corporation, which is the local authority for the capital's financial district, called on Starmer to place the powerful sector "at the forefront of Labour's plans to drive growth".

Spend and tax

Included in Labour's spending plans is the creation of publicly-owned Great British Energy, with the aim of slashing bills as millions of Britons still struggle with a high cost of living.

The party has an ambition also to hike defence spending to 2.5 percent of gross domestic product from around two.

According to Daniel Sopher, senior partner at tax specialists Sopher + Co, "tax is going to go up" to fund public services.

"There's only so much to what one can increase debt to," he told AFP.

At the same time, with Labour having been elected with a big majority, the party's leadership may feel pressure from its own members to relax budget rules, according to analysts.

"I don't think that anyone in the markets will be made nervous by yet another change of the fiscal rules," said Jonathan Portes, an economist at King's College London, noting that the Conservatives have altered them numerous times since winning power in 2010.

"Obviously the fiscal rules are going to change, the question is how will they change and will they change in a way that is sensible."