ALEX BRUMMER: Whatever Labour says, the economic system is on the up

Since Rishi Sunak called the election, Labour has been relentless in repeating the soundbite it hopes will carry it into power: ‘The Tories crashed the economy.’

From its biggest sharks to its tiniest minnows, the party has attempted to hoodwink the public into believing the Conservatives will leave our economy in a dismal state.

Shadow Chancellor Rachel Reeves claims – absurdly – that Britain’s next government will inherit the worst set of economic circumstances since World War II.

The inheritance, in fact, will be surprisingly positive.

The economy has turned the corner – in spite of a series of shocks. In the first quarter of the year, national output grew by a respectable 0.7 per cent, the highest rate among G7 major economies.

The rising cost of living has been tamed and inflation has fallen fast. Interest rates and mortgage repayments will follow.

Pledges by Keir Starmer and Reeves to ‘grow the economy’ are less an aspiration than a statement of what is already happening.

Of course, the major exception is the public finances, where first the coalition and then successive Tory governments have battled against powerful headwinds: the fallout from the great 2008 financial crisis, the uncertainty following the EU referendum, a global pandemic and a destabilising war in Ukraine.

So the next government will not be quite so fortunate as New Labour were when they achieved power in May 1997. Chancellor Gordon Brown inherited sound public finances from his Tory predecessor Ken Clarke.

In 1996-97, the government borrowed £26.4 billion to fund services and the national debt stood at £350 billion, or just 45 per cent of the national income of the whole economy (GDP).

Should it win tomorrow, Labour will inherit borrowing forecast at £87.2 billion, while the national debt stands at more than 90 per cent of GDP: close to its highest during peacetime.

Yet the notion that Britain is an exception or some kind of basket case among rich countries is nonsense.

All Western nations have been through the same budgetary mill and the UK has the lowest level of debt among the G7, with the exception of Germany – which is now teetering on the edge of recession.

The outlook is little better in neighbouring France, and should Marine Le Pen’s far-Right National Rally repeat its success in the second round of parliamentary elections on Sunday — and install the untested 28-year-old Jordan Bardella as prime minister — it could result in that country’s very own Liz Truss moment.

Markets would tank, borrowing costs would soar and France could risk economic meltdown. Here the picture is rosy by comparison.

The most visible reversal of Britain’s economic resurgence has been on inflation.

Rishi Sunak was mocked when he vowed to halve the rate of price increases. Yet in the face of widespread strikes and demands for public sector pay rises, the PM held firm, and avoided the inflationary wage-price spirals that blighted our economy in the 1970s.

Thanks in no small part to Sunak resisting the threats of junior doctors and the railway unions, the cost of living crisis has abated, with the rate of inflation plunging from 11 per cent in November 2022 to just 2 per cent in June.

The Bank of England has, admittedly, played a vital part in controlling inflation. But it was essential for the government to tackle the public finances and play hardball with rapacious unions.

The cost of basics such as milk, eggs and rice is now actually declining. And that should ensure interest rates fall rapidly from the current 5.25 per cent, with an expected 0.25 per cent cut only delayed by the Bank of England convention of not making such moves during an election.

By this time next year, rates could have normalised at 3 per cent, making borrowing for businesses and home-owners far more affordable.

That will be a welcome boon for mortgage-holders, both those on variable rates and those on fixed-rates that are coming to an end.

Barclays is already anticipating events and has introduced what brokers describe as ‘sizzling’ lower fixes over two and five years.

Inflation and higher mortgage costs have been a drag on economic output.

Yet in the first quarter of this year, growth has rebounded nonetheless.

Meanwhile, the Lloyds Bank ‘business barometer’ shows a resurgence of confidence in manufacturing. It reported ‘robust trading prospects’, with 55 per cent of businesses saying they are more confident than three months ago.

Equally as important, real pay (adjusted for inflation) is on the rise and should spark increased consumer spending, from 0.5 per cent this year to 2 per cent in 2025 and 2026.

Even without reforms to planning law – one of Labour’s ideas for boosting growth – output is strengthening. GDP should climb by at least one per cent this year if not more, 1.8 per cent next year and, barring shocks, should hit Reeves’s 2 per cent target by Labour’s second full year in office.

This growth will yield higher receipts for the Exchequer, and lower interest rates will slash the cost of servicing the national debt.

The ‘crashed’ economy, then, is on a clear recovery course which was set in motion by the Tories long before it seemed plausible that Labour could gain the keys to Downing Street. The danger now is that higher taxes, particularly those on wealth creation, could stymie the growth that Starmer and his team keep promising.

The key to higher living standards, faster growth and greater prosperity was recognised by Jeremy Hunt in his Autumn Statement in November 2023 and his subsequent Budget in March budget. It is to make work pay better by cutting National Insurance for employees and bringing some of Britain’s army of 9.4 million ‘economically inactive’ people back into the workforce.

Hunt also saw the opportunities presented by technology and artificial intelligence in the NHS, funding an extra £800 million investment, to help cut waiting lists.

If you listened to Labour and its pet think-tanks over recent months, it would be easy to believe that Britain is a broken economy symbolised by pot-holed roads and struggling families.

What the socialists never acknowledge is that Britain is the number one location for technology and AI investment and development in Europe, only outpaced by the U.S.

Our creative and gaming sectors are world-leading – as are our medical research and pharma innovation.

Though physical trade with Europe has slowed, our ‘invisibles’ – the business and financial services – exported to the rest of the world are booming.

The City is still the world’s pre-eminent banking and finance centre generating an astonishing £294 billion in economic output last year and generating £100 billion in tax income for the Exchequer.

Labour will doubtless seek to take all the credit for an upsurge in the nation’s economic fortunes. The danger is that an unprovoked attack on wealth and entrepreneurship, by the introduction of swingeing tax increases, will undermine a muscular recovery built under the harshest of circumstances.