This electoral revolution was propelled by the one-word title of Labour’s manifesto: “Change.” But, ironically, everything that matters in the UK will stay much the same after Labour’s landslide victory. That is because the Labour leadership, in sharp contrast to the party’s electoral slogan, holds positions that are indistinguishable from the defeated Conservatives on four key policy issues: government spending and borrowing; restoring relations with the European Union; conflict with China and Russia; and reform of a voting system that can produce an elective dictatorship. These positions will severely restrict the new government’s ability to change the country’s course.
As a result, the medium-term outlook for the UK economy remains grim, especially compared to the rest of Europe, and will only improve once the new government reneges on its promises to continue Tory policies. A U-turn on fiscal policy seems likely, but only in a year or two – which is how long it will take the public to realise that Labour cannot deliver on its promises, from housing and health care to education and defence, while following the arbitrary “fiscal rules” that it inherited from the Tories, who only rarely honoured them.
The most likely outcome is that a major economic or political crisis – say, a wave of strikes by doctors, nurses, teachers, and police officers, disillusioned by the huge pay gaps between private and public workers that opened during the Covid-19 pandemic – will precipitate the necessary increase in public spending. In the meantime, the new Labour government is likely to tinker with taxes, especially for capital gains, in a way that damages financial and business confidence while raising very little additional revenue.
More fundamentally, the structural handicap of Brexit will continue to weigh down UK growth, productivity, and living standards. The charts below contrast the country’s dismal economic record since the 2016 referendum with its world-leading performance in the preceding 25 years. During this pre-Brexit period, the UK enjoyed the benefits of participating in the EU’s single market without suffering the costs inflicted on member states by the euro project and its misbegotten predecessor, the European Exchange Rate Mechanism.
The obvious way to accelerate the UK’s dismal post-2016 growth rate, even without increasing public spending or borrowing, is to start restoring the pre-Brexit economic relationship with the EU, while remaining outside the bloc’s political structures. But that would require the new Labour government to commit to the long process of rejoining the EU customs union, preparing for single-market membership, and restoring freedom of movement.
A year ago, this closer embrace of the EU might have been a viable Labour policy. But that is no longer the case. To prove that a permanent divergence from Europe is now hardwired into Labour ideology, and not just a temporary expedient to win back working-class Brexit voters, Keir Starmer, the incoming Labour prime minister, went so far as to rule out rejoining the EU customs union or single market in his lifetime. Moreover, he made this statement only two days before the election, when his landslide victory was already secure.
If restoring the EU economic relationship is now out of the question, and stimulative fiscal policy only seems likely after some kind of economic or political crisis, is there anything else Starmer could do to boost economic growth? The nostrums proposed by the left and the right during the campaign were unconvincing: land-use reforms, “industrial policies” supposedly designed to accelerate technological progress; efficiency savings in government services; and better public-private partnerships in energy and utilities. These are not exactly revolutionary new ideas; indeed, many have been attempted by previous governments.
One economic policy that might have partly compensated for lost trade with the EU would have been a new trade and investment partnership with China (the only persuasive economic argument that the Brexiteers presented during the 2016 referendum). But the new Labour government’s hostile stance toward China, shared by its Tory predecessor, rules out such a deal.
The UK will continue to underperform in the medium term, because the new government will fail to boost productivity and economic growth and deliver on its promises without increasing taxes or borrowing. In the short term, however, the temporary upsurge in consumer confidence that seems to occur around every UK general election could create a bullish trading opportunity in cyclical assets, as the chart below demonstrates.
There is no clear explanation for this regular pattern. Perhaps it reflects the UK electorate’s optimism about its newly chosen leaders. But many voters eventually come to regret that choice, usually sooner rather than later. – Project Syndicate
- Anatole Kaletsky, Chief Economist and Co-Chairman of Gavekal Dragonomics, is the author of Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis (PublicAffairs, 2011).