(Bloomberg) — Standing in the rain and being drowned out by protesters playing the Labour Party’s 1997 victory anthem “Things Can Only Get Better” will not have been Rishi Sunak’s preferred backdrop for his announcement naming the date of the next UK election. The soundtrack, though, was apt.
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The prime minister will fight the campaign over the next six weeks in the belief that the economy is going to pick up further. Labour leader Keir Starmer will counter that the next government, which his party is the clear favorite to form, faces the worst economic inheritance since World War II.
Sunak has gambled on calling a vote for July 4 when many in his Conservative Party were still counting on having months to prepare. Yet the battle ahead is the same, whatever the timing: the trajectory for growth and living standards versus where the economy is right now.
Wind has started to fill Britain’s sails. Last year’s mild recession is over, gross domestic product is growing strongly and inflation is roughly at the central bank’s 2% target. For the electorate, unemployment is low, wages have outpaced inflation for 10 months and workers are feeling the benefit of £20 billion ($25 billion) of tax cuts. On Wednesday, Sunak said inflation was “back to normal” and “brighter days are ahead.”
Labour’s response is that while real wages are rising, they remain lower than before the financial crisis, meaning pay packets buy less than they did in 2007. Prices are almost 25% higher than before the coronavirus pandemic and GDP per head is 0.7% weaker than a year ago.
What’s more, for a Conservative Party that used to chastise Labour for taking people’s money, the tax burden is on course for a 70-year high, despite Chancellor Jeremy Hunt’s tax giveaway.
Last week, Hunt acknowledged that living standards have fallen since the last election in 2019, when former leader Boris Johnson triumphed with his promise to “Get Brexit Done” and leave the European Union.
“The Conservatives are trying to build momentum on the back of this latest economic data to try to build a case,” said Kate Dommett, professor of digital politics at the University of Sheffield. “But it’s going to be a real challenge.”
There are unresolved issues with Brexit, institutions such as the National Health Service and the UK’s vaunted university system are straining and immigration remains a key issue because of wrangling over how to process asylum seekers — and then where to send them. But it’s living standards that loom largest over the election.
Indeed, Labour will fight the campaign on the economy, Shadow Chancellor Rachel Reeves has said. Sunak also put the economy front and center in his speech on Wednesday announcing the election date.
“Economic stability is the bedrock of any future success,” he said. “Now is the moment for Britain to choose its future. To decide whether we want to build on the progress we have made, or risk going back to square one, with no plan, and no certainty.”
So far, Labour has played it safe. Its fiscal rules are almost a carbon copy of the government’s. The party has supported Hunt’s tax cuts. Growth-related policies like “productive finance” pension reforms could have been lifted from Tory documents.
When Labour’s economic plans clashed with fiscal virtue, public finances have won. Its £28 billion green investment plan was hacked back, though climate investment remains a central pledge. Planned employment rights laws were watered down as the party courted business. Industry swung behind Reeves’ “securonomics,” a doctrine of self-reliance, stability and investment.
“Financial markets and international businesses will be extremely relaxed about the prospect of a change to the Labour government,” Michael Saunders, a former Bank of England policy maker, said on Bloomberg TV. “That’s partly because Labour themselves are viewed as a moderate centrist party. It’s also because the Conservatives have lost their previous claim to be the party of economic competence after the chaotic period of the last few years.”
Opinion polls support the view that traditional perceptions have reversed, largely due to the market shock caused by former Prime Minister Liz Truss during her short tenure two years ago. Labour is now more trusted on the economy, according to polls by YouGov and Ipsos.
Neil Wilson, chief market analyst at financial services firm Finalto, welcomed Labour’s poll lead. Investors prefer certainty, with the stock market tending to do better “when results are easily predicted and not really close,” he said. A Labour-led government would be the best result for stocks and the pound, a Bloomberg survey of investors last year found.
Sunak was dealt a tough hand. After becoming chancellor in 2020, he supported the economy through Covid and then a cost-of-living crisis exacerbated by the war in Ukraine, which drove UK national debt to nearly 100% of GDP. Inflation hit a 40-year high and interest rates were lifted to levels last seen in 2008.
The higher cost of servicing public debt, combined with weak growth, required tax rises and spending cuts. Coming on the back of earlier austerity, the cuts have been described as unsustainable. The International Monetary Fund this week warned that another £30 billion of savings need to be found to balance the books and fund Britain’s crumbling public services properly.
Both parties have the same solution for the country’s economic woes: growth. Naturally, both argue that the other’s stated ambitions to get there are fiscally undeliverable.
The Tories believe tax cuts and tech innovation will deliver it. Last week, the Organisation for Economic Cooperation and Development said the UK tech industry is the fastest growing in Europe and catching up with the US. Labour also wants to “cut taxes on working people” but would invest more.
Both also hope the Bank of England will help by cutting interest rates now that inflation is largely under control. That first reduction, though, is now unlikely to come until after the election.
“A June rate cut is looking very unlikely after the inflation figures,” Saunders told Bloomberg. “The decision to call the election won’t really alter that, other than in a very limited extent the MPC would be especially reluctant to do a surprise rate change during an election campaign. But in practice, a June rate cut is already ruled out by inflation figures.”
One Tory minister who asked not to be named said the early election was a terrible idea. Had Sunak waited until the autumn, households would have been feeling the effects of the improving economy and lower interest rates.
Back in 1997, unemployment was down to its lowest in years, growth had picked up and the national debt had shrunk. But the damage to the Conservative Party had been done in previous years. Labour leader Tony Blair won a landslide.
–With assistance from Isabella Ward, Asad Zulfiqar and Alex Wickham.
(Updates with comments from former BOE policymaker Saunders in 14th paragraph.)
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