Can the UK economy grow by 2.5 per cent under a Labour government?

Party leader Keir Starmer says it can and while some analysts have their doubts, others feel it could be possible

Labour Party leader Keir Starmer is looking to achieve 2.5 per cent growth of the UK economy. Getty Images

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Embolden the market, take advantage of cyclical swings and launch bold structural reforms: that is the advice to the UK's opposition leader, Keir Starmer, who has said the British economy could grow by 2.5 per cent under a Labour government.

“Under the last Labour government, we grew by about two per cent,” Mr Starmer said in an ITV interview and, when pressed on whether he was seeking to achieve growth of 2.5 per cent, replied: “Certainly, yes.”

Despite placing economic growth at the centre of Labour's campaign, Mr Starmer and his team have steered clear of making economic growth predictions. They have promised sweeping reforms to the planning system that will boost housing and infrastructure, as well as state-backed investment in clean energy jobs.

'Laudable' but unrealistic

Economic forecasting over the five-year life of a parliament contains a high percentage of guess work. Since mid-2019, there has been the Covid pandemic, both Russia's invasion of Ukraine and the Israel-Gaza war, as well as rapid increases in inflation and interest rates.

Nevertheless Mr Starmer's annual target would represent quite a step up. In its latest assessment, the Office of Budgetary Responsibility (OBR) sees the British economy growing at 0.8 per cent this year, thanks to an easing of interest rates and a very modest rise in real household income.

“GDP growth picks up to around 2 per cent in the middle of the decade as slack in the economy is taken up, before falling back towards its assumed trend rate of around 1.66 per cent by 2028,” the OBR said.

Meanwhile, the International Monetary Fund (IMF) predicts 0.5 per cent growth this year and 1.5 per cent growth next year.

EY's number crunchers have been more optimistic, pencilling in growth of 2 per cent in 2025.

Bloomberg UK economists Dan Hanson and Ana Andrade were disbelieving of Mr Starmer's prediction, given the hill the economy would have to climb.

“A laudable goal? Absolutely. Realistic? Unfortunately not,” they said in a research note.

“The next administration needs to be prepared for a situation where the economy continues to muddle along.”

Others are willing to give Mr Starmer a little more latitude in his predictions, should Labour win the general election next week.

“If the [Labour] party is emboldened by initial market reaction and borrows more to invest, the 2.5 per cent growth looks more achievable,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, told The National.

“However, the economy will still be highly sensitive to global growth prospects and given the fractious nature of geopolitics there is the potential for fresh upset ahead.”

For Russ Mould, investment director at AJ Bell, Mr Starmer's forecast might be slightly optimistic, but not surprising given that at this stage of the game he is hardly going to “want to be seen talking down the potential impact their manifesto policies may have”.

In addition, Mr Mould told The National, Mr Starmer may have a few macroeconomic trends on his side as well.

“Oil and energy prices have calmed down, inflation has cooled, unemployment is still low and wage growth is robust,” he said.

“The GfK consumer confidence survey is showing improvement as a result and that could filter through to consumer spending, an important factor in an economy where services represent the bulk GDP and one that could get a further boost if the Bank of England starts to cut interest rates and lower the cost of mortgages, credit cards and other loans.”

'Guessing which way the wind is blowing'

Nonetheless, any new government still faces significant economic headwinds, said Stuart Cole at Equiti Capital.

“I accept that any forecasts going out more than a few months don’t carry much more weight than sticking your finger in the air and guessing which way the wind is blowing,” he told The National, “but the underlying picture is still fragile – consumer and business confidence is weak, global demand remains subdued.”

As such, at least in the short term, for most analysts the winner of the election will be caught between a rock and a hard place.

The debt-to-GDP ratio is at its highest point for 63 years and foreign direct investment fell for four out of the last five quarters up to the end of last year.

If it wants to avoid spending cuts, Labour will need to either increase taxes or increase borrowing, according to the Institute for Fiscal Studies (IFS), neither of which goes hand-in-glove with GDP growth.

But the IFS has accused both Labour and the Conservatives of vagueness over the economy in their manifesto pledges, saying both had “hidden and ducked” the serious tax and borrowing questions, creating a “knowledge vacuum”.

Mr Starmer's predictions, like all forecasts, can only be proven one way or the other through the passage of time and while many economists see 2.5 per cent growth in the short-term as a remote possibility, it could be a more realistic prospect further down the line.

“I don’t think it is reasonable to expect the economy to grow by 2.5 per cent per annum any time soon,” Mr Cole told The National.

“But if Starmer was serious about boosting growth and action on the measures needed very soon in the next parliament, then potentially we might be able to see growth of that magnitude in a second Labour term.”