The Observer view on the autumn budget: Labour must break this cycle of sluggish growth

‘Things will get worse before they get better.” That was the gloomy prognosis from Keir Starmer in his first set-piece speech as prime minister in the Downing Street garden last Tuesday. This was intended as a warning to voters that they can expect tough decisions in the budget this autumn.

But he could also have been talking about the annual living standards outlook published by the Resolution Foundation on Thursday, which forecasts that the poorest tenth of working-age households will be £600 a year worse off on average in 2029 than they were in 2023, and that they will have seen no real income growth in more than a quarter of a century. For median working-age households, incomes are predicted to grow by just 0.8% a year on average over the parliament, far lower than the 2.1% a year experienced between 1997 and 2009. This is a grim outlook, particularly for less affluent families who are the most squeezed. It means Labour ministers are entirely justified in pointing out just how challenging is the economic situation that they inherited from the Conservatives: poor forecast growth, together with the unfunded spending commitments that chancellor Rachel Reeves has written about in the Observer today, mean she has very difficult choices to make.

The lack of growth is a result of decades of poor productivity growth underpinned by low business investment. For too long, British economic growth was reliant on the City above other sectors, and on consumer spending fuelled by the housing bubble rather than growth in the productivity of the private sector. Layered on to this was the Conservative decision to pursue a hard Brexit rather than to remain in close economic alignment with Europe. This was compounded by 15 years of austerity that have undermined health and education, further impeding growth, and in which Conservative chancellors significantly cut back on financial support to low-income parents even as they cut taxes for more affluent households. The poorest decile of families with children lost an extraordinary £6,000 a year each on average as a result of changes to the tax and benefit system between 2009 and 2024.

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The Resolution Foundation predicts that, unless Labour is able to steer the country on to a different course, there will be an extra 400,000 children living in relative poverty by 2029; that is equivalent to just under one in three children, the highest child poverty rate since the 1990s. That would clearly be intolerable under a Labour government.

Unless Labour steers the country on to a different course, there will be an extra 400,000 children living in relative poverty

Something has to change, and fast. Labour must focus on two things: first, protecting the poorest from the effects of benefit cuts and stagnant growth, and second, generating the economic growth that will boost living standards across the board via real wage growth. It must at a minimum lift the two-child limit on benefits, scrap the benefit cap and unfreeze the local housing allowance from April 2025. The Resolution Foundation says this package of measures would move 600,000 children out of relative poverty overnight, bringing the child poverty rate down by four percentage points in one fell swoop. It estimates it would cost about £3bn next year, rising over time. But it must also look to restore the generosity of tax credits more generally back towards the real levels they were at in 2010. There is no other way of tackling child poverty in the short to medium term; it has to involve spending more on lifting the incomes of the poorest families with children.

When it comes to growth, Labour has some measures on the stocks: planning reform should help energise the construction industry and an improved package of workers’ rights should have an impact on productivity. But they are not, by themselves, enough. Growth is likely to require higher levels of public investment to leverage more private investment into the economy, including into housebuilding to bring down housing costs. Also needed is at least some extra spending above what is already allocated on the NHS and back-to-work services to bring down rates of long-term worklessness.

This upfront spending can be funded through a mixture of closing loopholes and increasing revenue from wealth taxes – particularly inheritance tax and capital gains taxes, which are currently easily avoided by the wealthiest – and borrowing more to invest. But the signs so far are that the chancellor is sticking to the overly conservative and arbitrary fiscal rules that she borrowed from her predecessor, Jeremy Hunt. The risk is that by doing so, she chokes off future potential growth, requiring even more public spending cuts on top of those already built into the Conservative assumptions for the next parliament that Labour took as the starting point for its manifesto.

It is a bitter pill to swallow, but Starmer is right that there will be pain over the next couple of years whatever Labour chooses: there is no instant fix for the country’s longstanding economic problems. But there is a very real danger that on current plans, the government is treading too conservative a fiscal path and growth does not materialise at the levels needed. It could drive a vicious cycle of sluggish growth leading to stagnant tax revenues, with the ongoing poor state of public services and a lack of infrastructure investment feeding into poor rates of growth. Starmer and Reeves have to break this cycle to give Labour the best chance of delivering the increase in living standards that so many people desperately need.