To boost the economy, Labour cannot afford to duck these four expensive challenges

The new government is facing some very thorny challenges where progress will be tricky – and costly.

Labour has come to power with a mandate for change and big ambitions to grow the economy and rebuild public services. It wants to move swiftly to implement its early pledges while keeping within its self-imposed spending limits.

But in the longer term, to achieve its broader goals Labour is going to have to address four key issues that have bedevilled successive governments: social care, council housing, university funding, and poverty.

They are difficult because solutions will require a long-term commitment of resources, and there will be political costs as well as benefits in tackling them. But they have now all reached crisis point, where action is urgently needed. Resolving them is vital to meeting Labour’s growth and reform objectives.

In the election campaign, Labour said little about its plans in most of these areas. But now that it is in government, it will need to develop a coherent strategy lest they derail Labour’s central goals and hamper the party’s hope of rebuilding trust in government.

1. Social care

Fixing social care is vital to reforming the NHS. Without grasping the social care nettle, the government will find it very difficult to free up hospital beds and cut waiting lists. It is also a key part of Wes Streeting’s ambition to shift health spending from acute hospital care to community and preventative care.

The UK’s social care system is widely acknowledged to be in crisis: dysfunctional, unfair, fragmented and under-funded.
Unlike the NHS, social care is not free at the point of use, but means-tested by local authorities which pay for it and set eligibility rules. It is hard to justify why, if people get cancer, they are treated for free on the NHS, whereas if they have dementia, they may need to mortgage all their assets.

The first of many barriers to reaching a solution to the social care problem is cost. The Office for Budget Responsibility projects that, as the UK population ages, social care costs will rise faster than any other category of government spending.

Yet a quarter-century of attempts to reach a consensus on how to pay for social care – including Labour’s proposal in 2010 for a “death tax”, Theresa May’s 2017 proposal for a “dementia tax”, and the 2011 Dilnot report’s proposal for a cap on how much someone should have to spend on their care – have all faltered or been delayed in the face of fierce political resistance.

Labour has recognised the care sector’s workforce shortages and pledged to raise wages and provide more training, but has not said how this would be funded. Its aspirations for a National Care Service, proposed back in 2005, still seem a long way off amid a lack of clarity on funding, the role of government, and how it would relate to the NHS.

2. Social Housing

Fixing the UK’s housing crisis was one of the central planks of Labour’s election campaign, and Labour has moved swiftly to announce changes to the planning system to facilitate this goal.

For decades, the UK failed to build enough homes, leading to high house prices, rising rents, growing homelessness, and problems for younger generations getting on the housing ladder. Building more homes could boost the economy, provide jobs, improve social mobility and eventually pay for itself.

Labour has pledged to build 300,000 homes per year, well above the historic average. But planning reform alone, although welcome, is unlikely to ensure that this goal is met. Labour will also have to substantially increase funding for social housing. The experience of the last 40 years, when very little public housing was built, has shown that the private sector alone has never been able to build that many houses.

However, Labour’s current plan, as outlined in its manifesto, is to stick to the previous government’s plans to build just 35,000 publicly funded homes a year, only half of them for rent.

Building more social housing raises both fiscal and political challenges.

Firstly, it will be costly and could stretch Labour’s fiscal rules. Building 90,000 council homes each year, which experts estimate is the minimum needed to start making up the shortfall in housing supply, could cost around £12 billion annually, five times more than the previous government’s Affordable Homes programme . And there would not necessarily be an immediate political payoff. Given how long it takes to build more housing, there would have to be a long-term spending commitment over several Parliaments.

There are also several other political dilemmas. Increased house prices have hugely boosted the wealth of the middle class – so lowering them with a massive housing programme, while benefiting the next generation, would not necessarily be popular. And Labour’s rhetoric has focused on giving everyone the chance to become a homeowner, reflecting the fact that living in social (rented) housing is no longer an aspiration for many young people.

3. University funding

The future of universities is one of the thorniest problems the government has inherited. Access to university is a key driver of social mobility and equality of opportunity, as well as increasing productivity. And the world-class research of the UK’s major universities could be a major driver of innovation and regional economic growth.

But the university sector is in crisis,, with some universities facing closure or major cutbacks in the courses they provide, as their income has fallen. Meanwhile, tuition fees and debt discourage some potential students from applying at all.

The new government faces unpalpable choices. Raising tuition fees - which have been frozen since 2017 - would be the quickest way to help university finances, but would increase student loan debt and discourage student applications. It would also be very unpopular.

But bailing out the universities with direct government grants would also be unpopular and expensive. It would raise questions about which universities would be favoured and how much autonomy they would still have. Rather than making an unlimited funding commitment, the new government might be tempted to cut back on places and courses, which universities would fiercely resist.

4. Poverty

Keir Starmer said relatively little about tackling poverty in the election campaign, instead focusing on the cost of living, and seems to be counting on economic growth to pull people out of poverty.

Welfare spending has never been popular, although the public has recently become more sympathetic, with only 19% of people in the UK now believing that benefit claimants don’t deserve help (down from 40% in 2005). With the squeeze on public spending, reserving any spare money for the NHS and schools seems a rational political choice.

But eventually, the government will have to tackle the challenge of growing child poverty, which now affects 4 million children in the UK. Of these, 1 million are living in destitution and relying on foodbanks.

Labour’s reluctance to increase support for them – for example, by upping universal credit or abolishing the two-child benefit limit, which penalises larger families – is rooted in fiscal as well as political considerations.

Like the Conservatives before them, the new government is worried about the rising welfare bill derailing future spending plans. And it hopes that getting more people into work from welfare will boost economic growth.

Ultimately, how Labour tackles poverty will be an indication of its fundamental values. If economic growth won’t be enough to lift all boats, should the government step in? The answer will depend on whether Labour’s vision for society includes challenging inequality.

Steve Schifferes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.