With great majorities come great responsibilities. Keir Starmer returned the Labour Party to power in Thursday’s general election, as exit polls predicted it had won 410 of the 650 seats in the UK’s House of Commons. His estimated majority of 170 members of parliament over all the other parties combined gives the new prime minister scope to move fast to cure Britain’s economic ills. But self-imposed fiscal straitjackets and campaign promises mean his actions will be slow and may have to involve raising taxes on wealth.
Investors will welcome, the UK’s newfound political stability after a tumultuous 14 years of Conservative governments. But now the hard part begins: the new government will need to get Britain growing again. The country’s GDP will expand by just 0.5% this year, a fraction of the 2% annual average in the 10 years before the 2020 Covid-19 outbreak, according to the International Monetary Fund. Starmer has gone further, talking, about growth of 2.5% a year in a recent interview.
The problem is that the new prime minister and the likely finance minister, Rachel Reeves, do not have enough money to turbocharge the economy. In an effort not to scare voters and markets, they pledged allegiance to an arbitrary rule stating that public debt must fall as a percentage of GDP at the end of a five-year rolling period. That leaves them with less than 9 billion pounds in extra public expenditure by 2028-2029, according to the UK’s Office for Budget Responsibility. They have also pledged not to increase major taxes on incomes and businesses.
In theory, the size of Labour’s majority could enable Starmer and Reeves to scrap those promises, but in practice that’s unlikely any time soon. UK investors remain haunted by the unfunded fiscal largesse during former Prime Minister Liz Truss’s brief tenure in September and October 2022. The new government’s first priority will probably be to plug the shortfall in public spending left by outgoing Prime Minister Rishi Sunak’s administration. That could amount to up to 20 billion pounds a year, according to the Institute for Fiscal Studies.
The new prime minister will have to find revenue, and fast. Taxing wealth is a good option. At present, wealth taxes – such as levies on capital gains and inheritance – only bring in 40 billion pounds a year, compared to the more than 580 billion pounds raised by taking income. Increasing the upper rate of capital gains tax from the current 20% to 25%, scrapping the current exemption for people who hold assets until they die, and ending tax reliefs on business disposals could raise an extra 6 billion pounds a year, according to an IFS calculator.
But annual UK public investment is set to slide from 2.4% of GDP now to 1.8% in 2028-2029. Preventing that requires an outlay of more than 26 billion pounds. Filling the hole would almost certainly require breaking free of the fiscal straitjacket. If Starmer is unwilling to do that, the stability promised by his landslide electoral victory may end up looking like stasis.
