UK: Labour government must prioritise pro-growth policies amid tight fiscal space

Inner circle shows vote shares; outer circle reflects projected seats. CON = Conservatives. LAB = Labour. LIB = Liberal Democrat Party. Reform = Reform UK. Vote shares (projected seats) of smaller political groups: Green Party: 6.8% (4), Scottish National Party (SNP): 2.4% (8), Plaid Cymru (PlaidC): 0.7% (4), Other: 3.8% (7), Democratic Unionist Party (DUP): 0.6% (4), Sinn Féin (SF): 0.7% (7), Social Democratic and Labour Party (SDLP): 0.3% (2), Ulster Unionist Party (UUP): 0.3% (1), Alliance Party of Northern Ireland (Alliance): 0.4% (1). Reflects locations announced as of 8:38 a.m. CEST, July 5, 2024.

Policy expected from a Labour government…

Incoming prime minister Keir Starmer has also ruled out cuts to capital spending, as well as spending on vulnerable public services, as outlined in the current budget. So a route for spending cuts to consolidate the budget is absent. This is despite Starmer already scaling back some of Labour’s more ambitious plans, such as its flagship green spending promise.

Much of the Labour manifesto focuses on increasing economic growth. While growth will certainly help achieve budget consolidation, it seems unrealistic to rely on growth alone to solve all of the budget problems, especially in the short term. Scope Ratings predicts just 0.8% growth for the UK in 2024 and 1.4% in 2025, then 1.5% in the medium term.

While potential reforms could support medium-term growth, our forecast for a trend rate of growth of 1.5% per annum remains unchanged at this stage, down from 2% following the Brexit referendum. This takes into account the relative lack of detailed policy in the manifesto, including specific policies to achieve stronger growth.

On taxation, Labour has restricted its political room for manoeuvre by introducing a number of tax blockades, such as income tax, national insurance contributions and value-added tax, as well as a relatively vague promise not to raise taxes for “working people”. Labour wants to raise more money from business taxes, but this is a relatively small pot.

Given these self-imposed constraints, the government will need to explore alternative ways to raise revenues or find savings within the existing fiscal framework to achieve fiscal targets. Without significant growth or significant policy changes, fiscal consolidation may prove difficult.