orpinion split with the Labor party after its heavy defeat in the 2019 general election. Optimists think it should be two terms for the party to have a chance to rebuild a government. Pessimists think it is doomed to permanent opposition.
Despite four years on, polls suggest Labor is on course for a landslide victory. With the Conservatives gripped by an existential crisis, Rishi Sunak could be the last Tory prime minister for a long time.
Publicly, Labour’s position is that no one is taken for granted and that every vote must be won. Privately, however, much attention is paid to what kind of economy Sir Keir Starmer will inherit if he takes the keys to Downing Street.
Clearly, not an economy in rude health, because if that were the case Labor might be looking at a fifth successive defeat. Governments that manage strong growth and rising living standards are usually re-elected. That’s not always the case, but this time. The economy as the next election approaches has more in common with the stagflation country that Ted Heath handed to Harold Wilson after the February 1974 election than the largely crisis-free Britain that John Major gave to Tony Blair in 1997.
However, there is a difference between 1974 and today. When Wilson won his third election, the crisis caused by the rise in oil prices was in its early stages. Inflation did not rise until the summer of 1975. Now inflation is slowing, although it is not falling fast enough to persuade the Bank of England to start cutting interest rates. The message coming out of Threadneedle Street in recent weeks has been consistent: borrowing costs remain fixed and there is more chance that they will rise than they will fall.
This hard line will almost certainly be maintained at this week’s meeting of the Bank’s monetary policy committee, where six members are expected to keep rates at 5.25% with the other three voting for a quarter-point increase. at 5.5%.
Whether this approach can survive in the longer term remains to be seen. The latest health assessment of the state of the labor market from the Recruitment and Employment Confederation shows permanent UK business hiring falling at the second fastest rate since the pandemic. With jobs less plentiful, companies are offering less generous starting salaries, which are rising at their slowest pace in nearly three years. Income growth – relative to the MPC – may be picking up. It takes time for changes in interest rates to have an effect to ensure that a recession is avoided, the Bank must act pre-emptively. There is no sign of doing so, raising the possibility of a mild recession this winter.
That’s a problem, but it’s a bigger problem for Sunak than it is for Starmer. One of the few things the prime minister has going for him is that the economy has proven stronger than expected a year ago. This outperformance is nothing to get excited about: the economy is still flatlining. But Sunak needs to be able to sell voters on a narrative that the worst is over. A winter recession — or even an economic recovery moving sideways — will make that a harder story to tell.
A bigger problem for a future Labor government is the need to improve public services at a time when there is a shortage of ready money. Jeremy Hunt could only deliver on the tax cuts in last month’s autumn statement by setting out incredibly tough plans for public spending after the election which – if implemented – would involve deep cuts for many Whitehall departments. In a final roll of the dice for the government, more tax cuts are lined up for the spring budget. The laborer will be given a poison pill and advised not to swallow it. An emergency revenue budget hike after the election – for which the Conservatives could be blamed – is inevitable.
There is some recent news that suggests the economy has the potential to perform even stronger than before. First, the Lloyds bank business monitor – which has a reasonable track record of anticipating activity trends six months ahead – shows confidence has improved. In addition, companies have money to invest and can start spending it when they are convinced that the economic threat has passed.
According to Berenberg bank economists, the debt level of non-financial corporations has fallen from a peak of 100% of GDP during the 2009 global financial crisis back to 75% of GDP levels in the late 1990s. . Similarly, corporate cash balances stood at 20% of GDP, up from 15% in 2009.
“Businesses have enough cash to cover two years of their average investment costs,” Berenberg concluded. “These buffers will prevent shocks and provide a springboard for recovery. This has played into labor hoarding, as well as healthy investment growth since the mid-2020s.
Second, last week’s release of the latest international Pisa league tables produced by the Organization for Economic Co-operation and Development showed that the relative performance of the UK has improved despite the severity of the lockdowns, with 15-year-olds in England doing better than Scotland. and Wales.
While there is some skepticism about the reliability of the findings, Sunak may have made a big deal about how post-2010 education reforms have worked. This, however, is a government with a death wish. The fact that this bit of good news was drowned out by a row over sending asylum seekers to Rwanda helps explain why Labor is heading for a remarkable comeback.