Labour’s Plans ‘Have Potential But Also Considerable Risks’ – DBRS

Nevertheless,
the
challenges
that
the
next
government
will
face
are
significant,
including
growing
the
economy,
improving
public
finances
and
services,
and
strengthening
energy
security.
In
this
commentary
we
take
a
look
at
these
three
key
challenges
for
the
new
government
and
the
policy
pledges
that
the
Labour
party
presented
in
its
manifesto
during
the
election
campaign,
which
could
potentially
have
credit
rating
implications
for
the
UK
(rated
AA,
Stable
Trend).

An
Early
General
Election
Amid
Gradually
Improving
Economic
Conditions

The
next
general
election
was
expected
later
this
year,
but
in
a
surprise
move
and
despite
the
Conservative
Party
being
behind
in
the
polls,
in
May
prime
minister
Rishi
Sunak
called
an
election.
Economic
conditions
have
been
gradually
improving
so
far
this
year,
but
the
polls
did
not
improve
for
the
Conservatives.

Since
the
election
was
called
almost
six
weeks
ago,
the
Labour
party’s
lead
in
the
voting
intention
polls
have
remained
at
around
20
points.
The
Labour
party
has
consistently
led
in
the
polls
since
December
2021.

The
Challenges
Are
Significant
and
the
Policy
Proposals
Are
Ambitious

Notwithstanding
the
strong
mandate
that
a
Labour
government
seems
likely
to
gain,
the
challenges
it
will
face
over
the
next
parliament
are
significant.
We
highlight
three
key
challenges
related
to
the
credit
analysis
of
the
UK:

1.
Growing
the
Economy,
Including
Increasing
Productivity
and
Strengthening
Trade
Links

For
years
the
UK
economy
has
been
struggling
with
persistent
low
growth,
mostly
reflecting
lower
productivity
growth.
Brexit,
the
pandemic
and
the
energy
price
shock
have
weighed
on
business
investment
in
recent
years,
while
a
rise
in
long-term
sickness
combined
with
Brexit
effects
seems
to
have
also
slowed
growth
in
the
labour
force,
with
an
increase
in
labour
inactivity.

The
Conservative
government
adopted
measures
to
increase
labour
market
participation
and
business
investment,
but
the
impact
of
their
policies
has
been
limited
so
far.
At
the
same
time,
since
2020
the
UK’s
export
performance
has
weakened,
with
trade
volumes
falling.
Thus,
post-Brexit,
trade
policy
has
gained
a
more
prominent
role
as
the
UK
tries
to
secure
stronger
trade
links
around
the
globe.

Since
leaving
the
EU,
the
UK
has
signed
just
over
70
free-trade
agreements,
of
which
68
are
rollover
deals
and
three
are
new
deals,
with
Australia,
New
Zealand
and
the
Comprehensive
and
Progressive
Agreement
for
Trans-Pacific
Partnership
(CPTPP),
though
the
latter
is
not
yet
enforced.

When
the
election
was
called,
the
UK
was
negotiating
a
few
trade
deals,
including
with
the
Gulf
Countries
Council
(GCC)
and
India,
while
trade
negotiations
with
Canada
were
suspended
at
the
beginning
of
2024
and
negotiations
with
the
US
have
not
progressed
since
October
2020.
Over
the
longer
term,
uncertainty
remains
over
the
lasting
impact
of
the
UK-EU
Trade
and
Co-operation
Agreement
(TCA)
and
that
of
new
trade
deals
on
trade,
investment
and
migration,
and
ultimately
on
potential
output
of
the
UK
economy.

Looking
ahead
to
the
potential
economic
policy
proposals,
the
Labour
Party
manifesto
revolves
around
the
Party’s
already-known
five
missions:
reviving
economic
growth;
making
Britain
an
clean
energy
“superpower”;
reducing
crime;
reforming
childcare
and
education
systems,
and
building
an
“NHS
fit
for
the
future.”

In
our
view,
the
Labour
Party’s
economic
plan
seems
ambitious
and
is
subject
to
execution
risks.
Even
if
it
is
fully
implemented,
the
results
will
take
time
to
materialise.
Boosting
economic
growth
seems
to
be
at
the
core
of
the
Labour
manifesto.
Under
Labour,
the
government
looks
likely
to
have
a
bigger
role
on
the
economy.
In
particular,
Labour
is
set
to
launch
a
new
industrial
strategy,
which
involves
an
advisory
Industrial
Strategy
Council,
to
support
specific
economic
sectors,
including
financial
services,
automotive,
life
sciences
and
creative
sectors.
Trade
policy
is
set
to
be
aligned
with
the
industrial
strategy.

Furthermore,
to
increase
investment
Labour
has
proposed
the
creation
of
a
national
wealth
fund,
with
capital
of
£7.3
billion
(0.3
%
of
GDP)
and
a
mandate
to
support
growth
and
clean
energy
and
to
attract
private
investment.
Labour
has
also
pledged
to
adopt
reforms
to
the
pension
fund
sector
with
the
aim
of
increasing
investment
from
these
funds
in
the
UK
economy.
Moreover,
full
expensing
for
capital
investment
will
be
retained.

Importantly,
a
Labour
government
intends
to
develop
a
10-year
infrastructure
strategy
aligned
with
the
industrial
strategy
to
drive
infrastructure
investment.
A
reform
to
the
planning
system
to
build
infrastructure
and
housing
is
also
on
the
table.
Construction
could
certainly
provide
a
boost
to
the
economy.
To
increase
labour
market
participation,
Labour
has
pledged
to
tackle
long-term
sickness
and
to
reform
employment
support.

2.
Improving
Public
Finances

Over
the
past
16
years,
the
UK
fiscal
position
has
been
hit
by
successive
crises
and
shocks,
including
the
pandemic
and
more
recently
the
energy
shock,
which
required
substantial
fiscal
support
and
led
to
large
deficits
and
a
high
government
debt
ratio.

From
a
moderate
level
of
43.2%
of
GDP
just
before
the
global
financial
crisis
in
2007,
the
general
government
debt
ratio
more
than
doubled
to
101.1%
in
2023.
Thus,
reducing
the
high
government
debt
ratio
and
creating
fiscal
room
will
remain
a
priority
for
the
new
government.
This
is
especially
the
case
as
the
cost
of
debt
is
more
expensive
after
the
low
interest
rate
environment
ended.

The
latest
projections
from
the
OBR
in
March
this
year,
presented
together
with
the
Spring
Budget,
show
the
general
government
debt
ratio
peaking
at
104%
of
GDP
in
2026
before
starting
to
fall
(for
further
information
please
read

UK
Budget
2024:
Modest
Fiscal
Loosening
and
a
Declining
Margin
to
Meet
the
Fiscal
Rules).
The
projections
incorporate
the
Conservative
government’s
measures,
including
lower
taxes
in
the
near
term,
and
the
reform
of
the
non-domicile
tax
regime
and
increase
in
some
taxes
in
later
years.

In
its
manifesto,
the
Labour
Party
has
pledged
to
follow
the
UK
fiscal
rules,
indicating
a
commitment
to
fiscal
prudence.
This
means
reducing
the
public
debt
ratio
and
the
fiscal
deficit
below
3%
of
GDP
by
the
fifth
year
of
the
rolling
forecast.
Labour’s
fiscal
plan
includes
increased
spending
in
public
services,
particularly
in
the
NHS,
to
be
more
than
offset
by
increased
revenues
largely
from
the
elimination
of
the
non-domicile
tax
regime,
reduced
tax
avoidance,
and
VAT
on
private
schools.
Moreover,
Labour
intends
to
partly
fund
its
“green
prosperity
plan”
with
a
temporary
oil
and
gas
windfall
tax,
with
borrowing
covering
the
rest.
Corporation
tax
will
be
capped
at
25%.

In
our
view,
risks
to
the
fiscal
outlook
will
remain
high,
given
the
degree
of
uncertainty
over
some
revenue
measures.
A
bigger
role
of
the
state
in
the
economy
could
also
increase
contingent
liabilities.
Moreover,
partly
relying
on
expected
stronger
economic
growth
to
reduce
the
fiscal
deficit
and
public
debt
leaves
the
fiscal
position
exposed
to
the
risk
of
lower-than-expected
growth.
A
Labour
government
seems
unlikely
to
present
a
budget
with
the
first
few
weeks
of
government,
as
the
presentation
of
a
budget
together
with
a
full
set
of
economic
and
fiscal
forecasts
from
the
Office
for
Budget
Responsibility
(OBR)
would
require
about
10
weeks.
Therefore,
a
new
budget
or
fiscal
event
with
updated
forecasts
seems
more
likely
to
be
presented
from
mid-September.

3.
Strengthening
Energy
Security
and
Meeting
Climate
Targets

With
the
UK
being
a
net
importer
of
natural
gas,
the
energy
shock
in
2022
hit
the
UK
economy
hard,
leading
to
high
inflation
and
contributing
to
a
deterioration
in
the
UK
current
account
deficit
as
a
result
of
a
terms
of
trade
shock.
Therefore,
reducing
the
UK’s
energy
dependence
on
imported
oil
and
gas
has
become
a
key
policy
goal.

The
Conservative
government
updated
its
energy
security
strategy
in
2023.
On
climate
ambition,
the
UK
has
decarbonised
its
economy
notably
over
several
years,
with
its
greenhouse
gas
(GHG)
emissions
falling
by
about
53%
from
1990
to
2023,
more
than
many
advanced
economies,
and
now
accounting
for
around
1%
of
total
global
emissions.
The
decline
largely
reflects
the
increase
in
renewables.
Transport
remains
the
main
source
of
GHG
emissions
in
the
UK,
followed
by
the
energy
sector.

The
UK’s
commitment
to
reach
net
zero
emissions
by
2050
is
legally
binding.
While
Labour
is
also
aiming
to
strengthen
energy
security
and
the
UK’s
legally-binding
Net
Zero
Target
(NZT)
is
unlikely
to
change,
climate
policies
are
likely
to
be
somewhat
different
under
a
Labour
government.
One
key
proposal
from
Labour
is
the
creation
of
a
publicly-owned
company
called
Great
British
Energy
to
supply
clean
energy
by
investing
in
partnership
with
industry
in
clean
technologies.
A
Labour
government
would
supposedly
provide
initial
capital
of
£8.3
billion
(0.3
%
of
GDP)
to
Great
British
Energy,
which
is
set
to
be
headquartered
in
Scotland.

In
line
with
its
mission
of
making
Britain
an
clean
energy
“superpower”,
the
Labour
Party
confirmed
in
its
manifesto
its
commitment
to
clean
energy
by
2030.
Through
its
“green
prosperity
plan”,
a
Labour
government
intends
to
double
onshore
wind,
triple
solar
power,
and
quadruple
offshore
wind
by
2030,
working
together
with
the
private
sector.
It
has
promised
to
invest
£6.6
billion
to
improve
energy
efficiency
in
residential
properties.
It
has
also
pledged
to
invest
in
carbon
capture
and
storage,
hydrogen
and
marine
energy;
to
give
nuclear
power
a
key
role
in
achieving
energy
security
and
clean
power;
and
to
maintain
long-term
energy
storage.

Equally,
it
has
promised
not
to
revoke
existing
licences
in
the
energy
sector
and
that
oil
and
gas
production
in
the
North
Sea
will
be
managed
in
the
coming
decades
to
avoid
putting
jobs
at
risk.
However,
Labour
committed
to
not
issuing
new
licences
to
explore
new
oil
and
gas
fields
–
in
contrast
to
the
Conservative
Party.
It
would
not
grant
new
coal
licences
either
and
would
ban
fracking.
Regulatory
certainty
would
help
investors.
A
new
Energy
Independence
Act
would
set
the
framework
for
energy
and
climate
policies,
with
a
reform
of
the
energy
system
with
stronger
regulation
and
upgrade
of
the
national
grid
also
on
the
cards.

Labour
is
in
favour
of
introducing
a
carbon
border
adjustment
mechanism,
to
protect
British
industries
during
the
decarbonisation
of
the
economy.
It
has
also
promised
to
reinstate
the
2030
target
for
phasing-out
sales
of
new
cars
with
internal
combustion
engines,
which
was
relaxed
to
2035
under
the
Conservative
government.
It
would
also
reverse
the
decision
to
prevent
the
BoE
giving
consideration
to
climate
change
in
its
mandates,
and
would
mandate
UK-regulated
financial
institutions
and
FTSE
100
companies
to
implement
transition
plans
aligned
with
the
Paris
Agreement.
Likely
reflecting
the
expectation
of
a
higher
degree
of
stringency
in
climate
policies
under
a
Labour
government,
the
carbon
price
in
the
UK
increased
since
the
general
election
was
called.

Nevertheless,
reducing
the
UK’s
reliance
on
gas
and
achieving
the
NZT
will
be
challenging,
as
it
will
require
significant
investment
and
the
deployment
of
clean
energy
installations
take
several
years.

Labour’s
Plans
Have
Potential
but
Also
Considerable
Risks

The
broad
expectation
is
that
the
Labour
Party
will
win
a
majority
in
the
UK
general
election.
Despite
a
change
in
government
from
Conservative
to
Labour,
we
expect
a
Labour
government
to
follow
prudent
economic
policies,
with
the
potential
of
boosting
growth.

In
its
manifesto,
Labour
has
pledged
ambitious
plans
to
grow
the
economy
and
step
up
clean
energy,
while
returning
public
finances
to
a
sound
position.
Although
further
details
on
concrete
policies
are
yet
to
be
presented,
we
see
execution
risks
in
Labour’s
plans,
largely
because
of
the
scale
of
the
investment
needed.

Moreover,
poor
effectiveness
of
the
plans
could
lead
to
lower-than-expected
growth,
with
adverse
implications
for
the
fiscal
outlook.
Other
risks
could
come
from
a
failure
to
attract
private
investment
and
the
external
environment,
including
geopolitical
risks
and
weak
external
demand.

Adriana
Alvarado
is
senior
vice
president
for
global
sovereign
ratings

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