Yahoo Finance Sir Keir Starmer warned against risking growth with tax rises
Sir Keir Starmer has been warned that tax rises would threaten crucial UK investment as the new Labour Government seeks to boost Britain’s economy.
Goldman Sachs upgraded its forecasts for UK growth for the next two years on Friday in the wake of the Labour leader’s historic victory.
The economy is now expected to expand by 1.6pc in 2025, slightly higher than its previous forecast of 1.5pc.
However, it said that the increase will largely be driven by higher public spending, with its reforms to the planning system, the party’s net zero policies and forging closer ties with the EU more likely to impact growth in the medium term.
Sven Jari Stehn at Goldman also warned Sir Keir against raising taxes further in order to pump more money into public services.
The party has already committed to £8bn of tax rises by targeting private schools and non-doms. There are fears that it is plotting a further raid on pension pots and capital gains to fund even higher spending.
He said: “We see risks that possible further increases in taxation could affect incentives to invest and Labour’s pledge to reduce net migration could weigh on labour supply. That said, it is difficult to gauge the magnitude of the effects of these policies on growth without further policy details.”
He also said Labour’s plans to lift the minimum wage further could also keep interest rates higher for longer.
Goldman said: “Firmer demand is likely to result in marginally higher wage growth and inflation ... Labour’s pledge to introduce a ‘genuine living wage’ points to the possibility of stronger wage growth and some risk of slower rate cuts.”
George Buckley, the chief UK economist at Nomura, said there was a risk that Labour could increase its spending plans even further, though this would be constrained by a commitment to get debt falling.
He said: “We think there is a risk that the scale of Labour’s majority may embolden the incoming government to go beyond its manifesto pledges – safe in the knowledge that the size of its win is likely to insulate it against losing the next election.”
Mr Buckley also warned that borrowing costs could remain higher for longer under Labour. The Bank is expected to cut interest rates to 5pc from 5.25pc in August.
He added: “The most notable risks to the Bank of England cutting rates by less might be an emboldened Labour government providing significantly more fiscal support (though it’s difficult to see how this could be the case if the fiscal rules are adhered to) and the possibility that abolishing the age bands in the minimum wage (and raising it) would have the effect of sustaining higher wage growth, particularly in the spring of next year when this might come into force.”
By contrast, Rob Wood, the chief UK economist at Pantheon Macroeconomics, said investment could increase under Labour if it enabled him to “plot a stable policy course”.
He added: “[This] should boost business investment and attract greater foreign investment. He has a good chance of making major supply-side reforms like cutting planning regulations. But that will all take time to fully implement and impact the economy.”
The UK economy grew at its fastest pace since 2021 in the first three months of the year. The Bank now expects the economy to expand by a further 0.5pc in the second quarter.
