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Treasury & Capital Markets / Europe
UK economy – and now for something completely different (or not?)
The challenge of turning Labour pledges into actions
Keith Mullin 8 Jul 2024

What awaits the sluggish, debt-laden UK economy as the new Labour government of Keir Starmer takes office is being closely scrutinized both at home and around the world. When all’s said and done, election pledges are just so many words on a sheet of paper or what gurning campaign politicians last say in the media or post on social media.

The new government’s pledge-to-action conversion rate will only emerge over time but financial markets will be watching for early pointers as they tee up UK trading and investment strategies. Political party manifestoes and pre-election statements are crammed with all manner of dewy-eyed aspirational vote-catching nonsense juxtaposed with a few concrete plans. As such, they’re a cross between works of fiction and DIY assembly manuals.

The Labour party’s ‘Kickstart economic growth’ programme was a classic in respect of these things: reasonable-sounding, long on ambition but short on specific detail about how to drive forward an economy that the International Monetary Fund forecasts will show real growth of 0.7% in 2024 and 1.5% in 2025.

With an almost certainly unintended nod to Donald Trump’s 2016 presidential campaign mantra, Labour’s economic plans (“Our approach will back what makes Britain great …”) tick many of the boxes as these things are expressly intended to do. Among core pledges: delivering economic stability and kickstarting growth (obviously). And espousing a reform agenda anchored by tough spending rules but promising higher investment while keeping tax and inflation as low as possible (ditto).

If one thing is clear, the new government has a clear mandate to forge ahead, now that it has a super-majority of seats in parliament. Albeit with just 20% of the voting population backing it – 33.9% of votes cast with a turnout rate of 60%. That speaks to the unrepresentative nature of the first-past-the-post electoral system in the UK but that’s a story for another day. Even with a large majority, progress won’t be without its challenges.

So, what’s on the table

So, what are we being promised? The supposedly pro-business and pro-worker agenda is a bit of a laundry list. We’ll apparently get a statutory Industrial Strategy Council to provide expert advice. No more barriers to growth and an end to short-term economic policy. Reform of planning regulations and a pledge to build 1.5 million new homes – a hot-button issue in the UK – including more social and affordable housebuilding under mandatory housing targets. A competition and regulatory framework that supports innovation, investment, and high-quality jobs.

How about a new National Infrastructure and Service Transformation Authority to set strategic priorities and oversee the design, scope and delivery of projects under the framework of a 10-year infrastructure strategy that aligns with industrial strategy and regional development priorities that in turn will align with procurement and trade policy? The infra plan will cover transportation (new roads/road renewal, the rollout of more electric vehicle charging points, reversing the ban on municipal ownership of bus franchises, an overhaul of the railways), reservoirs, laboratories, 5G/digital infrastructure, gigafactories and new data centres.

Meanwhile, the British Business Bank will be given a stronger mandate to support UK regional growth and make it easier for small and medium-sized enterprises to access capital.

Labour’s approach to economic management will be a supply-side programme that finance minister Rachel Reeves has (rather irritatingly) sloganized as securonomics. Labour wants to work in partnership with business, trade unions, local leaders, and devolved governments in England and the other home nations of the UK (the latter empowered by landmark devolution legislation).

Public investment will be used to leverage and de-risk private sector investment. One area where Labour did go into specifics is in its plans for a National Wealth Fund to invest in jobs. Capitalized at £7.3 billion (US$9.35 billion) over the lifetime of the next parliament, the fund has a three-times leverage target, that is, it hopes to attract three pounds of private investment for every pound of public investment. A total of £1.8 billion will go to upgrading ports and building supply chains; £1.5 billion to new automative gigafactories; £2.5 billion to rebuilding the steel industry; £1 billion to accelerating carbon capture; and £0.5 billion to supporting the manufacture of green hydrogen.

UK financial sector plans vague

The UK’s financial and professional services sector produced £278 billion of economic output, according to the review of UK financial services 2023 published by the City of London and UK Treasury. That’s 12% of the UK’s entire economic output and the sector generates around £100 billion in tax revenue. What happens here will be crucial, but there is a lack of detail.

On financial services, Labour wants to support innovation and growth through new technology and it backs Open Banking and Open Finance. It also wants to increase investment by UK pension funds in domestic financial markets but doesn’t say how. This, too, is a hot-button issue. As there is a view, expressed in some quarters, that UK financial markets suffer because they lack support from domestic institutional investors, because too many UK companies opt to list overseas and too few foreign companies opt to list in the UK.

I have no issue with incentivizing UK pension schemes to invest in UK financial markets but I’m opposed to government regulation that forces private capital into mandatory directed investment. That’s the stuff of centrally-planned Communist economies. So, while we await Labour reforms (“to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC”), I’m sceptical.

Challenges

Labour’s growth agenda will not be without challenges (not of its making) especially in an environment where the government has limited fiscal space. In a short comment as the final election results were being tallied, Scope Ratings noted that Labour has ruled out easy revenue generation (through wide-ranging tax locks that significantly tie its hands on budget consolidation), as well as cuts to investment spending and cuts to unprotected public services.

That, Scope says, takes the spending-cut route to budget consolidation off the table, as without substantial growth or significant policy shifts, budget consolidation may prove challenging, and that it is unrealistic anyway to rely just on growth to resolve budget issues.

The problem is that much of the budget deficit forecast for the next several years is locked in by higher net interest payments. On debt sustainability, Labour is not expected to change existing net-debt reduction targets. In fact, UK general government debt is projected to rise from 101% of GDP at the end of 2023 to almost 110% by 2029.

Labour’s first 100 days is up in mid-October. Progress report then.

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