Oxford Economics discusses how potential changes in Labour’s leadership could reshape the UK’s economic backdrop
Political uncertainty over Labour’s leadership is unlikely to turbocharge the UK economy – and the choice of successor to Keir Starmer would matter more for the mix of risks than for the overall growth outlook, Oxford Economics suggests. But the possible leaders represent very different economic directions, with clear implications for growth, inflation, sterling and ultimately the path of interest rates.
In a recent report, Michael Saunders, senior economic adviser at Oxford Economics and former Bank of England MPC member, argues that while Labour’s poll slump has put Starmer under pressure, a switch to Angela Rayner, Shabana Mahmood, Wes Streeting or – less likely in the near term – Andy Burnham would not by itself deliver a step-change in potential growth over the next few years. What it would do is change the balance between fiscal risks, migration policy, the UK’s stance towards the EU and the market’s view of UK credibility.
Fiscal slippage, not a stimulus surge
Speaking to Mortgage Introducer, Saunders stresses that the story is one of direction rather than dramatic, easily quantified shifts. On the fiscal side, he expects looser policy than currently planned, whoever is in Downing Street – but not a wholesale turn to stimulus.
“It is hard to be precise, and I still expect fiscal policy will be tightening – just not as much as in the current plans,” he said. That means the Treasury is still on a tightening path this Parliament, but with enough extra spending, delayed tax rises or new support measures to push borrowing above the official baseline.
For the Bank of England, the identity of the Labour leader feeds into this backdrop rather than overriding it. A government that repeatedly lets fiscal discipline slip, or courts market unease, could find the MPC more cautious about cutting rates deeply. Oxford Economics already judges that political and fiscal risks “may reduce the likelihood of very sharp rate cuts in the next year or two”, even if they do not prevent modest further easing.
Different leaders, different tilts
Where the choice of leader really matters is in the tilt of economic policy.
Rayner is seen as the likeliest to lean further into tax‑and‑spend. Her past calls to scrap welfare reforms and fund this via higher taxes point to a more interventionist, redistribution‑focused agenda. That might support some lower‑income households in the short term, but, at the macro level, risks weaker incentives to invest and work.
Saunders is cautious but blunt about the direction of travel if Labour leans harder into higher spending and taxation. “Again, hard to be precise, it is the direction of the effect that is important. These policies make things worse, rather than better.”
Mahmood, by contrast, has been a leading voice on restricting net inward migration. Economically, Saunders highlights the long‑run drag from such a stance: persistently lower migration would narrow labour supply and population growth, weighing on potential output and tax revenues and leaving less room for the state to cushion shocks.
Streeting represents the clearest pro‑EU, pro‑market reform option. In Oxford Economics’ framework, a Streeting‑led pivot to much closer EU trade links is one of the few clearly positive medium‑term scenarios for growth. Saunders expects the benefits to come in stages – stronger business investment first, followed by productivity gains – with households also benefiting if a more EU‑friendly stance supports sterling, reduces inflation and lifts real wages.
Burnham would bring a different mix again, with his long‑standing support for nationalising key utilities and expanding the state’s role in housebuilding. That could mean more state‑led investment but also higher borrowing and greater sensitivity to market concerns over the fiscal framework.
Cost‑of‑living support: shifting the burden
Overlaying these leadership scenarios is the government’s current focus on cost‑of‑living support, which Saunders sees as largely redistributive rather than a net gain for households.
“They shift the burden elsewhere,” he said. “In effect, the government is raising taxes on income to cut taxes on spending. Households are in aggregate no better off, because they are paying for the cost of living policies with higher taxes elsewhere.” He argues that, from a long‑run growth perspective, it would be healthier to tax spending more and incomes less – “the opposite of what the government is doing”.
For brokers and lenders, that means clients may feel some relief on visible bills like energy or fuel, while being gradually squeezed by frozen thresholds and higher effective tax rates. Pressure on real disposable incomes – a crucial driver of housing demand, refinancing capacity and arrears – is therefore likely to prove stickier than headlines suggest.
Implications for rates and the mortgage market
Taken together, Oxford Economics’ analysis suggests the UK’s medium‑term trajectory will be nudged, rather than transformed, by who leads Labour. A Rayner or Mahmood leadership would probably reinforce existing headwinds from higher taxes or tighter migration. A Streeting leadership offers the clearest upside if it delivers a credible move towards deeper EU integration and a revival in business investment. A Burnham premiership could mean more state‑led building, alongside higher fiscal and market risks.
Against that backdrop, the most likely interest rate path is one of gradual, cautious cuts from the Bank of England rather than a rush back to ultra‑low borrowing costs. For the mortgage market, politics will shape the flavour of the economic headwinds – tax mix, migration, EU relations – more than it will suddenly unlock a new era of rapid growth. Real incomes are likely to remain under strain, policy noise will stay elevated, and the central case from Oxford Economics is a managed, if bumpy, adjustment rather than a full‑blown macro shock, provided fiscal slippage remains contained and market confidence holds.
