RAchel Reeves is preparing to announce the Treasury’s analysis of Labour’s spending legacy from the Conservatives in parliament on Monday to highlight why she will have to make “difficult decisions” in her autumn budget.
The chancellor’s audit is expected to reveal £20bn of unaccounted for liabilities by the previous government, drawing on the narrative that the Conservatives left Labour in the “worst situation since the Second World War”.
After more than a decade of stagnant economic growth and strained public services, Reeves’s arguments are largely supported. However, there are also signs that progress was being made before Keir Starmer’s landslide victory this month. Here are eight charts that illustrate the economic legacy the new administration will face.
National debt soars
Keanu Reeves will be painfully aware of the damage George Osborne did to Labour the last time his party left power, illustrated by the way David Cameron’s chancellor seized the infamous Treasury note left by Liam Byrne, joking that “there’s no money left”.
Without such a powerful tool this time around, Labour will be keen to highlight official figures which show a more difficult situation than in 2010.
Public debt has risen from 64.7% of GDP in 2010 to 99.5%, its highest level since the 1960s, after successive annual budget deficits and the damage of the Covid-19 pandemic. Debt interest reached a post-war high of 4.4% of GDP in 2022-23, but is now falling as inflation slows.
UK government bond yields – a gauge of borrowing costs – have also been on a rollercoaster ride, rising after Liz Truss’s mini-budget in September 2022, falling after Rishi Sunak took office, but rising again in 2023. They have fallen in recent weeks but remain higher than in 2010, amid expectations that the lows seen after the 2008 financial crisis are unlikely to return.
Falling standard of living
If there is a chart to illustrate how the UK’s situation over the past five years compares with the period after the Second World War, it is a look back at the ups and downs of disposable income in each parliament.
Between 2019 and 2024, household incomes fell by 0.1%, after adjusting for inflation. To find another five-year period in which real household incomes fell, you have to go back to the 1945-50 Labour government led by Clement Attlee.
Then, as now, the government was also increasing spending on defense, health, education and infrastructure, while trying to reduce borrowing from historically high, though not unprecedented, levels.
Relaunching economic growth
Since the 2008 financial crisis, UK GDP growth has slowed. Treasury analysis commissioned by Reeves shows that if the UK economy had grown at the Organisation for Economic Co-operation and Development average over the past 13 years, it would have been more than £140bn higher.
However, there have been more encouraging signs in recent months. The UK emerged from last year’s brief recession in the first quarter at a faster pace than many forecasters had expected. Gross domestic product (GDP) grew by 0.7%, more than double the eurozone’s growth and above the G7 average.
Business surveys show that growth remains robust, unlike in France and Germany, where political uncertainty and headwinds from global trade are weighing on activity. Sterling has appreciated on international financial markets and the FTSE 100 is close to a record high.
Cooling inflation
After reaching its highest level since the early 1980s, 11.1% in October 2022 after the Russian invasion of Ukraine, inflation has fallen in recent months to the government target of 2%.
However, prices are significantly higher than they were three years ago and are continuing to rise. Labour also believes that insufficient action to decarbonise the UK’s energy supply and insulate homes has left households more exposed to the cost of living crisis.
However, slowing inflation is likely to lead the Bank of England to cut interest rates, possibly as early as next Thursday, easing pressure on households and businesses after 14 consecutive increases, from 0.1% in December 2021 to the current level of 5.25%.
Tax constraints
Reeves criticised the Conservatives for leaving office when “working people are facing the highest tax burden in 70 years”. Taxes as a share of GDP are set to rise from 36% to 37.1% by 2028-29. That would be four percentage points higher than before the pandemic and the highest level since 1948.
Despite these high levels of taxation, public services are struggling and could face cuts if the chancellor sticks to his self-imposed fiscal rules requiring national debt to fall as a share of GDP in the fifth year of the forecast.
Labour’s manifesto promised not to raise income tax, social security or VAT, which make up the bulk of overall taxation, which would limit the power of the new government. Reeves could, however, change budget rules or raise taxes, probably targeting capital gains and inheritance tax.
Employment challenge
The proportion of people in employment in the UK has fallen over the past five years, mainly in response to an acceleration in the number of people taking early retirement and an increase in the number of people too ill to work.
It is a trend that other G7 countries have managed to reverse. In France, there has been a significant increase since the coronavirus pandemic in the number of people in employment relative to the entire working-age population, although this level is lower than in the UK.
Investment challenge
Investment in the UK has lagged behind other G7 countries for decades, hampering productivity growth and making key infrastructure increasingly inadequate for a modern, advanced economy.
Public investment has surged in recent times, from an average of 1.8% of national income to 2.4% since 2021, but the last Conservative chancellor, Jeremy Hunt, paid for his pre-election cuts to national insurance with a dramatic reduction over the next five years that Labour is struggling to restore.
Business investment has also been low for decades. Huge injections of foreign direct investment have mostly gone to buying British companies rather than building new factories. Brexit has added a layer of uncertainty, deterring foreign companies from setting up in the UK and discouraging businesses from investing to boost exports.
Municipalities in crisis
In the last three years, more English councils have declared bankruptcy than in the previous thirty years, with victims including Birmingham, Nottingham, Thurrock and Woking.
Rising inflation and rising demand for public services have played a part, as have missteps by some authorities. However, local authorities have been hardest hit by the Conservatives’ austerity policies of the 2010s, with central government funding cut by 40% in real terms over the decade to 2020. The Institute for Government estimates that local government budgets would need to increase by £7.1bn to return to 2010 funding levels.
Among the biggest challenges is a £5bn debt crisis to fund special educational needs, which has been kept off council balance sheets thanks to a special “derogation” agreement with central government.
