Labor is on course for victory – but what kind of economy will it inherit? | Larry Elliott

OhThe Labor Party was divided after its crushing defeat in the 2019 general election. Optimists believed it would take two terms before the party had a chance of forming a government again. Pessimists thought he was doomed to permanent opposition.

Yet four years on, polls suggest Labor is on course for a landslide victory. With the Conservatives in the grip of an existential crisis, Rishi Sunak could be the last Conservative Prime Minister for a long time.

Publicly, Labour’s position is that nothing is taken for granted and every vote must be earned. Privately, however, much attention is being paid to the type of economy Sir Keir Starmer will inherit if he gets the keys to Downing Street.

Clearly, this is not a case of an unhealthy economy, because if it were, Labor would likely be facing a fifth consecutive defeat. Governments that ensure strong growth and rising standards of living are generally re-elected. This isn’t always the case, but it is this time. The economy heading into the next election has more in common with the stagflation nation that Ted Heath ceded to Harold Wilson after the February 1974 election than with the largely crisis-free Britain bequeathed by John Major to Tony Blair in 1997.

There is, however, a difference between 1974 and today. When Wilson won his third election, the crisis triggered by the quadrupling of oil prices was only just beginning. Inflation did not peak until the summer of 1975. Today, inflation is falling, although it is not falling fast enough to convince the Bank of England to start cutting interest rates . The message from Threadneedle Street in recent weeks has been consistent: borrowing costs remain unchanged and are more likely to rise than fall.

That hard line will almost certainly be maintained at this week’s meeting of the Bank’s monetary policy committee, at which six members are expected to keep rates at 5.25%, with the other three voting for a quarter increase. point at 5.5%.

It remains to be seen whether this approach will last for much longer. The latest health check on the state of the jobs market by the Recruitment and Employment Confederation showed that permanent hires among UK businesses are falling at their second fastest rate since the pandemic. With fewer jobs, companies are offering less generous starting salaries, which are growing at slowest pace in nearly three years. Profit growth – which the MPC is concerned about – may well have peaked. It takes time for changes in interest rates to have an impact. Therefore, to be sure to avoid a recession, the Bank should act preemptively. There is no indication that this will be the case, which increases the risks of a mild recession this winter.

It’s a problem, but it’s a bigger problem for Sunak than it is for Starmer. One of the prime minister’s few strengths is that the economy has proven more resilient than expected a year ago. This outperformance is nothing extraordinary: the economy is still at a standstill. But Sunak must be able to make voters believe that the worst is over. A winter recession – or even continued economic stagnation – would make this story much more difficult to tell.

A much bigger problem for a new Labor government will be the need to improve public services at a time when cash is tight. Jeremy Hunt was only able to propose tax cuts in his autumn statement last month by setting out incredibly strict post-election public spending plans which, if implemented, would involve deep cuts to many departments in Whitehall. Last chance for the government: new tax cuts are planned for the spring budget. Labor will be given a poison pill and would be well advised not to swallow it. An emergency revenue-raising budget soon after the election – for which the Conservatives can be blamed – seems inevitable.

Some recent news suggests that the economy has the potential to perform stronger than it has been. First, the Lloyds Bank Business Monitor – which has a reasonable history of anticipating activity trends six months in advance – shows that confidence is improving. What’s more, businesses have cash to invest and may well start spending it once they are convinced that the threat of recession has passed.

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According to economists at Berenberg Bank, the debt level of non-financial corporations rose from a peak of 100% of GDP during the 2009 global financial crisis to 75% of GDP in the late 1990s. , corporate cash balances amount to 20% of GDP, compared to 15% in 2009.

“Companies have enough liquidity to pay for two years of their usual capital expenditures,” concludes Berenberg. “These buffers absorb shock and can provide a springboard for recovery. This is already reflected in labor retention, as well as the healthy upward trend in investment since mid-2020.”

Second, last week’s publication of the latest Pisa International rankings produced by the Organization for Economic Co-operation and Development showed that the UK’s relative performance improved despite the severity of lockdowns, with 15-year-olds in England faring better than those in Scotland and Wales.

Although doubts remain about the reliability of the results, Sunak could have benefited greatly from the operation of post-2010 education reforms. However, this is a government that wants to die. The fact that this modest piece of good news was drowned out by a row over sending asylum seekers to Rwanda helps explain why Labor is heading for a spectacular comeback.

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