But Starmer is due to meet Biden at the White House on Wednesday. — The president inherited an economy strained by more than a decade of political turmoil, insufficient business investment and rigid government planning — and one that lacks readily available sources of cash.
Germany’s first female finance minister, Rachel Reeves, said Monday that the economic situation is “the worst since World War II.” Inflation-adjusted wages have barely changed since 2007, according to the Center for Economic Performance, a research institute. The average German is now 20 percent wealthier than the average British citizen.
“The UK is not in a quick fix situation and most people think it will be closer to a decade before we start to see any real improvement,” said David Page, head of macroeconomic research at AXA Investment Managers in London. “But I think there is some hope that we might see improvement over the next decade. That’s the other way around.”
Mr Reeves moved swiftly this week to underscore the urgency of the task, calling economic growth a “national mission” and saying there was “no time to waste”. But he has vowed to abide by informal fiscal rules that limit Labour’s free-spending given the country’s high debt. His aim is to use a moderate amount of public money to attract private capital.
Economists say the root of Britain’s economic woes is sluggish productivity growth — enabling workers to produce more goods per hour is key to economic expansion and rising living standards — and it has been lacking in Britain’s recent performance.
The typical American worker produced 23 percent more than his British counterpart last year, a gap that has more than doubled since 2007. French and German workers are also more productive than their British counterparts.
Britain’s productivity has plateaued since the 2008 financial crisis after nearly three decades of steady growth. Economists say government austerity measures and successive political crises after the Great Recession led companies to refrain from investing in making workers more efficient.
Government figures show business investment in the US has increased by more than a third since 2016, almost seven times the increase in the UK.
“What does that mean? It means they’re working with outdated equipment and there’s less of it,” said Rob Wood, chief UK economist at Pantheon Macroeconomics in Newcastle upon Tyne.
The pandemic and government cuts that have led to staffing shortages in the NHS have also hit productivity: A House of Commons analysis found that 754,000 more people of working age are out of work than before the pandemic. Many of them are among the more than six million Britons waiting to see a doctor, according to the British Medical Association.
Britain’s problems are the result of a long-standing intertwining of public and private choice: Britain’s overly large financial-services industry shrank after the 2008 financial crisis, making it harder to get credit than in other countries.
The government responded to the crisis with an “era of austerity”, which hit public services and stifled economic growth.
“We’ve learned that austerity has also destroyed the private sector. You need to invest,” said David Blanchflower, an economics professor at Dartmouth College who served on the Bank of England’s monetary policy committee before the 2008 crisis.
The 2016 decision to leave the European Union, Brexit, and its implementation have consumed nearly a decade and three prime ministers and continue to cast a shadow over the economy.
According to the Office for Budget Responsibility, a public body, imposing commercial barriers on our largest trading partner would shrink the UK economy by 4 percent and reduce both imports and exports by around 15 percent compared to if the UK remained in the EU.
Government instability has hindered growth: since 2010, the UK has had five prime ministers, seven chancellors, nine business ministers and countless long-term economic plans.
Last autumn, Chancellor Rishi Sunak cancelled the second half of a high-speed rail link between London and northern cities. First proposed in 2009, the line would have been Europe’s biggest infrastructure project and would have linked London further north to Birmingham and Manchester.
But in October Chancellor Sunak axed the section from Birmingham to Manchester, infuriating companies that had planned to build a faster rail link.
“Political and policy instability [means] Businesses don’t know if they’re coming or going,” Wood said.
Starmer and Biden’s meeting, scheduled to take place on the sidelines of a NATO summit, is likely to highlight the “special relationship” between the allies.
In a speech in Washington last year, Mr. Reeves outlined an economic formula similar to Treasury Secretary Janet L. Yellen’s theory of “modern supply-side economics.” The two share a passion for boosting growth by expanding the workforce and investing in infrastructure and climate-friendly energy sources.
The U.S. public debt is slightly larger than the U.K.’s relative to the size of its economy, but the dollar’s status as the world’s reserve currency gives the U.S. government more leeway in dealing with spending problems.
Labour has said it will follow informal fiscal rules drawn up by the previous UK government that require it to start reducing its debt as a percentage of gross domestic product within five years – debt is currently expected to hit 95% in 2026.
Labour also rejects any increases to personal income tax, national insurance or VAT.
Budget realities have already caused Labour to scale back its ambitions: In February, it backed away from a pledge to spend 28 billion pounds ($36 billion) annually on green energy projects. Instead, party leaders said annual spending would reach 4.7 billion pounds ($6 billion).
“Reality is setting in,” said Paul Dales, chief UK economist at Capital Economics. “The new government needs to focus on areas where it can make a real difference without spending a lot of money.”
One such priority is an overhaul of the notoriously slow planning process that governs housing and infrastructure projects: Labour wants to build 1.5 million new homes over the next five years, overhaul the energy grid and speed up planning approvals.
The new government this week lifted the Conservative ban on onshore wind farms, which came into force in 2015 and allowed a single challenge to block a project.
Labour faces a tough challenge. But there may be some short-term tailwinds. Inflation stood at an annualized 2.8% in May, down from a peak of nearly 10% in 2022. Growth is starting to pick up after a brief recession last year. The International Monetary Fund sees economic growth accelerating to 0.7% this year and 1.5% in 2025.
Falling inflation means the Bank of England may soon cut its benchmark lending rate of 5.25% for the first time in four years, which would stimulate the economy.
The economy could pick up further if the new government can improve the country’s health care services and bring some of the out-of-work workers back into the workforce.
With Labour’s huge majority in Parliament and the opposition Conservative Party in disarray, Starmer is expected to stay in power for at least five years, and possibly two.
This relative stability comes as other major economies are distracted by domestic politics: in France, a left-wing coalition that won parliamentary votes this month is backing extravagant spending policies that could rattle financial markets, and in the United States, a divisive presidential election that could return an unpredictable former president to the White House.
“In an uncertain world, the UK is the place to do business,” Mr Reeves said on Monday.