Just as in the movie Sliding Doors, there are two endings to the story that began on Thursday with Labour’s victory in the 2024 election. One is happy, one is sad, and either is possible. What happens to the economy over the next five years will determine which one materialises.
Let’s start with the happy ending: the one where the credits roll as Keir Starmer wins big for a second time in 2029. The script for that one starts slowly. The scale of Labour’s win means it doesn’t have to rush things but has time to put in place the supply-side reforms, such as changes to planning rules, that will boost growth. Structural changes don’t bear fruit overnight but by the early 2030s it should be possible to notice the difference.
In the meantime the economy will benefit from a much-needed period of stability. Business investment was depressed during the period when there was uncertainty over whether the UK would leave the EU or not. It suffered another hit during the pandemic, and a third after Russia’s invasion of Ukraine. A chaotic period in which the UK had three prime ministers and five chancellors in a single parliament is now over.
The poor showing of the SNP in the election means the prospects of a second referendum on Scottish independence in the next five years are much diminished. Likewise, Starmer is unlikely to reconsider his decision to rule out rejoining the EU (or even the single market) with Reform UK breathing down Labour’s neck in so many seats. As things stand, Britain looks a safer place for investment than France or Germany.
Much has been said about Labour’s baleful economic inheritance, but growth is set to surprise on the upside in the coming months. Consumer spending power has been boosted in recent months because wages have been rising more rapidly than prices, but there tends to be a lag before households realise they are better off. The election result will be the catalyst for higher consumer spending, and it will also prompt businesses to give the go-ahead for investment decisions put on hold in recent months.
The boost to growth will provide Rachel Reeves with a bit more scope in her autumn budget. She may also be tempted to make changes to the government’s debt rules, which would provide her with some additional wriggle room. It won’t be a massive windfall, and the new chancellor says money will be tight. But she might have an extra £20bn to spend on public services.
Starmer and Reeves won’t need to rush because the Tories will spend the post-election period at war with each other over the future direction of the party rather than in opposing what Labour is doing. One big problem for Rishi Sunak in his period as prime minister was that the economic and political cycles became misaligned, with tough decisions, such as the freeze on tax allowances and thresholds, biting in the last years of the parliament. The prospects of a second Labour victory will be much enhanced if Reeves gets the unpopular stuff out of the way early and then lets up as the next election approaches.
The alternative ending is not nearly so cheerful. The gentle recovery in the economy runs out of steam as stubbornly high inflation in the service sector deters the Bank of England from cutting interest rates. Business investment continues to disappoint, while dearer fixed-rate mortgages and stagnant house prices make consumers cautious about spending money.
The situation cries out for the new government to boost public spending or cut taxes, but Reeves is boxed in by her own self-imposed fiscal rules. Public demands for better public services go unanswered, and disillusionment quickly sets in. Starmer and Reeves insist that their structural reforms will eventually pay dividends but, as was the case when Sunak tried the same line of argument, nobody is listening.
Labour’s landslide victory was the result of a collapse in support for the Conservatives rather than a ringing endorsement of Starmer’s offering. Never before has a party won so big a majority with such a modest share of the vote: 34%. Jeremy Corbyn won a bigger percentage of the vote when Labour was defeated in 2017.
Starmer and Reeves are on probation as far as Britain’s sceptical and impatient voters are concerned, and they are deluding themselves if they think this is 1997 redux. The economy is weaker and public services are in a worse state. Sitting tight for two years is not an option.
It may take time for the Conservatives to recover from the pasting they have just taken, but there are alternative sources of opposition. The Green party threatens to pick up unhappy Labour voters from the left, while Reform UK could do the same from the right. The Liberal Democrats will be attractive for those who want a closer relationship with the EU. The Tories won big in 2019 but last week lost more than 250 seats. Something similar could easily happen to Labour in 2029.
So which ending is it going to be? On balance, the happy ending looks slightly more likely. That’s not because the country is set for an economic boom. The UK has deep-seated problems that are not going to be solved overnight. But such was the desire of voters to be shot of the Conservatives that it will take time before they are trusted again.
The Tories need Labour to screw up the economy to have a chance of a quick comeback, but it is reasonable to assume that the next five years will be better than the previous five. That might not be saying much, but it should be enough.