Labour Party on the Brink of Power
Britain: Time for Change
Labour Party on the Brink of Power: Parliamentary elections are set for July 4th, which will likely see the Labour Party’s victory after 14 years of Conservative rule.
Britain may be approaching a new turning point post-Brexit in 2021. The parliamentary elections on July 4th, traditionally held on a Thursday when Britons always go to the polls, are expected to signal a shift in power from the Conservatives to the Labour Party.
After 14 years in power, it seems the Conservatives are on the path to a historic defeat, along with current Prime Minister Rishi Sunak, who according to some polls, might even fail to secure his Westminster seat in his constituency.
For the current majority, the poll results could be so disastrous that they might not even reach second place. In fact, the Reform UK party could surpass the right-wing Conservatives in voting, thanks to the UK’s electoral system, which is based on a purely majority criterion for seat allocation.
How can such a defeat be explained, if it happens? The causes of this announced collapse date back to distant times, leading to a country that is economically poorer, financially more fragile, and socially more fragmented.
So, what are the proposed solutions from both sides that will face off on July 4th, and what is the outlook for the British economy more than three years after Brexit, which pursued the Global Britain model?
Power Wears Out
Giulio Andreotti, the former Italian politician and Prime Minister during the post-World War II era, wittily remarked that power wears out, but it’s better not to lose it.
Indeed, fourteen years of uninterrupted Conservative rule, led by five different leaders since 2010, have worn out the British Conservative Party: David Cameron, Theresa May, Boris Johnson, Liz Truss (albeit for a very brief and quite damaging interlude), and Rishi Sunak.
Over the past 15 years, Britain has faced economic challenges similar to those experienced by other Western countries. These issues began with the vulnerability of the financial system, leading to a severe crisis in 2008-2009 that affected the real economy of Western countries, resulting in long-term structural problems mainly explained by the loss of productivity. In fact, if productivity had grown by more than 2% annually on average in the 15 years before 2008, in the years following, this growth was only 0.5%, primarily due to a lack of investment, both in the public and private sectors. This weak productivity dynamic means that from 2009 to 2023, the UK’s GDP grew by an average of 1.2% annually, which is below the average of advanced economies that recorded a growth rate of 1.5%, according to IMF data.
In addition to the consequences of the global financial crisis, there were primarily two events that impacted the UK’s weak economic performance. The first, almost mundane, was Brexit. The long-term uncertainty following the unexpected referendum result in June 2016 began to weaken the country and reduce its attractiveness for foreign investment, which had previously thrived during the boom years following deindustrialization and the transition to a high value-added economy. Then, the negative effects of the pandemic led to a situation where, in 2022, the flow of Foreign Direct Investment (FDI) to the UK fell to one-fifth of its pre-COVID levels. Exiting the European Single Market coincided with the unfortunate timing of the pandemic, making trade exchanges with EU countries, which still accounted for nearly half of London’s trade, more difficult.
The second factor that simultaneously weakened the economy and damaged the Conservatives’ credibility with British voters was the practically irreparable, short-lived, and disastrous experience of Liz Truss in government.
In just 44 days in Downing Street, Truss and her Chancellor, Kwasi Kwarteng, managed to unleash something akin to a perfect storm on the British economy. Truss emphasized that among tax cuts and increased household payments, she would choose the former to help household livelihoods.
Her tax cut plan included a proposal to reduce green taxes on energy bills, which were designed to fund renewable energy projects. Truss also intended to cancel the planned increase in corporate tax and reverse other planned tax increases, including payroll taxes.
These plans sparked a real revolt in the financial markets, causing the pound to plummet and, in turn, leading to an increase in the yield on ten-year government bonds.
Thus, the task for Rishi Sunak, who replaced Truss and was previously Boris Johnson’s Chancellor, was very complex. Undoubtedly, the current British leader has shown caution and pragmatism and continues on the path set by Brexit, but he also has a more open attitude towards the European Union, as demonstrated by the significant agreement on trade with Northern Ireland.
However, Sunak could not restore momentum to the British economy due to severe inflation, which was more intense in the UK than in the rest of Europe, imposing a heavily restrictive monetary policy that penalized consumption. Sunak claimed success for the government in fighting inflation, which is eventually converging towards the 2% target, although in this case, the credit is more attributed to the independent Bank of England.
Nevertheless, it seems that in the face of increasingly weak economic growth, a victory at a very high cost has been achieved. In 2023, GDP grew weakly by 0.1%, and the outlook for 2024 is not very promising either, as the IMF predicts growth of only 0.5%. Therefore, if this is the reference framework, it won’t be hard to understand why the current parliamentary majority is in a poor state in the polls.
Comparison of Election Programs
What proposals do the two main parties have on the eve of the elections? As often happens, the main focus of the programs revolves around fiscal policy. On one side, the Conservatives propose to cut taxes and abolish pension contributions for all employees in the long term. On the other hand, the Labour Party says this plan is unfeasible and promises not to raise income tax rates or corporate tax, instead targeting wealthy taxpayers, for example, by introducing VAT on private school fees.
Therefore, the intention to implement redistributive fiscal policies to support the middle class, which has suffered from numerous economic problems in recent years, and to reduce severe social inequalities that have recently expanded in the country, is clear.
Regarding energy transition, the Labour Party proposes to accelerate and achieve net decarbonization by 2030, while the Conservatives propose adopting more gradual climate policies, while maintaining commitments made at the international level, hoping to reach net zero by 2050. Overall, the Labour Party proposes to increase the role and presence of the state in economic management by nationalizing parts of the energy and rail transport networks to reduce passenger tariffs.
Finally, in relation to the European Union, it seems there are not too many differences. Neither party, in fact, promises to reverse Brexit, while still proposing an open and constructive relationship with Brussels.
These commitments should be tested against the facts in early 2025, when the first five-year review of the Trade and Cooperation Agreement (TCA) is planned. The free trade agreement between the UK and the EU has been signed but is still incomplete, as the entire chapter on services trade is yet to be settled.
A Turning Point is Looming
While the election result seems almost certain, the same cannot be said for the future of the English economy. The country has faced 15 very complex years, weakening its growth potential and part of its attractiveness in terms of foreign investment.
The Conservatives are destined to pay the physiological consequences of 14 uninterrupted years in power, which have been indescribably marked by the Brexit experience, an experience that has not yet produced the anticipated effects in terms of economic revitalization and dynamism.
Prime Minister Sunak is likely to overpay for the mistakes of his predecessors as he has tried to implement cautious policies that allow the UK to avoid financial collapse.
The Labour Party, the probable winner, will face very difficult challenges, particularly 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 must not forget that a stronger and more cohesive Great Britain is a prerequisite for continuing to exert influence in the world, and for implementing the Global Britain goal, closer ties with the European Union, an economic partner without which it is not possible, seem inevitable.
However, the Reform UK party’s program should also be considered, as it could gain more support, at least in terms of percentage, if not seats, from the Conservatives.
This party, established as a right-wing populist party in Britain under the name Brexit Party, was renamed Reform UK on January 6, 2021, following the completion of the UK’s exit from the EU. Nigel Farage’s new party, after securing Brexit, proposes a very radical political agenda focused on a tough fight against immigration, much more than what previous governments have done.
Widespread tax cuts for companies and the abolition of net zero targets, which according to Reform UK, would save £30 billion annually to be invested in other sectors not dedicated to energy transition.
