Labour Party one step away from power
Britain at a Turning Point
The parliamentary elections in the UK will be held on July 4th, where we are likely to witness the Labour Party’s victory after 14 years of power for the conservatives.
Britain may be approaching a new turning point after Brexit in 2021. The parliamentary elections, traditionally held on a Thursday, the day Britons have always gone to the polls, on July 4th, will likely determine the shift of power between the conservatives and the Labour Party.
After 14 years in power, it seems that the conservatives are on the brink of a historic defeat, with the current Prime Minister Rishi Sunak, who according to some polls, might even face the risk of not entering Parliament in his own constituency of Westminster.
For the current majority, the poll results could be so catastrophic that they may not even reach second place. In fact, the UK Reform Party could even surpass the Conservative Party in the voting, thanks to the UK’s electoral system, which is based on a completely majority-based criterion for seat allocation.
How can such a defeat be explained? If this happens, the reasons for this collapse are traced back to distant times, conditions that have made a country economically poorer, financially more crippling, and socially more devastated.
Therefore, what are the proposed solutions by the two sides that will face each other on July 4th? And after more than three years of Brexit, which follows the global model in which Britain is pursuing, what is the outlook for the British economy?
Power is becoming worn out.
Giulio Andreotti, a former politician and prime minister of Italy in the post-World War II era, cleverly remarked that power is becoming worn out but it is better not to lose it.
In fact, fourteen years of uninterrupted rule by the Conservative Party in Britain, led by five different leaders from 2010 to the present, has worn out the power. David Cameron, Theresa May, Boris Johnson, Liz Truss, of course, in a very brief and destructive parenthesis, very rootless.
Over the past 15 years, Britain has experienced economic challenges that few other Western countries have suffered. These problems began with the vulnerability of the financial system and culminated in a severe crisis in 2008-2009 that spilled over to the real economies of Western countries, leading to long-term structural problems primarily attributed to loss of productivity. In fact, if productivity had grown by more than 2% per year on average in the 15 years leading up to 2008, in the subsequent years this growth was only 0.5%, largely due to underinvestment, both in the public and private sectors. Therefore, this weak productivity dynamic means that from 2009 to 2023, Britain’s Gross Domestic Product has grown by an average of 12% per year, which is lower than the average of advanced economies that have recorded a growth rate of 15%, according to International Monetary Fund data.
In addition to the repercussions of the global financial crisis, there were primarily two events that impacted the weak performance of the UK economy. The first one was the almost predictable Brexit, causing long-term uncertainty. Following the unexpected outcome of the referendum in June 2016, it weakened the country and reduced its attractiveness for foreign investment. Despite experiencing success in the years following deindustrialization and transforming into a high value-added economy, the negative effects of the pandemic also led to a sharp decline in foreign direct investment (FDI) into the UK in 2022, dropping to one-fifth of the pre-COVID level. The exit from the European single market coincided with a very unfortunate time of global pandemic, making trade transactions with EU countries, which still accounted for almost half of London’s trade, more challenging.
The second factor that simultaneously weakened the economy and dealt a blow to the credibility of conservatives among British voters was the almost irreparable short and disastrous experience of Liz Truss in government.
In just 44 days on Downing Street, Chancellor Kwasi Kwarteng and his team were able to launch something akin to a full-blown economic storm on Britain. Kwarteng emphasized that among tax cuts and increased payments to households, the first step to help household livelihoods will be chosen.
His plan for tax reduction includes a proposal to reduce green taxes on energy bills designed to fund renewable energy projects. Kwarteng also intended to eliminate the planned increase in corporate taxes and reverse other planned tax hikes, including taxes on income and wages.
These plans caused a real upheaval in financial markets, leading to the pound’s fall and, in turn, increasing the yields on government bonds.
Therefore, the task for Rishi Sunak, who replaced Kwarteng as the former Chancellor Boris Johnson was very complex. Undoubtedly, the current leader of Britain has shown caution and pragmatism and continues on the path set by Brexit, but also has a more open attitude towards the European Union, as evidenced by the significant agreement on trade with Northern Ireland.
However, Sunak was unable to accelerate the UK economy due to severe inflation, which was higher in Britain than in the rest of Europe. By imposing a highly restrictive monetary policy through penalizing consumption, he failed to bring momentum back to the British economy. Sunak claimed the government’s success in combating inflation, which ultimately converges towards the target rate of 2, although more credit is given to the Bank of England, which is independent of government policies.
Nevertheless, it seems that in the face of increasing weak economic growth, a costly victory has been achieved. In 2023, the Gross Domestic Product showed a weak growth of 0.1%, and the outlook for 2024 is not very promising, as the International Monetary Fund has only predicted a growth of 0.5%. Therefore, if this framework is the reference point, understanding that the current parliamentary majority is in an unfavorable situation according to polls will not be an easy task.
Comparison of election programs
The two main parties on the eve of the elections have different proposals. As often happens, the main focus of their programs revolves around fiscal policies. On one hand, conservatives suggest reducing taxes and eliminating the retirement share for all employees in the long term. On the other hand, the labor party argues that this plan is unfeasible and promises not to increase income tax rates or corporate profit taxes. Instead, they target wealthy taxpayers, for example, by introducing value-added tax payments for private school tuition.
Therefore, the intention to implement redistributive fiscal policies aims to support the middle class, who have suffered greatly from economic problems in recent years, and to reduce the severe social inequalities that have recently spread throughout the country.
Regarding the transfer of energy, the Labor Party suggests accelerating the pace to achieve net carbon neutrality by 2030, while the Conservatives propose adopting more gradual climate policies and maintaining international commitments, aiming to reach net zero by 2050. Overall, the Labor Party suggests nationalizing a portion of energy and rail transport networks to reduce passenger fares and increase government involvement in economic management.
Ultimately, regarding the European Union, it does not seem that the differences are excessive. Neither side is actually offering a retreat from Brexit, while still proposing an open and constructive relationship with Brussels.
These commitments must be tested against reality. In early 2025, the first five-year review of the Trade and Cooperation Agreement (TCA) will be planned. Although the free trade agreement between Britain and the EU has been signed, since the entire chapter on trade in services has not yet been regulated, it is not complete.
A turning point is looming.
Although the election result seems almost certain, the future of the UK economy is uncertain. The country has faced a very complex 15 years that has weakened its growth potential and attractiveness for foreign investment.
It is inevitable that conservatives address the consequences of 14 uninterrupted years in power in a nearly physiological way, which has been indescribably marked by the Brexit experience, which has not yet produced the predicted effects in terms of economic reboot and increased dynamism.
Prime Minister Sonak will likely overcompensate for the mistakes of his predecessors as he has tried to implement cautious policies that allow Britain to prevent financial collapse.
The Labour Party, the likely winner, will face very challenging tasks, especially the need to restore power to the middle class and the welfare system, which has gradually been left with fewer resources and lower quality services.
They should not forget that Great Britain will need to be stronger and more cohesive to continue to have influence in the world, and for achieving Britain’s global goal, closer economic partnership with the European Union, which is indispensable, is inevitable.
However, the Reform UK party’s plan should also be considered, as it can garner more support, at least in terms of percentage, even if it does not win seats from conservatives.
This party, founded as a right-wing populist party in Britain under the name Brexit Party, changed its name to Reform UK on January 6, 2021, following the completion of Britain’s exit from the European Union. The new party, led by Nigel Farage, proposes a very radical political agenda based on a tough fight against immigration far more than what previous governments have done after putting Brexit as a top priority.
A significant reduction in corporate taxes and the cancellation of net zero goals, which according to Reform UK, will save £30 billion annually for investment in other sectors not related to energy transition.
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