Does Britain’s next leader have a plan?

FocusEconomics

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On 22 May, UK Prime Minister Rishi Sunak called snap elections for 4 July. Polls suggest that the opposition Labour Party—led by the centrist MP Keir Starmer—will sweep to victory, putting an end to 14 years of Conservative leadership. But what are Keir Starmer’s economic policies? Thus far, Starmer has focused on small-scale policy pledges, such as hiring extra teachers, cutting hospital waiting times, and improving border security—a cautious approach to policymaking that contrasts with the large challenges the country faces.

Sluggish economic growth

One key challenge for Starmer will be improving Britain’s economy. After easily and consistently outperforming the Euro area economy in the years prior to the 2016 Brexit vote, the UK has underperformed since. This is despite the tailwind of a population which has boomed by around 2.5 million in the intervening years on surging immigration from outside the EU. Our panelists forecast UK GDP growth to roughly track Euro area GDP growth over our forecast horizon to 2028. Given higher population growth in the UK, this means the UK’s GDP per capita growth will actually lag behind that of the Euro area. Starmer has pledged to make the UK the G7’s top-performing economy; our panelists see little chance of this happening. That said, the labor market will be one saving grace: The unemployment rate is hovering close to 4% and should remain there in the coming years, which would be below the G7 average.

Strained public finances

Government finances are likely to present Starmer with further difficulties. Weak growth, together with rising spending pressure from an aging population and the Covid-19 pandemic, has translated into a large budget deficit and stubbornly high public debt in recent years. And public debt is set to stay above 100% of GDP over our forecast horizon. This will likely tie Starmer’s hands and prevent lavish new spending commitments—particularly given the still-fresh memory of the ill-fated attempt by former PM Liz Truss to play fast and loose with fiscal discipline, which resulted in a sharp spike in market interest rates.

Damaged cross-Channel trade ties

Finally, Starmer will have to grapple with the UK-EU relations. The UK-EU trade deal has led to a raft of non-tariff barriers on both goods and services trade with Europe which have hampered both UK exports and investment into the country. And while Sunak has succeeded in making ties with Brussels more

The full article is available here. This article was published at FocusEconomics.