Large majorities carry enormous obligations. In the general election held on Thursday, Keir Starmer brought the Labour Party back to power by taking over 410 of the 650 seats in the UK's House of Commons. With an anticipated 170-plus members of parliament, he has a larger majority than all the other parties combined, giving the incoming prime minister ample room to act quickly to address Britain's economic problems. However, due to his own self-imposed budgetary constraints and campaign pledges, he will likely take a slow approach and would need to increase wealth taxes.
Investors will be relieved to see political stability return to the UK following a turbulent 14 years under Conservative rule. But now comes the tricky part: the incoming administration will have to restart Britain's economic growth. The International Monetary Fund projects that the nation's GDP will grow by just 0.5% this year, an enormous decrease from the 2% yearly average in the ten years before the Covid-19 pandemic in 2020. Starmer has gone one step farther and, in a recent interview, discussed growth of 2.5 percent annually.
The issue is that there isn't enough money for the incoming prime minister and potential finance minister, Rachel Reeves, to blow up the economy. They swore adherence to an arbitrary rule that said public debt must decrease as a proportion of GDP at the conclusion of a five-year rolling period, hoping to avoid scaring voters and markets. That means that by 2028–2029, they will have less than 9 billion pounds in new public expenditure, as per the UK Office for Budget Responsibility. Additionally, they have promised not to raise major taxes on earnings and businesses.
Although Starmer and Reeves may theoretically break their vows given the strength of Labour's majority, it seems unlikely that this will happen anytime soon. The unfunded fiscal extravagance that occurred in September and October of 2022, during the brief tenure of former Prime Minister Liz Truss, continues to haunt investors in the UK. Closing the budget deficit left by the previous government of departing Prime Minister Rishi Sunak would likely be the top priority for the incoming administration. The Institute for Fiscal Studies estimates it might come to as much as 20 billion pounds annually.
The incoming prime minister needs to find money quickly. Imposing wealth taxes is a wise move. Currently, income taxes raise over 580 billion pounds annually, but wealth taxes, such as capital gains and inheritance taxes, barely generate 40 billion pounds. An IFS calculation indicates that an additional 6 billion pounds might be raised annually by raising the top rate of capital gains tax from the present 20% to 25%, eliminating the exemption currently granted to individuals who retain assets until their death, and abolishing tax breaks on company sales.
In 2028–2029, however, yearly public investment in the UK is expected to decrease from 2.4% of GDP to 1.8%. Over 26 billion pounds must be spent in order to prevent that. Releasing the financial restraint would most likely be necessary to close the hole. Should Starmer decline to take that action, the stability that his overwhelming electoral victory promised could instead look like stasis.