A downside of living in a country with an extraordinarily one-sided media is that it becomes ever harder not to be affected by the dissing-the-Labour-government-at-every-turn lens through which it sees the world. So it is with the economy. The story that an over-empowered chancellor has made a series of mistakes, so risking near certain economic stagflation, is told with relentless enthusiasm.
The statistical revision before Christmas that showed there was no economic growth between July and September is allegedly proof of an economic stasis Rachel Reeves has engendered, while private sector wage inflation suddenly accelerating to 5.4% is obviously a harbinger of inflation to come. The Bank of England has paused further interest rate reductions despite the decline in business and consumer confidence. Investment remains stubbornly low. The Labour government is plainly the only cause of this worrying turn of events, according to the consensus narrative. The chancellor, exaggerating the balefulness of the Tory economic legacy, has talked down the economy. In addition, Labour has released the demon of public sector pay with generous settlements to doctors, nurses and railway workers, and heaped costs on business through its thoughtless £25bn hike in national insurance contributions and unnecessarily empowered workers with its proposed agenda for work. Typical Labour.
Yet, while Reeves could have played the bad hand she was dealt better – the summary abolition of the pensioners’ winter fuel allowance at Treasury insiders’ behest saved too little money for the political cost, while the refusal to increase excise duties on petrol and diesel was baffling – there can be no doubt that the fiscal and economic legacy she was bequeathed was genuinely grim. Equally, contrary to the near universal despair about Britain’s economic prospects for 2025, there are grounds for relative economic optimism that rarely get aired.
First, Reeves’s big call in the budget – to dare to raise taxes by £40bn – was right. Money on that scale had to be raised if public services – ranging from the NHS to the court system – were not to slide towards the abyss. Fourteen years of squeezing public sector pay had reached the end of the line; morale, retention and recruitment were at rock bottom and had to be addressed. Business may not like the £25bn increase in employers’ NICs but – even had other options not been excluded by manifesto commitments – to have raised, for example, employees’ contributions, income tax or VAT would have depressed consumer spending, which would not have been to business’s liking either. Correcting years of misgovernance – or in reality non-governance – was never going to be easy.
There are more hopeful auguries. The strength of private sector wage increases – twice the rate of inflation – now means that disposable incomes are rising for the first time in four years, with promising implications for consumer spending. Indeed, there are reports that a depressed housing market is at last stirring. Equally, the over-criticised budget means that government is sufficiently resourced for its spending also to climb in real terms; the government is spending, not hoarding, the cash it has raised, so there is a net fiscal stimulus and some prospect of improved public services. Such a general rise in demand is usually accompanied by business bringing forward investment, especially as now every pound spent on investment can be wholly offset against corporation tax – an initiative by Tory chancellor Jeremy Hunt that Reeves has wisely retained.
Business investment is like a cork in water: the longer it is held below the surface, the more there is a natural proclivity for it to bounce back upwards. Systems, whether office IT or machine tools on a factory line, wear out; their replacement cannot be deferred indefinitely, particularly in a climate of rising demand – and potentially falling interest rates. The pause in interest rate cuts is an international phenomenon until the outlook for inflation becomes clearer; the expectation – especially if there are peace deals in the Middle East and Ukraine – is that cuts in rates will resume as oil prices fall and world inflation recedes. After a prolonged period of underinvestment, the balance of probabilities is that there will be a rise in 2025 to help growth prospects.
UK share prices demonstrate that the market hesitates to endorse economic despondency despite the deluge of negative commentary. While share prices are certainly not heading for the sunlit uplands, neither are they falling into a sea of despond; they show an underlying resilience. This is not surprising. Compared with those elsewhere, the British stock market values companies well below the value of the assets they own and the stream of future profits they are expected to earn. As the process of pension fund consolidation initiated by the government gets under way, these larger funds will start to buy British shares they have over-cautiously shunned, especially as growth re-emerges. Some savvier investment managers, including those from overseas, are now buyers of British shares, anticipating such a recovery. There is the real prospect of a virtuous circle of rising investment, growth and stock market.
Pension fund consolidation is not the only long-term measure the government has launched. Rebalancing planning so it does not actively obstruct economic growth is long overdue. The green paper on a modern industrial strategy opens up the possibility, after many failed attempts over the previous 14 years, of creating an architecture for business-government partnership that would drive forward the growth of sectors from the creative industries to life sciences. Some of the worst barriers to trading with the EU may be reduced.
There are many uncertainties and hazards ahead, not least internationally, with the inauguration of Donald Trump and the ambition of China and Russia to remake the international order to their advantage. But such risks would face any government. Keir Starmer, as his biographer Tom Baldwin notes, has started other jobs in his career unsteadily only to complete them well. It is fashionable to decry the possibility he will repeat the exercise as prime minister – but good reason to suppose that he just may.
