After his general election victory, Keir Starmer must tackle Britain's economic turmoil.

CNN London —

British voters have given Labour its first election victory in nearly two decades, hoping the new centre-left government will revive Britain's sluggish economy and fix its crumbling public services.

This landmark moment brought to a close 14 years of turbulent Conservative rule, marked by austerity, Brexit and disastrous tax cut gambles, during which incomes stagnated, living standards deteriorated and business investment dried up.

The victory is a triumph for former attorney general Keir Starmer, who only entered parliament in 2015. He was appointed prime minister on Friday, succeeding Rishi Sunak, who resigned after the Conservatives' historic defeat.

Change starts now, Starmer said early in his victory speech to party members. It feels good, to be honest.

But Labour's cheers could soon turn to anxiety given the economic difficulties ahead.

The list of problems is long: bankrupt local governments, crumbling infrastructure, chronic housing shortages, rising homelessness, and a national health care system in crisis.

Of the approximately 42.4 million working-age people (16-64 years old), more than 2.8 million are unemployed due to a chronic illness. Around 6.7 million people in England, Scotland and Wales receive Universal Credit, which helps with living expenses. This figure includes many workers.

The British people, unsurprisingly, are desperate for change. But the new government’s ability to address these issues will be severely constrained by a debt burden that is larger than the size of the economy, meaning that tax increases or spending cuts will be inevitable.

What makes solving these problems even more difficult: stubbornly low economic growth rates.

The UK economy barely grew last year. Incomes are also in a slump. Adjusted for inflation, pay has barely grown since 2010. That means people aren’t getting much better off.

Last month, the Resolution Foundation, a think tank, said in a report that the UK economy was still in recession following the financial crisis.

Ending the recession will require a major increase in investment by businesses and governments to boost productivity, a key measure of economic efficiency that has been very weak for more than a decade.

Gregory Thwaites, director of research at the Resolution Foundation, told CNN that more investment would lead to infrastructure, equipment and research and development that would make workers more efficient. Greater productivity would lead to higher growth and wages.

The good news is that Labour has made it a priority to boost economic growth through increased public investment, a new industrial strategy and policy reform.

The less good news is that while the government has pledged to reduce its massive government debt, it has largely ignored the hard choices about how to tax and spend to achieve that goal.

The government is likely hoping that economic growth will be stronger than expected to some extent, helping to achieve both goals.

Yes, growth could surprise upward, and if it does, it would make the fiscal calculations easier, said Paul Johnson, director of the nonpartisan Institute for Fiscal Studies (IFS). But if it doesn’t, and it hasn’t been that way in recent years, we’ll have cuts, or fiscal targets that are being manipulated, or taxes that are being raised.

Meanwhile, Labor insists its growth-boosting policies have been fully costed. One of the more eye-catching plans is a $7.3 billion ($9.3 billion) National Wealth Fund to invest in infrastructure and the green energy transition as part of a broader industrial strategy.

A new public energy company, Great British Energy, aims to decarbonise Britain’s energy grid by 2030. It will cost £8.3bn (£10.6bn), partly funded by a windfall tax on oil and gas companies.

Another key priority for Labour is reforming Britain’s planning laws, which the party hopes will help create a building boom that will deliver 1.5 million new homes over the next five years, making housing more affordable.

While many have welcomed Labour’s focus on growth, there is growing scepticism about whether Labour’s plan, which is thin on details, can actually achieve its goals. The IFS points out that, apart from a significant increase in investment in green projects, all other investment areas will be frozen in cash for the next five years.

According to Johnson, planned spending increases on crumbling public services such as health and education are tiny and insignificant.

Making real change will almost certainly require real resources, and there is no mention in the Labour manifesto of where the funding for this will be, he said in a statement.

Ultimately, the government will need to boost investment from businesses that have been stagnant since the 2016 Brexit referendum to achieve its plans.

One way Labor can spur investment is by setting a clear and consistent green energy policy, along with better tax incentives, according to the Confederation of Business Industry, a business lobby group.

CBI chief economist Louis Hellem told CNN that many companies are very focused on net zero. It’s really important for the government to set a general ambition and a target. The key here is certainty.

A new ban on the sale of petrol and diesel cars, announced by the Conservative government in 2020, was suddenly extended by five years to 2035 in September last year, angering some car manufacturers. Labour has said it will reverse the move to give manufacturers more certainty.

Labour's Rachel Reeves – likely to become the next Chancellor of the Exchequer – is determined to get Britain building again, and has described the country's rigid planning system as the biggest obstacle to economic success.

While the focus on policy certainty and planning reform is encouraging, Labour is decidedly less ambitious on the third area that is crucial to reviving economic growth: the relationship with the European Union, which remains Britain's biggest trading partner.

According to Britain in a Changing Europe, Labour’s timid plans to improve relations will do little to reduce the economic costs of Brexit, which has hit UK trade in goods and is estimated to have reduced GDP by 2-4% since the 2016 referendum.

The party’s proposals are largely technical, such as reducing red tape for food trade, the think tank said in a report last month. The gains from technical improvements would be relatively small, useful for reducing trade frictions but not enough to actually address the lasting economic impact of Brexit.

Brexit has also hurt business investment, with national output expected to fall by 4% in the long term compared with if Britain had remained in the EU, according to the Office for Budget Responsibility, which provides economic forecasts for the government. Trade is expected to fall by around 15%.

But despite Brexit, there are some bright spots in trade: UK services exports, for example, have grown faster than the G7 average since 2021.

According to the Resolution Foundation, the UK is now the world's second-largest exporter of services, after the US, including finance, law, education, architecture and the arts.

It also has other strengths, including strong institutions and the rule of law, world-class universities, innovative companies and a highly skilled workforce.

Starmer and his new government must build on these strengths and develop new ones to create the right environment for growth and revive Britain’s prosperity.

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