The UK’s budget problems date back to the 2008 financial crisis

Over the past few weeks, economic news from the U.K. has heavily focused on the state of British national finances and how they might impact both the British public and the prospects for economic growth.

A number of accusations and denials have flown between the rival Labour and Conservative parties over the state of the country’s budget deficit, particularly between current and former finance ministers Rachel Reeves and Jeremy Hunt.

Regardless of how the U.K. fiscal situation stands now, it is clear that the current shortfalls are both years in the making and run the risk of having consequences that could last for years to come. The ultimate dilemma facing Labour now is that the country cannot produce enough revenue to close systemic shortfalls without sustained economic growth, but it also cannot create economic growth without real investment, both from the public and private sectors.

In many ways, the current fiscal situation dates back to the financial crisis of 2008 and the fact that the country’s economy was unable to snap back readily to close the budget shortfalls that occurred then.

When U.K. revenues failed to recover, the Conservative government of the time chose to implement austerity measures, temporarily cutting back on public investment in everything ranging from infrastructure to public health and social services.

The problem lies in the fact that these measures, sold as a short-term solution, still remain and that the cost of the continued ageing of the U.K. population, the burden of Brexit on everything ranging from small business exporters to the financial sector, and continued sluggish economic growth mean that any options available for the current Labour government are and remain limited.

One thing that the U.K. government clearly cannot do, unlike countries such as the United States, China, or Japan, is run large-scale deficits, either by increasing spending or by further cutting taxes. Borrowing in the financial year to August stood at £64.1 billion ($85 billion), with the country’s debt hitting 100% of GDP.

For decades, Britain was considered one of the world’s reserve currencies, but with all of the benefits it granted, recent events have reinforced this to no longer be the case. The reaction of the bond markets to then Prime Minister Liz Truss’ proposed budget of 2022 showed that the private sector would not support any significant deficit spending, particularly from tax cuts.

At the same time, both Labour and Conservative leaders are keenly aware of the limited financial resources currently available to fund public programs. One well-known argument put forward in favor of Brexit was the fact that money being sent to the European Union could be used to restore funding to the beleaguered National Health Service.

In recent days, in advance of the Labour Party Conference that kicked off Monday and next month’s release of the first budget of the new Labour government, concerns about new levels of austerity have become widespread. Recent coverage of potential cuts of the winter fuel benefits for U.K. pensioners and a recent House of Lords report on the unsustainability of current budget deficits have only further raised concerns.

The new Labour government has taken great pains that they are not planning to implement further austerity on public services, underlined by Reeves’ keynote speech on Monday afternoon.

The key question then, not just for the party conference, but also for Labour plans going forward is how to address the need for greater investment in the public sphere, especially in services and infrastructure, while also drawing significantly greater private sector investment into the country to help address shortfalls in both revenue and economic opportunity.

One sign of possible solutions has come from the government’s proposed aim of using private development monies to help complete the HS2 rail line into an upgraded Euston Station in London. Any such partnerships will need to find ways to benefit both the investors and the public in order to avoid repeats of the poorly implemented privatizations such as those with Railtrack and Thames Water.

Other possibilities could focus on further efforts to remove red tape and improve trade efficiencies with continental Europe in the wake of Brexit. Multiple global businesses have expressed frustration with maintaining their supply chains in the wake of border delays and unclear rules implementation.

The final possibility, which has been so far dismissed by the new government, is to raise taxes. Both businesses and markets may well tolerate tax increases if they can see the value for the money they pay in terms of improved services and business infrastructure.

Ultimately, the private sector will be looking for a clear long-term plan for execution, whether in tax and fiscal policy or in courting and building long-term public-private partnerships. If Labour can execute in that regard, it will go far in helping to establish a stronger environment for public confidence in its economic plans for the next several years.

Kevin Klowden is the chief global strategist at the Milken Institute.