All the signs point to a change of government after the UK’s general election, most likely to take place in the autumn.
The Conservative government’s announcement of around £20bn in personal tax cuts has failed to boost its poll figures, while there is little prospect of a significant improvement in economic outlook in the near term.
Barring surprises, the opposition Labour party seems set to take power. Investors are now increasingly focused on what the party might do in government.
Detailed policy plans will be published only as the election campaign begins. In the meantime, recent statements and speeches by Rachel Reeves, who would lead the Treasury in a Labour government, offer insight on the party’s fiscal and economic direction.
“Barring surprises, the opposition Labour party seems set to take power; investors are now increasingly focused on what the party might do in government.”
Cathal Kennedy, Senior UK Economist
Economy: taking cues from Biden
Labour’s economic policy is heavily influenced by that of the Biden administration. It could be broadly defined as an active industrial strategy coupled with a strengthened fiscal framework, with a focus on stability and structural reforms to enhance growth.
Reeves’ advocacy of a more active state would represent a break with three decades of UK economic policy. She promises to work with business in areas where the UK has potential advantage, but where market failures or other barriers curb investment.
Reeves focuses less on spending commitments than on repairing the supply side of the UK economy. She advocates reform of the planning system to make it easier to build housing and infrastructure, as well as improving vocational and skills training.
Fiscal policy: tight rules and spending plans
Labour’s fiscal rules are based on two key elements: reducing debt as a percentage of GDP, and covering day-to-day spending through current receipts. Independent economists have pointed out that weak growth forecasts and higher interest rates make a tough backdrop in which to aim for a falling debt-to-GDP ratio.
The plans also limit Labour to relatively tight spending. Already this year, it has significantly scaled back one of its major commitments, the Green Prosperity Plan, originally planned to reach £28bn a year during the next parliament.
At the same time, the party has pledged not to raise key income taxes, including capping corporation tax at the current 25%. Some relatively minor revenue raisers have been identified – we estimate these at £2-5bn.
In 2023 Reeves said Labour would aim to restore investment as a share of GDP “to the level it was under the last Labour government, to bring us in line with our peers”.
The latter element will be stretching, with public sector net investment forecast to fall from 2.5% of GDP this year to 1.7% in 2028/29. More recently, Reeves has switched emphasis, underlining the importance of partnership to unlock private investment.
“Economists point out that weak growth forecasts and higher interest rates make a tough backdrop in which to aim for a falling debt-to-GDP ratio.”
Cathal Kennedy, Senior UK Economist
European Union relations: reconnection, not reunion
Labour has pledged to “reconnect” with the European Union, but it will not revisit the issue of the UK rejoining the EU Union, or participating in the Single Market or Customs Union.
The party has, however, vowed to use the 2025 review of the post-Brexit Trade and Cooperation Agreement between the UK and EU Union to “fix” the current deal and seek a closer trading relationship. For its part, the European Union has signaled reluctance to reopen the agreement.
Bank of England: status quo
Labour – which introduced operational independence for the Bank of England at the start of its last spell in power – will not change the central bank’s monetary policy remit, and will retain the existing 2% inflation target.
The issue of payment of interest on the Bank’s stock gilt holdings has gone unaddressed. The debate around managing the fiscal costs of the Bank’s quantitative easing and tightening program is only likely to grow louder, given the fiscal constraints set for itself by a future Labour administration.
Labor market: A new deal for workers
Labor market regulation is probably where Labour’s policy differs most from the status quo, though internal debate within the party will determine how much of its proposed changes will appear in its election manifesto.
The party’s ‘new deal for working people’ would seek to reverse a decades-long decline in collective bargaining. This would start with a fair pay agreement in the social care sector.
Labour would end zero-hour contracts, where employees are not guaranteed a specific number of hours in a given week. These contracts are most commonly found in sectors such as accommodation and food, and among younger workers. However, recent remarks by Reeves suggest point to reform that would still afford employers some flexibility.
“Labor market regulation is probably where Labour’s policy differs most from the status quo, though internal debate will determine how much of its proposals appear in the manifesto.”
Cathal Kennedy, Senior UK Economist
