Starmer's Growth Hurdle: The Labour Party

A Year of Labour Rule: Resilience Amidst Challenges

A year into the Labour government's rule, the UK economy has shown a degree of resilience despite some missteps by the administration. However, Prime Minister Sir Keir Starmer's statist instincts and fiscal errors could hinder the growth he promises to deliver, according to Eliot Wilson.

Sir Keir Starmer may not have much in common with former Prime Minister Liz Truss, but both leaders agreed on one key point: the UK's prosperity and rising living standards depend on substantial and sustained economic growth. Labour's manifesto last year emphasized that growing the economy would be at the heart of everything they do. Truss had previously identified the main challenge as being stuck in a "high-tax, low-growth" cycle.

The current government needs growth more than ever, especially after a chaotic period where economic and fiscal policies seemed more aligned with Mr. Bean than with economist Maynard Keynes. Last-minute concessions to potentially rebellious Labour MPs over the Universal Credit and Personal Independence Payment Bill included the minister agreeing to scrap whole clauses, which wiped out hoped-for savings totaling £5 billion.

It now seems inevitable that the autumn Budget will include more tax rises, although Labour will try to frame them as consistent with its manifesto pledge that it "will not increase taxes on working people." This move could further strain an economy already affected by the rise in employers' National Insurance announced last year and by some of the highest energy costs in Europe. Yet, "investment" (the modern term for public spending) must be funded somehow.

The UK economy grew by 0.7% in the first quarter of this year, the largest rise in a year and the highest growth rate in the G7. While this is a positive sign, we are not yet on solid ground. Ben Wiles, managing director for restructuring at financial and risk advisers Kroll, noted that early 2025 saw a perfect storm of challenges gathering and accelerating towards UK businesses. However, by mid-year, a picture of general resilience remains—despite a combination of employment rights updates, national minimum wage increases, national insurance changes, higher energy costs, and tariff threats.

Wiles also pointed out that we haven't seen the volume of insolvencies or restructuring exercises that the gloomiest forecasts predicted. Some of the firms that disappeared were recent, post-Covid enterprises that likely lacked a sustainable future.

Economic Resilience and Future Outlook

Despite the government's policies, the underlying resilience of the UK economy is evident, but it cannot be taken for granted. Growth for the rest of 2025 is expected to be weaker than the initial three months, and in April, the International Monetary Fund revised its annual forecast for the UK downward from 1.6% to 1.1%. Whatever the exact number, the UK is firmly in the territory of "anaemic" growth, and we should not take too much comfort from the fact that competitors are performing even more weakly.

There is money in the economy, certainly, but borrowing is expensive. Gilt yields rose sharply last week as bond markets became increasingly anxious about the government's direction and whether Rachel Reeves, the embattled Chancellor, might be replaced by a more left-leaning figure. Wiles believes businesses are determined to weather the storm and pay the price now to wait for more favorable economic conditions. But they cannot wait forever.

Statist Approach and Policy Setbacks

Starmer’s government has always been misguided. Instinctively dirigiste, he and his ministers believe that the state is the principal motor of economic expansion. This was underlined in the long-awaited Modern Industrial Strategy published last month. In October 2024, Starmer reassured potential investors that the government was “not in the business of individual picking winners.” Yet the purpose of the Industrial Strategy is “to back British businesses, invest in our comparative advantage and take punts in pursuit of growth and productivity.” Picking winners, some might say.

This stifling statist approach is now aggravated by policy setbacks and changes of direction, which are robbing the government of financial room to maneuver. Ministers know that politically they must deliver perceptible change, but are struggling to afford it. The traditional Labour nostrum of tax-and-spend will put economic growth even further away. Already this financial year, the tax burden will be 36.8% of GDP, the highest since the late 1940s.

Promises and Reality

Labour has been in power for a year. We are promised jam tomorrow, yet almost everything the government does pushes 'tomorrow' further into the future. Sir Keir Starmer boasts of his willingness to take hard decisions. At what point is he willing to decide that his current approach is simply not working, that ministers cannot manage the fine details of a free-market economy and these ministers emphatically cannot? The clock is ticking.

Eliot Wilson is a writer.