Opinion was divided in the Labour party after its crushing defeat in the 2019 general election. Optimists thought it would take two terms for the party to have a chance of again forming a government. Pessimists thought it was doomed to permanent opposition.
Yet four years on, the polls suggest Labour is on course for a thumping victory. With the Conservatives gripped by an existential crisis, Rishi Sunak could be the last Tory prime minister for a long time to come.
Publicly, Labour’s position is that nothing is being taken for granted and that every vote has to be won. Privately, though, plenty of attention is being paid to what sort of economy Sir Keir Starmer will inherit if he gets the keys to Downing Street.
Clearly, not an economy in rude health, because if that were the case Labour would probably be looking at a fifth successive defeat. Governments that preside over strong growth and rising living standards are usually re-elected. That’s not always the case, but it is this time. The economy as the next election approaches has more in common with the stagflation nation that Ted Heath handed over to Harold Wilson after the February 1974 election than the largely crisis-free Britain bequeathed by John Major to Tony Blair in 1997.
There is, though, a difference between 1974 and today. When Wilson won his third election, the crisis triggered by the quadrupling of oil prices was in its early stages. Inflation did not peak until the summer of 1975. Today,m inflation is coming down, even though it is not coming down fast enough to persuade the Bank of England to start cutting interest rates. The message coming out of Threadneedle Street in recent weeks has been consistent: borrowing costs are staying put and there is more chance of them being raised than there is of them being reduced.
This hard line will almost certainly be maintained at this week’s meeting of the Bank’s monetary policy committee, at which six members are expected to keep rates at 5.25% with the other three voting for a quarter-point increase to 5.5%.
Whether this approach survives for much longer remains to be seen. The latest health check on the state of the labour market from the Recruitment and Employment Confederation showed permanent hiring among UK business falling at its second fastest rate since the pandemic. With jobs less plentiful, firms are offering less generous starting salaries, which are rising at the slowest pace in almost three years. Earnings growth – which concerns the MPC – may well have peaked. It takes time for changes in interest rates to have an impact so in order to be sure of avoiding a recession, the Bank would need to act pre-emptively. There is no indication that it is going to do so, which increases the chances of a mild recession this winter.
That’s a problem, but it is a bigger problem for Sunak than it is for Starmer. One of the few things the prime minister has going for him is that the economy has proved more resilient than expected a year ago. This outperformance is nothing to get too excited about: the economy has still flatlined. But Sunak needs to be able to sell to voters a narrative that the worst is over. A winter recession – or even a continuation of the economy moving sideways – would make that a much more difficult story to tell.
A much bigger problem for an incoming Labour government will be the need to improve the public services at a time when there is a lack of ready cash. Jeremy Hunt could only deliver tax cuts in last month’s autumn statement by setting implausibly tough plans for post-election public spending that – if implemented – would involve deep cuts for many Whitehall departments. In a last roll of the dice for the government, further tax cuts are being lined up for the budget in the spring. Labour will be handed a poisoned pill and would be well advised not to swallow it. An emergency revenue-raising budget soon after the election – for which the Conservatives can be blamed – looks inevitable.
There have been a couple of recent pieces of news that suggest the economy has the potential to perform more strongly than it has been. Firstly, the Lloyds bank business monitor – which has a reasonable track record of anticipating trends in activity six months ahead – shows confidence is improving. What’s more, firms have cash to invest and may well start to spend it once they are convinced the recession threat has passed.
According to the economists at Berenberg bank, the debt levels of non-financial corporations have fallen from a peak of 100% of GDP during the 2009 global financial crisis back to the 75% of GDP level of the late 1990s. Similarly, corporate cash balances stand at 20% of GDP, up from 15% in 2009.
“Businesses have enough cash to pay for two years of their typical investment expenditures,” Berenberg concludes. “These buffers cushion against shocks and can provide a springboard for recovery. This is already playing out in labour hoarding, as well as the healthy uptrend in investment since mid-2020.”
Secondly, last week’s release of the latest Pisa international league tables produced by the Organisation for Economic Co-operation and Development showed the UK’s relative performance improved despite the severity of the lockdowns, with 15-year-olds in England doing better than those in Scotland and Wales.
While there is some doubt about the reliability of the findings, Sunak could have made a big thing out of how post-2010 education reforms were working. This, though, is a government with a death wish. The fact that this modestly good news was drowned out by a row over shipping asylum seekers to Rwanda helps explain why Labour is heading for a spectacular comeback.