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- The Cost of Living in a Politically Fragmented Europe - June 19, 2024
Starting in late 2021, the United Kingdom is experiencing an economic downward spiral. With the country’s worst cost of living crisis of the twenty-first century, citizens have dealt with rising energy prices and frequent industry workers strikes while their disposable income falls miserably.
The principle reason behind this crisis is inflation – an economic phenomenon owing to which the price of a commodity or a service rises gradually over time. Though inflation is not the cause of a cost of living crisis, the UK has sustained low wage growth since the financial crisis in 2007.
The second cause are various global political factors, which have adversely affected the domestic economy. The UK is a net importer of goods, including energy. But the COVID-19 pandemic restricted demands for oil and gas. The Russian invasion of Ukraine also disrupted supply chains, thus putting strain on limited power and food supplies. The third reason is Brexit. With high trade barriers, the UK plunged into inflation much faster than in the US or the EU.
Amid this crumbling cost of living crisis, the UK has seen a paradigm shift in the affiliations of the governing administration. The Labour Party won a landslide victory against the 14-year-long reigning Conservative Party, with Keir Starmer assuming the role of the UK’s new Prime Minister. With a new party leading the country, many anticipate substantial changes.
A strong plan for a weak economy?
As the UK’s first-ever female Chancellor, Rachel Reeves echoed the same points in her maiden speech as originally highlighted by Starmer in February 2023. These pledges related to kickstarting economic growth have formed guidelines for the Labour government and consist of:
- Economic stability and security through government expenditure
- A shift towards business-friendly partnerships
- Employment opportunities via the National Wealth Fund
- Constructing 1.5 million homes
- Devolving powers to the grass-root level
- Reforming the worker’s conditions
The perception of Labour among businesses has become favourable, as demonstrated with the cancelling of all the nationalisation plans. However, with nationalisation off the agenda, stricter regulations for UK businesses will occur.
Another policy area of prime focus for the Labour government is partnership with private investment, particularly in energy transition, infrastructure and technology. Proposals such as the National Wealth Fund uphold this approach. Capitalised with £7.3 billion, the fund will have the up-gradation of ports, steel industry, large-scale battery manufacturing, green hydrogen manufacturing, and carbon capture technology as the focal points.
Another one of the major commitments of the Starmer-led government is ensuring greater stability in business taxation. The manifesto lays out a plan to cap corporation tax at 25% for the parliamentary term, guaranteeing a sense of security and certainty to businesses for long-term plans of investment. Keeping the motto of stability, the government will also unfurl a new tax roadmap. This will involve a permanent full expensing system, allowing companies to reinvest and modernise themselves.
A top priority for Britain’s government is building robust infrastructure through its ten-year strategy, boosting investment, innovation, and technical development. Keeping it aligned with industrial and regional priorities, Labour seeks to strengthen connectivity by establishing nationwide gigabit broadband coverage. The government will also set up a new National Infrastructure and Service Transformation Authority to oversee large-scale projects and reduce delays and red tape. Moreover, Foreseeing the potential of digital infrastructure in the future, Labour has incorporated transitioning to electric vehicles.
Perhaps the most ambitious part of the infrastructure strategy is housing. Housing prices have skyrocketed in the UK in recent years. Studies indicate that by 2030, nearly 1.7 million households will reside in unaffordable houses. With a staggering rise in the cost of living, rent prices will rise, thus pushing low-income families into a vicious circle of poverty.
Labour’s emphasis on social and affordable housing was a cornerstone of its election campaign. It set its target of building 1.5 million new homes. On July 30th, Deputy Prime Minister Angela Rayner announced in a House of Commons statement the administration’s initiative to ‘build the homes we need’. This suggested a long-term housing policy to turn its ambitious manifesto promises into a reality. The plan comprises bringing back the mandatory housing targets, which were previously scrapped by the Conservatives in December 2023, and reforming the National Planning Policy Framework (NPPF).
Furthermore, Labour seeks to increase the involvement of local authorities and communities in the decision-making process, a deviation from the working strategy of the previous government. An appealing feature of the proposed plan is to use grey belts – consisting of poor-quality land, car parks, and wastelands within the green belts. Inspired by the 1954 Labour government, the current administration strives to continue its legacy by building a new generation of towns on these grey belts. By deploying a dedicated task force, the party wants to identify the appropriate areas to achieve the target of 300,000 homes each year.
The current crisis in the UK is owing to a relatively smaller increase in their income as opposed to the price of goods and services. Labour, through its employment laws reform, aspires to change this scenario, bringing inclusivity to the table. The new plan includes support for the disabled and health-affected employees and job creation for skilled youth employment. It also puts forward legislation to improve working conditions through measures such as banning zero-hours contracts, access to enhanced parental leave and sick pay and reforming long-pending restrictions on trade unions. This will ensure the quality of employment and subsequent production is not compromised.
Keeping in consonance with increasing local involvement to reduce economic inactivity, the government has announced plans to reform the points-based immigration system. It envisions doing so by imposing stricter visa restrictions on immigrants and reducing reliance on them by engaging the domestic workforce through training programs.
Source: Reuters
The Challenge of Implementation
There were six policy initiatives spread out in Labour’s manifesto to achieve their goal of economic growth, stability and development. During the King’s speech held on July 10th, certain key legislative commitments were announced to deliver these promises. These included the Office of Budget Responsibility bill to reform the UK’s fiscal structure, tax reforms to avoid tax evasions, an industrial strategy, a new National Wealth Fund, and a plan to repeal the Trade Union Act 2016 and the Strikes (Minimum Service Levels) Act 2023 to empower trade union rights.
However, there are challenges ahead. Starmer has inherited a weak economy with sluggish growth and his promises are being deemed as far too ambitious. Since the 2016 Brexit vote, the UK economy has consistently underperformed. Thus, the Labour government wanting to make the UK the G7’s top-performing economy looks too far-fetched.
Moreover, the administration’s firm stance on retaining the existing tax rates might put financial constraints on the budget. For instance, fulfilling the objective of building 300,000 homes a year is difficult. This is due to price rises of construction materials and the shortage of skilled workforce. The problem of public finances looks like the biggest hurdle since all the proposed projects require huge amounts of investment. Through direct and quick action on long-persisting issues, Starmer and his government has gained the trust of people. Whether they can retain this majority and deliver economic growth is something to be seen in the long run.
- Are Starmer’s plans and policies enough to bring the UK’s economy to a stable level?
- Is the government’s plan achievable or too ambitious?
- How will the Labour government finance its initiative without disrupting the public finances?
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