The tricky year ahead for Labour

Good afternoon, and happy new year. Just a short missive today to consider the road that lies ahead.

As the FT’s Policy Editor, I’m filled with anticipation for the first half of this year since (after what feels like countless reviews, consultations and deferrals) many of the Labour government’s manifesto policies will begin to crystallise around the spending review.

There’s the industrial strategy, the 10-year plan to rebuild the NHS, apprenticeship reform and the birth of Skills England, the publication of a growing number of local growth plans, the results of the curriculum review and the ongoing rollout of planning reforms . . . to name but a few.

The challenge facing the government, to put it mildly, will be implementing these reforms and pro-growth measures when there’s no money — having already bet the farm, fiscally speaking, on the NHS.

The “zero-based” spending review — in other words one that starts from the ground up — is going to be an even more bruising process than the one-year “holding” review that accompanied last October’s Budget.

Even with that exercise, we saw ministers breaking ranks in order to fight for their own departments, and we can expect this spending review to be even more brutal. 

The government will find it hard to build a constructive narrative in a spending environment that for many Whitehall departments will feel actively destructive. 

The much-anticipated Industrial Strategy (IS) is a case in point. After being whacked with punitive payroll tax rises, business groups have identified the IS as one of the big potential positives, serving as an antidote to a Budget that so damped animal spirits.

Yet as one Whitehall insider bluntly summarised the situation: “Except for the green stuff and defence, there’s just no seed money for these projects.” 

There will be similarly tough conversations on the housing front. The government is sticking to its “hugely ambitious” target to build 1.5mn new homes before the next election, a 50 per cent increase on the long-run annual average of 200,000 over the past 50 years.

Planning reforms will make some difference, as would steps to force big developers to “use or lose” their existing permissions, but in the end if the government wants 300,000 homes a year when the market has historically delivered 200,000, it’ll have to invest at that level.

That’s just three examples — IS, NHS reform and housebuilding — where the government has strong stories to tell, but even so will need to work hard to make sure they’re not overshadowed by the counter-narrative from disgruntled losers. 

Brace for a turbulent 2025

Away from domestic policy, State of Britain will be watching closely for the blowback from the interlinked foreign policy challenges of delivering an EU-UK reset alongside reaching an accommodation with the incoming Trump administration.

The reset will start in the new year with Sir Keir Starmer’s February 3 meeting with EU27 leaders to discuss defence and foreign policy — the first UK PM to meet EU leaders in that format since Brexit — before a summit later in the year to kick off talks on the trade elements of the relationship.

The risk to Starmer is that if he’s too clever in trying to finesse Trump’s return to the White House, the UK could end up in the worst of all worlds: receiving meagre returns from both Brussels and Washington as the have-your-cake-and-eat-it playbook backfires.

The theoretical prize is some kind of limited sectoral trade deal with the US — focusing on digital and critical minerals, for example — with both sides accepting the need to park agricultural issues as the price of a “quick win” for which Trump can take credit. 

That would, in theory, still leave the door open for the UK to begin its trade reset with the EU, based around a veterinary agreement that (in Brussels’ view at least) will require the UK to accept dynamic alignment with EU law.

It is still not a foregone conclusion that the UK side can swallow that condition, since both the US and Canada are already lobbying against the UK accepting dynamic alignment since they view EU rules as spurious and protectionist.

Dynamic alignment also throws up potential problems, both for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and post-Brexit deals with New Zealand and Australia, as well as potentially complicating areas such as gene editing where the UK has already diverged from EU practice.

In short, it will be a delicate balancing act. The danger is that the UK, which has signalled low ambition for the substance of the reset thus far, continues to delay the hard decisions on EU trade as it tries to triangulate with Trumpworld — and neither go anywhere fast.

On the other hand, Trump could have a catalytic effect for the EU-UK “reset” and a clarifying impact on No 10.  

Trump going cold on Kyiv could inject urgency into EU-UK strategic defence co-operation and, if the UK economy continues to sputter post-Budget and tariffs affect growth, sharpen the UK’s internal decision-making on trade too.

The chance of the UK and EU striking a youth and professional mobility deal may also improve if, as anticipated, net migration falls throughout 2025, creating more domestic political space for a deal to be done.

That all feels rather optimistic, given how timid the Starmer administration has proved to be in its first five months in office. But it’s still early days. There’s nothing like a brutal spending review and the capriciousness of Trump to concentrate minds.

And whatever happens, we’ll be there to try to make sense of it all.

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Britain in numbers

This week’s chart is one that won’t cheer Starmer, but reflects just how fast life comes at you when in government. The drop in the PMs favourability rating was almost instant after July’s vote, with the election “bump” evaporating within a month of taking office.

The unsugared pill of the winter fuel payment cut; the row over freebie suits and glasses; the Sue Gray debacle and then a Budget that alienated business all contributed to that precipitous decline.

Generally speaking, when a prime minister’s approval rating starts to slide it doesn’t recover, although there are some exceptions — most notably Margaret Thatcher who was pulled out of the doldrums by the Falklands war of 1982.

That isn’t an argument for Starmer to fight a small war in 2025 but, as Manchester university politics professor Rob Ford observes, a reminder that fortunes can return particularly if the government is resilient and waits for reforms to bear fruit.

The trend lines point to the polls getting grimmer still for Starmer this year as the effects of Labour’s “tough choices” start to bite, but the upsides of NHS reforms and other policies have yet to feed through.

This, Ford adds, will be the big test of temperament in 2025 for a party that had been ahead in the polls for three years until it took office but now faces grinding unpopularity. 

As he puts it: “The question is whether the Labour leadership is really braced for unpopularity, and how it will react. Will they panic, or will they dig in? Because if they resort to the constant empty sloganeering of the election campaign, that will be dangerous because you can’t govern like that for four years.”

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