Next Chancellor faces challenge of weak growth

Rachel Reeves
Rachel Reeves arrives in Scotland with a message for the financial services (pic: Terry Murden)

Britain’s next Chancellor will face the “unenviable” mix of a weak outlook for growth and the high cost of debt interest, according to the Institute for Fiscal Studies (IFS).

It says a decade and a half of historically poor growth, largely a result of low investment, has taken its toll and stored up challenges for the future.

The warning comes as Shadow Chancellor Rachel Reeves arrives in Scotland to map out Labour’s plans for the financial services sector.

The IFS says the UK has shared slow income and productivity growth with other developed countries since the financial crisis on 2008-09.

But on a per person basis, economic growth has been slower than in the US, the EU27 and Germany in that time.

The IFS says the slowdown has been particularly stark given that the UK economy, and its productivity, were growing quite quickly prior to 2008.

“While employment growth has been strong, average earnings growth has been dreadful – for which read almost non-existent.”

It points out that gross domestic product per head today is nearly £11,000 lower than it would have been had pre-crisis trends continued.

Much of that slowdown is a result of international factors well outside the control of any government – the fallout from the financial crisis, Covid, the energy price spike.

But low investment, policy mistakes, political instability, and Brexit, have combined to hold back growth by more than in many comparable nations.

Carl Emmerson, deputy director at the IFS, said: “Britain’s slow recovery from the Great Financial Crisis was far from unique among developed economies, but the gap between Britain and its neighbours in household income has widened.

“Lower investment than the rest of the G7, particularly in the aftermath of the vote to leave the European Union, will not have helped and risks storing up challenges for the future.

“Whoever is Chancellor after the forthcoming election will face the unenviable mix of a weak outlook for growth and the combination of much elevated debt and higher interest rates leading to much greater spending on debt interest than we have become accustomed to.

“Taxes are high by UK standards, but many public services are under very visible signs of strain. There are evident opportunities to improve growth through shifting policy on investment, education, planning, tax, trade and elsewhere, but an incoming government will need to pursue any such policies from the starting point of a difficult fiscal situation.”

Ms Reeves and Scottish Labour leader Anas Sarwar will meet a number of people in the financial services sector today.

Last December, Scottish Labour Leader Anas Sarwar, Keir Starmer and Rachel Reeves launched the party’s review of financial services alongside an independent advisory panel of experts from the sector.

Reeves will tell business leaders this week that a Labour government will back the review, saying: “When Scotland succeeds, we all succeed.”

Labour’s plan for boosting the financial services sector will include:

Bolstering the growth of financial services hubs in London and Edinburgh and unlocking the full potential of the mutuals sector.  

Increasing financial security for consumers, adopting a coordinated cross-sectoral approach to fraud prevention, creating a national financial inclusion strategy, and regulating the Buy Now Pay Later sector. 

Unlocking the potential of AI in financial services, delivering the next phase of Open Banking, defining a roadmap for Open Finance, embracing securities tokenisation and a central bank digital currency, and establishing a regulatory sandbox for financial products to reach underserved communities.

Guaranteeing the UK leads the world in sustainable finance by making the country a global hub for green finance activity, delivering a world-leading green finance regulatory framework, and partnering with the financial services sector to support the decarbonisation of our homes.

Ms Reeves said: “The SNP in Holyrood and the Conservatives in Westminster have let Scotland’s economy down, so it falls to Labour to help pick it up back up and deliver the change we need. I will unleash Scotland’s economic firepower to deliver jobs and growth because when Scotland succeeds, we all succeed.

“That’s the change we offer and it is the change we can deliver together if we are elected on 4 July.”

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