Labour secures landslide general election victory

Labour has secured a landslide general election victory on a par with Tony Blair’s 1997 win.

But the new Labour government faces greater economic challenges than Blair’s New Labour did when it came to power. Back then UK economic growth was consistently stronger than it has been since the Global Financial Crisis of 2007-08 (1).

As incoming Chancellor of the Exchequer Rachel Reeves said before the election: ‘We know that things are bad. I know the inheritance is going to be really tough.’ But she added: ‘Under the last Labour government, average growth was 2 percent a year. I’m confident we can get our growth back up [although] I’m not going to put a number on it’ (2).

If good economic growth rates can be achieved, then the new government may be in a financial position to bring down its heavy debt burden. It might also be able to significantly increase public spending and reduce taxes. It may even make us generally feel better off.

High tax burden

But the UK’s current tax burden is near a post-1945 record. And, based on the Labour manifesto, it is forecast to hit a record 37.4 percent of gross domestic product (GDP) in 2028-29 (3). GDP comprises the total value of all goods and services a country produces in a particular time period.

This high tax take is partly due to the freezing of key tax thresholds since April 2022, and the Conservative government planned to leave them unchanged until April 2028. So, as things stand, we still start to pay income tax at the 20 percent basic rate once we earn more than £12,570 a year. And we still pay the higher 40 percent rate of tax once we earn more than £50,270.

In contrast, wages have gone up since 2022, along with the cost of living. This means an increasing portion of our salaries goes to HMRC at a time when many people find it harder to make ends meet.

High debt burden

A key challenge for the government is it has the highest debt burden since the Second World War. The new Labour administration is committed to bringing this down. Its manifesto says: ‘Debt must be falling as a share of the economy by the fifth year of the forecast’ (4). But this limits how much money is left to spend on public services.

Labour is committed to leave rates of income tax, national insurance and VAT unchanged. This may sound positive to taxpayers, even if they don’t feel the same way about those frozen tax thresholds. But it won’t help the new government fund debt reductions or significantly increase public spending.

Public and private sector UK spending on new facilities, factories, buildings, equipment, innovation and productivity improvements has been the lowest in the G7 group of leading economies for 24 of the last 30 years. And the Institute for Public Policy Research (IPPR) expects the new Labour regime to make cuts to public investment.

George Dibb, associate director for economic policy at IPPR, said: ‘Without resources flowing into new investment, it’s hard to see how UK economic performance can improve’ (5). Indeed the Office for Budget Responsibility forecasts a relatively lacklustre ‘assumed trend rate’ for UK economic growth of around 1.7 percent a year (6).

Targeted tax rises

Labour does, though, intend to introduce VAT on private school fees, close private equity tax loopholes and increase the tax take from non-doms (people who live in the UK but aren’t legally domiciled here). But Tax Policy Associates describes these measures as ‘so small as to be irrelevant’ (7).

There has been press speculation that Reeves could increase stamp duty on property purchases from first-time buyers (8) and raise rates on capital gains tax (9). But, again, these will only bring in limited tax revenues.

Even so, the new government has made some relatively modest spending pledges. These include on policies for healthcare, education and mental health.

But the Resolution Foundation said: ‘The constraints of meeting its fiscal rules and the limited scale of new tax rises, mean that an incoming Labour government would likely need to deliver around £18 billion of cuts to unprotected departments, such as Transport, Justice and the Home Office. This could prove very challenging to deliver given the current state of these departments’ (3).

The UK economy did, however, grow by a higher-than-expected 0.7 percent in the first three months of 2024, compared with the previous three months. This was the fastest growth since the end of 2021 and the highest of any G7 country (10). Let’s hope it bodes well for the new government.

Sources

(1) Financial Times (www.ft.com), ‘Fastest growth in two years lifts UK out of recession’, 10 May 2024.

(2) The Guardian (www.guardian.com), ‘“No jobs women can’t do”: Rachel Reeves on idols, fiscal prudence and broken promises’, 19 June 2024.

(3) Resolution Foundation (www.resolutionfoundation.org), ‘Growing for gold? Analysing the tax and spend package of the 2024 Labour manifesto’, 14 June 2024.

(4) Labour Party Manifesto 2024, page 7.

(5) Institute for Public Policy Research, ‘Rock Bottom: low investment in the UK economy’, June 2024.

(6) Office for Budget Responsibility (obr.uk), ‘Economic and fiscal outlook’, March 2024.

(7) Tax Policy Associates (taxpolicy.org.uk), ‘Our take on the Labour manifesto’, 14 June 2024.

(8) The Guardian (www.guardian.com), ‘Stamp duty for first-time buyers would rise in 2025 under Labour government’, 28 June 2024.

(9) The Guardian (www.guardian.com), ‘Rachel Reeves under Labour pressure to raise capital gains tax to revive public services’, 6 June 2024.

(10) Office for National Statistics (www.ons.gov.uk), ‘GDP quarterly national accounts, UK: January to March 2024’, 28 June 2024.