Labour’s dismal inheritance

Labour looks set for a big comeback in UK election [View in browser]( [Bloomberg]( Welcome to the [Year of the Elections](, Bloomberg’s newsletter on the votes that matter to markets, business, and policy amid the most fragmented geo-economic landscape in decades. For Britain’s Labour Party, the good news is that it appears set for a sweeping electoral victory on Thursday, ending 14 years of Conservative rule. The bad news is that it faces what it calls the [worst economic and fiscal inheritance]( for any government since the war. With the National Health Service and other essential public services in crisis, growth anaemic, the tax burden at a post-World War II high and [debt as a share]( of Gross Domestic Product close to 100% for the first time since the 1960s, the electorate is crying out for change. Keir Starmer’s opposition is on track to win as many as 400 of the 650 seats according to some polls, giving his party as strong a mandate for legislative change as Tony Blair’s landslide victory in 1997. There seems little Prime Minister Rishi Sunak can do to alter that. Labour’s 20-point lead in Bloomberg’s poll of polls is the same as it held when the election was called in late May. The Tory manifesto promised billions of pounds of personal tax cuts on top of the £20 billion handed out since November but the party’s fortunes have not budged. WATCH: The new government will inherit an historic economic challenge as a result of Brexit, the pandemic, Russia’s war on Ukraine and the debt burden exacerbated by all three. So what’s the solution to Britain’s growing economic crisis? Source: Bloomberg Britain’s problems have been piling up since the 2016 Brexit referendum, which triggered years of Tory political infighting, and then the pandemic. The Conservatives have even lost their traditional title as the party of fiscal responsibility after Liz Truss crashed the pound during her short-lived tenure as prime minister in 2022. The electoral wipe-out expected would see several top Tory politicians losing their seats, including the Chancellor Jeremy Hunt. Sunak himself is even at risk.  Brexit has barely featured in the debate, although Labour and the smaller left-of-centre Liberal Democrat party promise a better relationship with the European Union if they win. Even so, the right-wing Reform UK — rebooted from the former Brexit Party — has splintered the Conservatives’ vote by targeting immigration, which at 685,000 last year was more than double pre-Brexit levels. Nigel Farage, Reform’s leader, has a good chance of winning a parliamentary seat, at the eighth time of trying. The Liberal Democrats, campaigning hard against sewage dumping by water companies, lag Reform in the polls but are still likely to emerge as the third-largest party due to the UK’s first-past-the-post electoral system. Labour, which Starmer has rebuilt as a business-friendly centrist party from the socialist leadership of Jeremy Corbyn, has promised to fix the UK’s myriad problems by delivering growth. But its [manifesto was light]( on detail and it will largely stick to existing Tory spending plans. The non-partisan Institute for Fiscal Studies think tank said those proposals are undeliverable as public services urgently need funds — in part due to the years of austerity after the Tories retook power in the 2010 coalition. Starmer’s bid to be all things to all people — promising simultaneously a revolution in workers rights and to make “wealth creation our number one priority” — may be easier on the campaign trail than in office. — [Philip Aldrick]( Starmer at a campaign event in Hitchin on Monday. Photographer: Jose Sarmento Matos/Bloomberg Coming later today: [On the new episode of the Voternomics podcast](, senior reporter Phil Aldrick and Abrdn Chair Douglas Flint join hosts Stephanie Flanders, Allegra Stratton and Adrian Wooldridge. UK Economy Q&A [Dan Hanson](, the chief UK economist for Bloomberg Economics, lays out the challenges ahead. The BOE is about to cut rates and growth is recovering. Does that mean the UK economy is out of the woods? The incoming government will inherit an economy where growth is buoyant, inflation is low and interest rates are set to start falling. What’s not to like? Turns out quite a lot, particularly when it comes to the growth outlook. The UK’s positive 2024 story is likely to be a cyclical one that ultimately fades as the economy returns to full capacity. What will drive growth beyond that will be supply side forces like productivity and employment. Here the UK’s outlook is less upbeat, particularly when it comes to productivity, which has barely grown since the financial crisis. We think the rate of growth in the medium term will settle at about 1.2%, about half the pace seen prior to the financial crisis. What are the fiscal challenges the next government faces? There are three big issues the government needs to contend with, all of which will likely require higher taxes than any party has been willing to admit during the election campaign. The first challenge is that the spending plans that the new government will inherit look undeliverable. We estimate there will need to be about a £20 billion top up if departments outside health, education, defence and foreign policy are to continue providing current levels of service. The second issue relates to growth. We think the Office for Budget Responsibility — the UK’s fiscal watchdog — is too optimistic about the outlook. Indeed, its own analysis of its forecast errors suggest it has tended to overestimate growth in the medium term. The new government would be wise to take steps to insulate the public finances from the possibility that history repeats itself. Finally, more space needs to be created for investment spending. It is set to fall from 2.4% of GDP in 2024-25 to 1.7% in 2028-29. Those plans need a re-write if the new government is serious about tackling the UK’s productivity problem. Labour hopes to boost growth, is there any reason to believe they will get it? A big part of Labour’s pitch is that it will bring stability which will create an environment that is more conducive to growth. While that may help at the margins, it’s probably wishful thinking to imagine a transformational impact on the outlook. Labour’s fiscal plans are also extremely modest. They are broadly neutral for the public finances with £9.5 billion of spending paid for by [£8.6 billion of tax rises](. It’s hard to see that being enough to shift the dial on a near £3 trillion economy. One area we think could yield dividends is planning reform. If Labour get that right — and it is a big ‘if’ — it could unlock a more durable source of growth. Bottom line? Starmer’s aim to achieve a sustainable growth rate of ‘at least’ 2.5% is certainly laudable but Labour’s current plans won’t get him there. The Markets Take [Alice Gledhill](, a Bloomberg reporter covering government bonds and foreign exchange, writes about the outlook for European debt markets. After a turbulent few years for UK markets, what investors are craving most is stability.  With Labour so far ahead in the polls, there’s little doubt about who’s going to end up in charge. That relative certainty contrasts with France, where the unknown quantity of the right wing could secure power in snap parliamentary elections. Where once a Labour victory might have spooked markets, investors have taken comfort from the centrist policies under the current leadership. The party has already vowed iron discipline in its approach public spending. That stance [has soothed the gilt market](, where yields remain well below the peaks seen last year. Price fluctuations are likely to depend much more on monetary policy. Earlier this month, sterling strengthened to the highest level against the euro in nearly two years. Hedge funds are notably more optimistic about the UK, boosting bets for a stronger pound to the highest in nine months, according to positioning data. Corporate Stakes [Philip Aldrick](, Bloomberg’s senior UK economics reporter, looks at how companies are viewing Labour. Business has been skeptical about some of Labour’s plans, such as employment reforms to give staff unfair dismissal rights from day one, but [welcomes the stability]( the party is promising. Starmer and his shadow chancellor spent the last year reassuring industry that the socialist principles of former party leader Corbyn are buried. They have pledged not to raise corporation tax and to provide the policy consistency businesses say they want. “Wealth creation is our number one priority,” Starmer said at the party’s manifesto launch. “We are pro-business and pro-worker.” Labour’s plans to [overhaul the UK’s planning system](, which has been a block on growth, and reform of the Apprenticeship Levy, which has failed to develop skills, have been welcomed. But oil and gas producers face an increased windfall tax under Labour and car makers are demanding the winner of the election scraps costly fines for missing electric vehicle sales targets. Access to skilled labor remains a key issue and will focus attention of the next government’s immigration policy. The Tories are promising a cap on numbers but Labour has taken a softer line just “to reduce net migration” from recent record highs. An improved trade deal with the EU is another big ask. Shevaun Haviland, director general of the British Chambers of Commerce, has urged both parties to “stop walking on eggshells and start saying it how it is.” More from Bloomberg - Check out our [Bloomberg Investigates]( film series about untold stories and unraveled mysteries - [Bloomberg Opinion]( for a roundup of our most vital opinions on business, politics, economics, tech and more - [Next Africa](, a twice-weekly newsletter on where the continent stands now — and where it’s headed - [Washington Edition]( for exclusive coverage on how the worlds of money and politics intersect in the US capital - Explore all Bloomberg newsletters at [Bloomberg.com](. Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Want to sponsor this newsletter? [Get in touch here](. You received this message because you are subscribed to Bloomberg's The Year of Elections newsletter. 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