After a dreadful first year, Starmer has no hope of fixing the economy

Telegraph

2 days ago

This Friday is the anniversary of Labour's victory at the polls, presenting us with an opportunity to assess Sir Keir Starmer's first year in office. I cannot comment on foreign affairs or domestic social issues. My bailiwick is simply the economy and the Government's influence over it.
If a week is a long time in politics, then a year is a short time in the life of an economy. It is perfectly possible for things that have started badly to turn out well in the end and, equally, for things that started well to turn sour. So a judgment this early in a government's tenure must be provisional.
We should start by acknowledging all the difficulties the Government has faced. It inherited a low-growth economy, accompanied by a serious fiscal problem. Notably, a deficit of nearly 5pc of GDP and a debt ratio not far off 100pc, and still climbing.
Moreover, given the continuing war between Russia and Ukraine, and especially since Donald Trump's return to the White House in January, the international environment has not been favourable.
With all that said, how has the Government done? Long ago, Labour's leaders acknowledged that the fundamental problem of the British economy was low economic growth, associated with weak productivity growth. They identified a low rate of national investment as the most important driver.
Accordingly, much of Labour's wish list has been about increasing the rate of investment. It has undertaken a number of measures, including redefining the fiscal rules, to enable a higher rate of public investment. The effects of this change have not yet come through. And it has sought to reduce the planning obstructions to building more houses.
As regards business investment, however, its approach so far has been woeful. It seems to have believed that, after the leadership chaos and infighting of the last 14 years, merely by not being Conservative, the new Labour Government would engender greater confidence.
Things have turned out rather differently. For a start, the underlying problems were always more serious than Labour's diagnosis acknowledged. Moreover, the gloom and doom about the ' fiscal black hole ' relentlessly pumped out by the Chancellor didn't help develop any sense of optimism among business leaders.
Then there were three key mistakes. The first was committed more or less immediately after taking office by caving in to the striking rail workers. This gave a green light to other militant groups to act, and it will surely take a long time for the Government to restore any sense of confidence that it will firmly resist militant union pay demands.
In a similar vein, it conceded to junior doctors and thereby, in all likelihood, set off a wave of claims and industrial disputes across the public sector.
Second, having boxed itself in with a pre-election commitment not to raise the main rates of personal tax and yet feeling that it had to increase some sort of tax to fund its increased spending, the Government then imposed a huge increase in business taxes in the form of increased National Insurance contributions for employers. Moreover, this came on top of a large increase in the minimum wage.
To cap it all, the Government is in the process of getting the Employment Rights Bill through Parliament. This will greatly strengthen the bargaining position of workers against their employers. Many small businesses, in particular, are fearful that they will be in a weak position to stand up against rogue employees.
It is hardly surprising, therefore, that business leaders feel depressed and are disinclined to invest or take on employees. Ultimately, it seems Labour really doesn't seem to appreciate the private sector or understand what makes businesses tick.
Simultaneously, the Government has failed to understand the nature and scale of the problem concerning the public finances.
Admittedly, most Labour Party supporters seem to think that we can increase the share of GDP accounted for by government expenditure without incurring any ill effects. Yet anyone reviewing the international evidence will conclude that government spending taking as high a share of GDP as it currently does is doing grave damage.
One of the most important drivers of surging public spending is the ballooning benefits bill.
Admittedly, the Government has made a nod in this direction by announcing various measures to combat the inexorable rise in welfare spending. But these measures have been pitifully small in scope.
They amounted only to a total saving of some £6bn, compared to a projected total welfare bill (including pensions) this year of £326bn. Moreover, the Government has already retreated on some of its proposals. It may be about to abandon the rest of them this week.
If you want to be optimistic, you could say that it is still early days. Even Margaret Thatcher's first year in office in 1979/80 was very far from an economic success story. Indeed, she began by agreeing to the pay recommendations of the Clegg Commission on public sector pay (no, not that Clegg).
And her monetarist obsession caused interest rates to be jacked up from 12pc to 17pc, prompting the pound to soar and much of the British economy to go down the tubes.
The economy picked up two years later, but it didn't really start to motor until after Thatcher's second election victory in 1983.
Somehow, though, I don't see this Government's dire beginning leading to any sort of major recovery, let alone a Damascene conversion.
With a tailwind from the international environment, things may get a bit better next year. But any sort of economic transformation looks unattainable. In that case, Labour's other aspirations will fall by the wayside.
Meanwhile, the Government somehow has to find the wisdom to appreciate the peril that this country faces from foreign aggression – and to muster the political courage to spend what is necessary to defend us against it.