Fiscal strain: Starmer holds a press conference in Downing Street in London. While fresh tax hikes may help fix the budget hole, they risk backfiring if they slow the economy. — AFP
LONDON: British Prime Minister Keir Starmer’s “defining mission” of spurring stronger growth in the UK economy relies on investment that so far is barely showing up.
His Labour government has ramped up planned spending on buildings, railways and information technology, with Chancellor of the Exchequer Rachel Reeves committing an extra £120bil over five years to provide the infrastructure that the United Kingdom’s public services require.
The problem for Reeves and Starmer is the government has pushed harder on low-return day-to-day spending while falling behind on the growth plan.
Official data shows investment was 7.3% behind target in the five months since April, while borrowing to cover day-to-day costs like wages, benefits and debt interest is 28.7% higher than planned.
The risk for Labour is the UK economy only truly logs the benefit of the spending spree after the next election due in 2029.
With a recent projection putting Reform UK’s populist leader Nigel Farage on course to be Britain’s next prime minister, Starmer may see the boost from his economic strategy inherited by a political rival.
“At this rate, the best-case scenario is that growth won’t show up until the next parliament or the back end of this one,” said Andrew Goodwin, chief UK economist at Oxford Economics.
Labour’s waning popularity – and a round of local elections in May in which the governing party risks haemorrhaging seats – means Reeves does not have the luxury of time.
The Chancellor needs to show the investment is being delivered at her Nov 26 budget to counter the growth-strangling policies she’s expected to unveil.
Reeves will have to raise taxes by more than £20bil to fix a deterioration in her fiscal position since March, many economists believe.
That comes after she already raised taxes by £36bil a year last October.
While fresh tax hikes may help fix the budget hole, they risk backfiring if they slow the economy.
Both Bloomberg Economics and Capital Economics reckon her upcoming measures will knock 0.2% off gross domestic product.
“Furthermore, it is hard to see with our low levels of projected growth how we can stabilise our fiscal position,” Jagjit Chadha, economics professor at the University of Cambridge, told a National Institute of Economic and Social Research survey last Monday.
Labour’s diagnosis of Britain’s economic malaise, which has seen growth in output per head slow to 0.5% a year since 2008 from 2.2% in the preceding 17 years, is straightforward.
If you don’t invest in your home for a year or two, “it will look a bit shabby, but nothing bad will happen,” Treasury Minister Torsten Bell said in September.
“Do it for 20 years and the roof will fall in. That’s what we need to start putting right.”
Bell said the solution was for Britain to invest more in the future than it had in the recent past.
Under Labour, public investment is due to settle at around 2.7% of economic output, the highest sustained level since the 1970s. — Bloomberg
