Labour’s first year report – ‘tries hard, but results still poor’

Keir Starmer was at least (half) right to warn last summer that things would get worse before they get better

One year on, the Labour government elected in July 2024 is claiming three big wins on the economy. Unfortunately, these are little to shout about.

The first is the large increases in the National Minimum Wage (NMW).

This simply maintained the last government's policy of raising the full NMW to two-thirds of median earnings and extending it to younger workers, so is not really a break with the past

However, when combined with the hikes in employer NICs, this policy has contributed to higher prices and large job losses, notably in hospitality and retail. Moreover, this is before the additional costs that will be imposed by the 'Employment Rights Bill'.

The second is the ‘three new trade deals’, with the US, India, and the EU.

In fact, credit for the US and India 'deals' really belongs to Brexit. And the significance of all three 'deals' has been overhyped, especially the minor changes to the existing UK-EU TCA. Indeed, closer regulatory alignment with the EU is likely to have more costs than benefits.

It is also reasonable to ask whether Labour should have done better in these negotiations. The previous government had achieved at least as much, and arguably more, notably paving the way to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The third ‘win’ is 'four interest rate cuts'.

However, interest rates are being cut around the world. In particular, the ECB has cut its key rate seven times since July 2024 (and eight times in total in this phase of the cycle).

What's more, UK interest rates remain relatively high, including the cost of government borrowing. Gilt yields are higher than when Labour took power, partly due to persistent worries about fiscal credibility.

If the Bank of England does now cut rates more aggressively it is most likely to be because the jobs market is weakening, and growth is tanking, under the weight of more regulation and further tax increases. This would not obviously be something to cheer.

And in any event, it is hard to see how Labour can take much credit for the rate cuts that the Bank has made, given what has happened to UK inflation, which was risen from 2.0% in June 2024 to 3.4% this May.

Of course, one year is arguably too short a period to judge a long-term 'Plan for Change'. It will take time to see the full impact of increased public investment and of structural reforms in areas such as planning laws and regulation of financial services.

The UK economy has also been buffeted by new external shocks, notably Trump’s tariffs and now the growing worries about US government debt, But it is still hard to see how Labour has 'fixed the foundations'.

In particular...

❌ the UK public finances are still deteriorating, with widespread speculation of another £20 billion or so of tax rises in the Autumn Budget

❌ the public sector unions are still unhappy and coming back for more

❌ energy policy is all over the place

❌ attempts to reform welfare have failed miserably, and economic inactivity remains high

❌ the OBR looks set to downgrade its assumptions about productivity growth, and hence economic growth overall, adding to the risks of an economic and fiscal 'doom loop'

In short, as Keir Starmer himself warned last August, things have indeed got worse. The best I can say is that the jury is still out on whether they will ever get any better.