What is waiting in the new government's in tray?

What is the new Labour government’s inheritance that could substantial claims on the Treasury?

| 7 min read

Labour says it will get a bad economic inheritance. They point to weak economic growth over the last five years, to the past dose of inflation, to the shortage of money for public services and the relatively high tax burden. The Conservatives claimed that inflation is back down to the 2% target, real incomes are rising again, interest rates should soon start to fall and the budget deficit is meeting the targets.

What is clear is the UK economy has grown slowly in recent years, and tax as a percentage of GDP is elevated. There are plenty of claims for more money from the public sector. Labour have signed up to the Conservative policy of freezing Income Tax thresholds so they can tax people more and ease more people into the higher rate bands. Both agree more money is needed for the NHS, defence and other priorities though there have been disagreements about the timing and size of increases. Both agree the UK needs to grow faster, but they have some differing policy proposals to tackle that.

The claims on the Treasury

As it enters Downing Street, the new government finds plenty of demands for more public spending.

Pensioners: 12.6 million are on state retirement pension. It costs £112bn (2022/3). It is a contributory benefit with people qualifying by paying National Insurance contributions. It is pay as you go, with no invested funds, so today’s NI contributions pay pensions for people already retired. The last government saved money by raising the pension age gradually. It could be raised further but not to affect payments in the next five years. The government has promised to pay the higher of inflation, 2.5% or wage growth each year in annual upratings for the life of the new Parliament which creates substantial demands each year for extra funding.

People not in work but of working age: Around nine million people of working age are not looking for work, alongside the 1.5 million unemployed who are. These numbers have risen considerably during and after the Covid-19 lockdowns. Whilst many are too ill to work or have caring responsibilities, there are others who would like a job if more were done to assist them back to the workforce. Labour has said it wishes to engage with them, as the outgoing government said it was doing. It will be interesting to see what additional help, persuasion and incentive the government harnesses as the welfare budget is large and increasing.

HS2: There is likely to be substantial updating of the cash costs of the remaining project to Birmingham given inflation and cost overruns. These are captured during a Spending Review. This could be a substantial additional sum to reflect high inflation of construction costs.

Post Office Compensation and losses: As more money is paid out to sub postmasters wronged by the Post Office there could be further claims on the Treasury to bail out the Post Office which is nationalised.

Contaminated blood compensation: The outgoing government agreed compensation terms for victims with the support of Labour. These claims, like the Post Office ones, extend back to past Labour and Coalition governments as well as the recent Conservative one. There could be further sums to be put in budgets given the past duration and magnitude of the problem.

NHS pay: The government has promised to open new talks with doctors and to reach an agreement with them over pay and conditions of employment. This will lead to further costs for the large NHS budget though Labour have made clear they will not pay the full claim.

Housing: The new government is likely to speed up asylum and visa applications and to grant more the right to reside. This will require finding permanent accommodation to replace the temporary hotels and hostels being used. Social housing generally needs to be expanded, leading to increased state costs.

Defence: Labour has said it wishes to raise the budget to 2.5% of GDP without offering a precise date for this. The Strategic Defence Review is likely to throw up other requirements for extra money ranging from more support for Ukraine to better defences against cyberattacks, the need for larger stockpiles of ammunition and missiles, and the need for new types of drone and superfast missiles in the light of lessons from recent conflicts. Phasing the increases will be an issue.

Funding the renewables and decarbonisation policy: There is money in their plans for the state involvement, but it may be necessary to increase this to hit the exacting targets particularly to shift power generation over to renewables by 2030.

Immediate actions

  • The government is likely to prepare an autumn budget whilst undertaking a major review of public spending and a separate review of Defence. There briefing to suggest that though it will put the higher VAT on school fees into the first budget it might its imposition to the academic year 2025-6 to allow the state sector to adjust to a possible increase in demand for places if parents and grandparents cannot afford fees with VAT. There may be anti-avoidance measures to stop people paying several years fees in advance.
  • It will set about establishing a new Border Force or Command to intensify efforts to close down small boat services that endanger lives and break the law.
  • Labour will take steps to set up and finance Great British Energy and the National Wealth Fund. The Energy and Net Zero reformed department will need to press on quickly with plans to encourage and pump prime large quantities of extra renewable power and projects for carbon capture, grid expansion and hydrogen rollout.
  • It may need to make a planning Bill an early priority both to tackle obstacles to more land for housing, and to speed permissions for national infrastructure projects. They will change Planning Guidance as one way of accelerating permissions.
  • It plans early legislation to ban zero-hours contracts and improve workers’ rights.
  • It will institute talks with the EU over the possibility of mutual recognition of professional qualifications, easing veterinary certification of food and animals and seeking visa-free access for musicians to the EU to perform. They may find the EU a tough negotiator expecting the adoption of more of the single market laws for any removal of EU controls and requirements. Labour have ruled out trying to join the single market.
  • UK policy to the US will need to be shaped pending the outcome of the Presidential contest. UK governments need to be careful not to be partisan during a fiercely fought US election.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

What is waiting in the new government's in tray?

Read this next

Markets take Labour victory in their stride

See more Insights

Read our latest UK market commentary and global investment news.

UK GDP jumps in May
By Garry White
Chief Investment Commentator
12 Jul 2024 | 9 min read
Nato rearms as it hits 75
By Charles Stanley
11 Jul 2024 | 9 min read
Will planning changes achieve their aims?
By Charles Stanley
10 Jul 2024 | 8 min read
Markets react to elections
By Charles Stanley
08 Jul 2024 | 8 min read