Blog by Jamie Selig, Political Consultant for the Economy and Financial Services
Yesterday, the Prime Minister, Keir Starmer gave a speech aimed at resetting and reinvigorating his mission-led approach to Government. In what looked and felt like a manifesto launch, Starmer’s speech largely repackaged the 5 missions outlined in the Labour manifesto, with a notable shift in his language on economic growth.
Government resets are not uncommon, but they tend to accompany a change of personnel. For example, Rishi Sunak made his pledges to the public after taking over from Liz Truss as Prime Minister, setting out how voters should judge his administration.
So, given Starmer led Labour to a sweeping general election victory only 5 months ago, on broadly the same platform, why is he now re-setting?
Context
Ahead of the 2024 general election, Starmer unveiled his “five missions to rebuild Britain”, a roadmap of the Labour Party’s priorities should they be elected. The missions are expansive and cover clean energy, crime, the NHS, opportunity and aspiration.
The key to the mission-based approach to government is to remove departmental silos in policymaking. In this light, Starmer and his ministers have highlighted that their departments will work together on cross-cutting objectives to get Whitehall rowing in the same direction on the Government’s key pledges.
The primary mission of the Labour Government is to “kickstart economic growth.” Contained within this pledge is a wider commitment to “secure the highest sustained growth in the G7.” This was seen as an ambitious goal, given the UK has suffered from anaemic growth since the 2008 financial crisis.
Both the Prime Minister and the Chancellor have repeated their commitment to the primary mission since taking office and have pledged to get Britain growing.
Achieving the growth mission
In the Labour manifesto, the party identified that the first step to achieving their primary mission was to “deliver economic stability with tough spending rules.”Indeed, this is a theme that the Labour Party have brought into Government, with the promise to “fix the foundations” of the economy. They have argued that the first step to growing the economy is to restore economic stability, shore up the public finances and re-establish the UK’s fiscal credibility with financial markets.
At the Budget, the Chancellor said she would take the “difficult decisions to restore economic stability”, particularly in light of the £22bn “black hole” in the public finances she claimed she had inherited from the Conservative Government. To plug this fiscal hole, the Chancellor unveiled new fiscal rules and a series of tax hikes. To address what the Chancellor described as a “lost decade of economic growth”, the Government also pledged to increase state spending by almost £70bn a year over the next five years.
The new Labour Government have identified a chronic lack of investment as one of the key drivers of economic stagnation and have therefore prescribed increases in both private and public investment to push Britain towards higher growth.
The Reception to the Government’s Economic and Fiscal Policy
The Government’s communication strategy surrounding the Budget – and the “tough choices” contained within it – was accused of stoking pessimism and suppressing business confidence.
However, following the Budget, at her Mansion House speech in November 2024, the Chancellor struck a more optimistic tone. Her views that the post-2008 regulation had “gone too far” and that the UK had been “regulating for risk, but not regulating for growth” were welcomed by businesses, investors and financial services groups. The Chancellor’s focus on the Financial Conduct Authority’s secondary objective on growth and competitiveness was particularly welcome, alongside the reissuing of growth-focussed remits for the other financial regulators.
Reeves also announced a plan to consolidate the 86 Local Government Pension pots into eight pools. Through this, the Chancellor aims to catalyse investment in UK infrastructure projects. Linked to this, the Treasury’s Pensions Investment Review, which aims to unlock the UK pensions market for growth, is due to be published in the Spring. This is a key element of the Government’s policy to boost investment, increase saver returns and tackle waste in the pension system. Overall, the Chancellor has indicated that she would like to leverage one of the UK’s greatest economic strengths, the substantial pension funds held in the UK, to invest in infrastructure and innovation.
In another move welcomed by stakeholders, the Chancellor unveiled the seeds of the Government’s Financial Services Growth and Competitiveness Strategy, which the Treasury are now consulting on. The strategy is set to be published in Spring 2025.
However, the speeches, the policies and various consultations unveiled in the wake of the Budget have not been enough to stem the tide of gloominess about the prospects for the UK economy. Recently, several key indexes have shown marked decreases in business confidence. The CBI’s Growth Indicator, Lloyd’s Bank Business Barometer report and iwoca’s SME Expert Index, are all down.
Lloyds has said that business confidence fell for a third month to the lowest since June 2024, with the decline led by lower economic optimism. Meanwhile, the CBI’s indicator is showing, for the first time this year, that expectations for growth are negative.
In a slight boost to the Government, the OECD have upgraded the UK’s growth forecast. They have said that the UK’s “momentum is positive.” However, the OECD forecast is still below the OBR’s growth projections, with the OECD also warning about higher inflation and risks to the UK’s fiscal framework.
Sleepwalking towards a Reeves ‘Mini-Budget’?
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, has said that “it would not take a significant deterioration in the economic outlook to wipe out the Chancellor’s headroom.” She notes that a 0.5 percent downgrade in the OBR’s forecast for nominal GDP would leave the Chancellor with no headroom.
There have also been claims that the Government is not being entirely forthcoming with its spending plans post-2025-26. It is true that many of the tough decisions have been kicked down the road. The Budget – which set out a five-year framework for spending – heavily front-loaded spending in the first two years, with a significant fall in spending during the last three years of the forecast.
Director of the IFS, Paul Johnson, has said that he’d “be surprised if the spending plans after 2025-26 survive contact with reality.”
Reality, for now, has been delayed. Last week, the Financial Times reported that the Spring Spending Review has been postponed to June 2025. The review will set departmental spending budgets for the next three years, and departmental capital budgets for the next five years.
The postponement most likely reflects the difficulty the Treasury is having getting Cabinet ministers to agree to the tough spending proposals outlined in the Budget.
However, as a result of the postponement, the Chancellor will now most likely have a full economic and fiscal outlook from the OBR, which is due in March, before the departmental spending settlements are finalised. The forecast may necessitate further “tough decisions”on tax and borrowingfrom the Chancellor if the OBR says that the fiscal rules are at risk of being broken.
Despite the pledge to hold only one fiscal event a year, there is a real risk that the Chancellor may need to hold a ‘mini-budget’ of sorts in the Spring to address this, where both increased taxes and borrowing would be back on the table.
Echoing this sentiment, the OECD said that the Government will need to raise taxes further to get the public finances on a sustainable footing. They have argued that “rebuilding fiscal buffers and continuing to mobilize additional revenues… [are] necessary to ensure fiscal sustainability.” With this statement, the OECD have joined a chorus of economists who believe that the Chancellor will have to raise taxes further or cut spending at the Spring Spending Review to meet her new rules.
Despite this, in a more optimistic tone, the Chancellor defiantly assured businesses at the CBI’s annual conference, that “you can be confident about the tax rates we’ve set for this Parliament.” She went on to say that “public services now need to live within their means because I’m really clear, I’m not coming back with more borrowing or more taxes.”
In recent days, both the Prime Minister and the Chancellor have sought to downplay this commitment. Regardless, the Government’s tone on this issue appears at odds with many economists’ warnings. This has sparked concerns that the Government may be sleepwalking into a ‘mini-Budget.’
Starmer pivots
In his speech on 5th December, the Prime Minister reiterated his commitment to the primary growth mission, but slightly tweaked the language. He watered down his commitment on growth, saying that the Government will instead ‘aim’ for the highest growth in the G7.
He also shifted the focus slightly with a new ‘milestone’ to raise living standards in every part of the UK by the end of the Parliament. The Government will measure progress against this milestone by comparing current Real Household Disposable Income per person and GDP per capita with the same figures at the end of the Parliament.
Although broadly the same commitment outlined in the Labour manifesto, the shift in language away from topline growth towards living standards reflects the growing dissatisfaction with the new Government. The Government needs business and the public to buy into their rebuilding project. Starmer sees this reset as an opportunity to effectively communicate their vision for the country.
Credibility concerns?
However, despite the Chancellor and the Prime Minister promising to bring back economic credibility and prioritise economic growth, concerns regarding the Government’s fiscal plans persist.
Although the Government have raised tax by record amounts and unveiled record spending plans, the amount of fiscal headroom is relatively small, at £9.9bn. In my last blog, I analysed the risks that come with such a small amount of wiggle room – namely that the relatively low headroom means that the Government’s fiscal plans are sensitive to external sensitivities and shocks.
Pressures on this headroom include the “temporary” 5p cut to fuel duty. Successive Governments have included an assumption that they would reverse this cut in their budget forecasts. The seldomly implemented cut has been the subject of harsh criticism by economists, mostly prominently the Institute of Fiscal Studies. The failure to repeal the cut, which is highly likely, will cost the Government about £5bn against their headroom.
In addition, the amount of additional tax the Government expect to receive as a result of Budget policies may be lower than expected. In their fiscal and economic outlook, the OBR has said that the indirect effects of the Budget mean that the Government will only receive a net of £16.1bn through the Employer NIC rise, not the £25.7bn figure on the Treasury’s scorecard. This is because the OBR forecasts that the measure will result in lower wages, which will reduce the amount raised from NICs (both employer and employee) as well as income tax receipts.
There have also been reports that the Government will not receive the full forecast amount of £33bn from its non-dom crackdown.
With weak public finances, tight fiscal rules, low growth prospects and higher inflation, the Government is facing pressures from all sides, with no apparent relief in sight.
Following the pessimism surrounding the Budget, the Prime Minister is keen to show that his Government will make strides in increasing the living standards of “working people.” This reset reflects the Government’s position that they have “wiped the slate clean”, and sought to fix the foundations, and can now press on with the core missions of their programme.
This shift in focus also reflects the negative sentiment amongst voters on Labour’s economic policy post-Budget. A recent poll by YouGov for the Times, showed that fewer than a quarter of voters think that the Government is handling the economy well, whilst the number of voters who think Labour is handling the economy badly has increased by almost ten percentage points in less than a month.
This reset is an opportunity for the Prime Minister to place his missions for the Government to the fore of the public consciousness and change the currently negative perceptions of their programme.
Conclusion – Regaining momentum with repackaged priorities.
The Prime Minister’s speech yesterday reflected broadly the same priorities outlined in the Labour manifestos ‘five missions to rebuild Britain’. On their primary mission, the Government maintained the bulk of their commitments on the economy and tweaked the language to include an explicit commitment to raising living standards.
Following the Budget, the pessimism surrounding the UK’s prospects from both voters and business has been growing to fever pitch. The Prime Minister will hope that by focussing on improving living standards and delivering on his targets, that business and voters will back his “Plan for Change.” Ultimately, the Prime Minister and the Labour Party will be judged on results.
Likewise, the Chancellor will be hoping that her fiscal calculations pay off, and she won’t be forced into a potential humiliation. Reneging on the Government’s commitment to hold one fiscal event a year and breaking the fiscal rules so quickly would be a far cry from the strong foundations promised at the general election.
Image source: Flickr/Number10Gov