Over the past decade, the UK has seen six prime ministers, and it appears increasingly likely that Andy Burnham will become the seventh. Regardless of who assumes the role, the economic challenges remain consistent.
The political instability experienced in recent years has been largely driven by economic factors. Issues such as limited job opportunities, stagnant living standards, and strained public services have heightened public demand for change, with patience wearing thin.
Below are the key economic issues the next prime minister will need to address.
Fiscal rules
Andy Burnham has committed to reviving the economy while adhering to the current government's fiscal rules on borrowing and spending. These rules stipulate borrowing only for investment purposes, not for day-to-day expenditures, and aim to reduce national debt as a proportion of the economy within a few years.
Prior to the outbreak of the US-Israel conflict with Iran, Chancellor Rachel Reeves estimated she could meet these financial rules with a £24 billion margin. However, much of this buffer may have been diminished due to the conflict.
Burnham's commitment to these rules indicates caution about unsettling bond markets, which are the government's lenders. Currently, interest repayments on the national debt consume one in every £10 of government spending.
Even Burnham's preliminary proposals could surpass the available fiscal flexibility. His ambitions might face limitations, and some ideas may not withstand financial constraints.
He could consider modifying these rules. For instance, bond markets might accept increased borrowing for investment if convinced it would yield higher growth. Alternatively, funding priorities could be met through other means such as tax increases or reallocating existing budgets.
Household income
Economic growth and increasing household income must remain the government's foremost priorities.
Between 1990 and 2007, average individual income grew by approximately 2.5% annually. Since then, growth has slowed to about half that rate, leaving households thousands of pounds worse off than they might have been.
Years of austerity and the impact of Brexit have led to reduced public and private investment, negatively affecting productivity and prosperity. This situation was exacerbated by the Covid-19 pandemic and rising energy prices.
Food prices have surged by 40% in recent years, significantly impacting household finances.
Although the war's economic impact has been less severe than initially feared, challenges remain in achieving sustainable and permanent economic growth.
Increased investment and a greater emphasis on skills development are likely necessary. While Burnham's plans are not fully detailed, he has suggested boosting both investment and skills, alongside increased state control of utilities to reduce bills.
Subdued economic growth contributes to the lowest hiring levels in five years, with young people particularly affected.
Employers' reluctance to hire reflects more than recent economic difficulties. Automation and government policies, including higher national minimum wages and taxes, have influenced this trend.
This is especially evident in sectors such as retail and hospitality, which are vulnerable to increased labor costs and typically provide entry-level jobs.
A recent report by former Labour minister Alan Milburn highlighted that the long-term decline in such positions has contributed to rising youth unemployment and an increase in young people not in employment, education, or training (NEETs).
He warned NEETs could rise to one in six young people, potentially blighting lives for decades.
The second part of Milburn's report, which will include policy recommendations, is expected later this year. It is anticipated to call for a comprehensive overhaul of how public sectors—including education, health, and welfare—interact with the private sector.
The next prime minister will need to determine how to implement these recommendations, which will entail financial costs.
Regarding costs, expenditures to provide safer and improved public services could increase rapidly.
The government's pledge to raise defence spending to 3.5% of GDP by 2035 remains unsettled. Burnham has indicated support for this commitment.
However, fulfilling this pledge requires substantial funding, potentially tens of billions of pounds.
John Healey resigned as defence secretary citing the Treasury's unwillingness to "commit the resources that the nation needs to defend the country at this time of rising threats."
Securing these funds may necessitate reallocating resources from other government areas due to fiscal constraints. Many departments are already experiencing budget pressures.
Welfare spending is projected to increase by over 25% between 2025 and 2030, mainly driven by sickness-related benefits for working-age adults and pensioner benefits.
Prime Minister Sir Keir Starmer has struggled to implement welfare reforms. It remains to be seen whether a new prime minister will have the resolve and flexibility to advance these changes.
Official government forecasters have indicated that the cost of providing the state pension under the triple lock system—which annually increases pensions by the greater of 2.5%, inflation, or earnings—is expected to double within the next 50 years.
Simplifying this formula could reduce pension increases and save tens of billions of pounds. This approach is supported by many economists, including Lord Jim O'Neill, one of Burnham's advisers.
However, pursuing such reforms risks alienating older voters, who are the most influential electorate group.
While older generations tend to vote more, younger generations feel more disadvantaged.
Although house prices have risen more slowly than earnings recently, making homeownership more attainable than a few years ago, prospective buyers face high rental costs that hinder saving for deposits. The average age of first-time buyers has increased over recent years.
The most sustainable solution is to increase housing supply, but the government is behind on its target. New home construction fell by 6% last year and remains below the 300,000 annual target.
Burnham advocates building more social housing, which could help address the shortage. However, as previous governments have experienced, this is a complex challenge.
Housing is among the many significant initiatives Burnham has proposed to address economic difficulties, but he must contend with a challenging legacy.
Ironically, the most straightforward way to finance these plans is through the benefits of faster economic growth.
Like many predecessors, Burnham's vision suggests that increased spending is necessary to stimulate economic gains. The question remains: whose money will fund these efforts?
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