Keir Starmer should not be afraid of cutting taxes

In taking over as prime minister of the United Kingdom in 2024, Keir Starmer inherited a difficult economic and political situation, to say the least. Up and down the country, people who did not vote for the Labour party suddenly found him in July 2024 addressing the nation as prime minister, with a stonking parliamentary majority to back him up, thanks to the quirky ‘first past the post’ British electoral system.

As well as international diplomacy and political stability, the economy has been at the very top of his agenda. Following the 2008 financial crisis, Brits have seen endlessly stagnant wage growth. While others, such as in the US, get richer with each year that passes, economic growth in the UK has been underwhelming, to say the least. Unsurprisingly, Keir Starmer and his chancellor, Rachel Reeves, have made achieving growth the cornerstone of their economic policy. But do they have the mettle required to make the tough decisions to achieve it?

At the very least, Britain’s immediate political future seems to be all but certain. After cycling through five Conservative prime ministers in just eight years, Keir Starmer now looks stable in the role until at least the next general election in 2029. That in itself will help bring growth, since businesses looking for places to invest love nothing more than stability and predictability.

But the elephant in the room is the size of the state. Despite over a decade of Conservative government, Britain’s state spending has consistently risen, and its tax take has had to climb to match. The British economy has gradually come to more closely resemble a social democratic-style European economy than the free-market American one. Brits are squeezed by taxes like almost never before, with tax revenues as a share of GDP at their highest since the Second World War.¹

Tax cuts, to reduce the burden on those hardworking people and to kickstart economic growth, seem logical. But the legacy of Liz Truss might be holding back Keir Starmer’s Labour government from taking the plunge into the world of cutting taxes. In 2022, Liz Truss became Britain’s shortest-serving prime minister ever when she went too hard and too fast on her economic policy, leading to a series of harmful U-turns and a loss of confidence in her government in record time.

Hopes were high at the time among free-market believers for Truss, as a ruthless disruptor of so-called ‘Treasury orthodoxy,’ to upend the status quo and unleash the limitless potential of economic growth. Unfortunately, she went about it at the wrong time, in the wrong way, and far too quickly. However, the underlying theory remains sound. Cutting taxes is good for Brits and good for growth, if done right.

Starmer has the power to reverse Britain’s gradual managed economic decline and give a kickstart to the growth engine that gave the world the Industrial Revolution: the British economy. He must resist the urge to put growth on hold in order to raise more tax money to fund this or that spending priority in the short term. The long term must win out.

While Brits of all political persuasions are no doubt grateful for the political predictability of the current situation, which is far preferable to the chaos of the Truss era, that does not mean tax cuts should be abandoned. Looking to the longer term, if Starmer is serious about turning around the fortunes of British economic growth, tax cuts cannot be off the table.

Free trade is essential, too. Starmer’s approach to Britain’s primary trading partners is encouraging but steady. He is taking steps in the right direction, but they are small steps. He became the first world leader to secure a deal with the United States under President Donald Trump, which allowed for exemptions from tariffs on key sectors like car manufacturing and steel.² That’s a great achievement, which no doubt made others envious, but it falls far short of the long-coveted comprehensive free trade agreement with the world’s largest economy.

Meanwhile, Starmer has come under fire for allegedly ‘betraying Brexit’ by inking a new deal with the European Union and, in the eyes of some onlookers, opening the door to more EU immigration through a ‘youth mobility scheme.’ However, the economic parts of the agreement, such as those focused on addressing the de facto post-Brexit customs border in the Irish Sea and reducing bureaucracy for British companies exporting food to the continent, seem like steps in the right direction.³ But as valuable as the food and manufacturing sectors are, they are unlikely to kickstart economic growth on their own. That’s where tax cuts need to come in.

There are lessons to be learned from the failure of Liz Truss, but to conclude that true economic growth is somehow undesirable or unattainable would be a detrimental shame. Liz Truss’s legacy must not be allowed to give tax cuts a bad name. There seems to be a new false dichotomy forming in recent years between centrist thinking, which values stability above all else, and free marketeers, often unfairly maligned as unrealistic radicals, who favor tax cuts.

The truth is this dichotomy does not exist. We do not have to choose between tax cuts and stability. If Keir Starmer combines tax cuts with vital supply-side reforms to areas like planning policy, he will be able to unleash growth in Britain’s economy while also keeping the markets calm and maintaining political stability.