British Prime Minister Keir Starmer engaged in discussions with Defence Secretary John Healey and Member of the House of Lords George Robertson at 10 Downing Street on July 16, 2024, in London, England, as depicted in a recent image by Getty Images.
Over recent weeks, the focus of economic news in the U.K. has centered on the nation’s financial health, its impact on citizens, and the implications for economic growth. The debate has been marked by a series of accusations and denials between the Labour and Conservative parties concerning the country’s budget deficit. Notable figures in this debate include current finance minister Rachel Reeves and former finance minister Jeremy Hunt.
Regardless of the current state of U.K. finances, it is evident that the present shortfalls have developed over several years and may lead to long-lasting consequences. Labour is now faced with a critical issue: the nation cannot generate enough revenue to address systemic shortfalls without sustained economic growth, which, in turn, requires significant investment from both public and private sectors.
This fiscal situation has roots extending back to the 2008 financial crisis, which left the economy struggling to recover and close budget gaps. In response to the lagging U.K. revenues, the Conservative government of the time implemented austerity measures, reducing public investment in infrastructure, healthcare, and social services. Although these measures were intended as temporary solutions, they persist today.
The challenges are compounded by the ongoing ageing population, the economic disruptions caused by Brexit, and overall sluggish growth, limiting the options available for the current Labour government. Unlike countries such as the United States, China, or Japan, the U.K. cannot sustain large-scale deficits through increased spending or tax cuts. Borrowing has reached £64.1 billion ($85 billion) for the financial year up to August, with national debt equating to 100% of GDP.
Britain’s status as a reserve currency has waned, evident in the bond market’s reaction to former Prime Minister Liz Truss’s 2022 budget proposal, which highlighted the private sector’s reluctance to support significant deficit spending. Both Labour and Conservative leaders are acutely aware of the current financial constraints affecting public program funding. Brexit proponents had argued that diverting funds from the European Union could help rejuvenate the National Health Service.
As the Labour Party Conference commenced and the first budget of the new Labour government approached, concerns about austerity reemerged. Speculation about cuts to winter fuel benefits for pensioners and a House of Lords report on budget deficits have heightened these fears. However, the new government, particularly highlighted in Rachel Reeves’ keynote speech, has reassured that further austerity measures on public services are not planned.
The primary challenge for Labour is to find ways to enhance public investment in services and infrastructure while also attracting substantial private sector investment to address revenue shortfalls and economic opportunities. One potential solution involves engaging private development funds for the completion of the HS2 rail line into an upgraded Euston Station in London. Successful partnerships must balance the interests of both investors and the public to avoid the pitfalls of past privatization efforts, such as those with Railtrack and Thames Water.
Additional initiatives could focus on reducing regulatory burdens and enhancing trade efficiencies with Europe post-Brexit, addressing global businesses’ concerns over supply chain disruptions and border delays. While the government has thus far dismissed raising taxes, this remains a possibility if businesses and markets perceive tangible benefits from such measures.
Ultimately, the private sector seeks a clear, long-term strategic plan encompassing tax, fiscal policy, and the development of public-private partnerships. Effective execution in these areas by Labour could bolster public confidence in its economic agenda for the coming years.
Kevin Klowden is the chief global strategist at the Milken Institute.
