Labour is living in a fool’s paradise if it thinks it has plenty of time to turn Britain around | Larry Elliott

In 1975, inflation hit a postwar peak of 25%, eventually leading to a run on the pound and spending cuts imposed on Jim Callaghan’s government by the International Monetary Fund in late 1976 as the price of securing a loan. It took many years for Labour to recover from that humiliation.

More recently, in 2008, the near-collapse of the banks during the global financial crisis led to the economy shrinking for more than a year. From peak to trough, the economy shrank by more than 6%. In the past year it has grown by slightly more than 1%.

Labour is confident that its political fortunes will improve, as voters start to feel the benefits of rising incomes and lower interest rates. That certainly happened in the past, although the impact has not always been enough to save the party from defeat at the subsequent election.

Attlee narrowly won in 1950 and secured Labour’s highest-ever vote share, despite losing the 1951 election. The economy grew strongly in the two years after the IMF loan, and by 1978, Callaghan toyed with the idea of holding an autumn election. He eventually lost in May 1979, as did Brown in May 2010.

Starmer is the most unpopular prime minister on record. His approval ratings are worse than those of Callaghan – who, even after the strikes in the 1978-79 winter of discontent, remained a more popular choice for prime minister than Margaret Thatcher – and of Gordon Brown, who ran out of time in 2010 but still did well enough to deprive David Cameron of an overall majority.

It is far from clear why the present Labour government has lost public support more extensively and more rapidly than those of the 1940s, 1970s and 2000s, even though economic conditions have been more benign. Almost certainly it is a combination of factors: life is genuinely tough for many people, especially for the young; the public’s patience has worn thin after a decade-and-a-half of flatlining living standards; Labour’s lack of a real plan has been exposed; issues other than the economy – such as immigration and asylum – may now influence voters more than they once did.

One thing seems obvious. There is no guarantee that voters will reassess their view of Labour even if – and this seems unlikely – the economy really starts to motor in 2026. On the contrary, things are likely to get worse before they get better, partly as the result of policy errors by the Bank of England and the Treasury. The Bank has been too slow in cutting interest rates, and last week’s downward move from 4% to 3.75% was a classic case of too little, too late. Rachel Reeves, for her part, made it more expensive to hire workers by raising employers’ national insurance contributions in her 2024 budget.

All governments make mistakes, and they need not be fatal. But Labour is living in a fool’s paradise if it thinks it has plenty of time on its hands to turn things around, even though the next election could be as far away as the summer of 2029 and much can happen in that time.

Yet, the economy ends 2025 with precious little forward momentum. Business confidence is weak, and high street spending by consumers fell in both October and November. The rate cut from the Bank of England was a response to an economy that is not simply sluggish, but in real distress.

So here’s the rub: the government is already phenomenally unpopular. There would be no coming back from a recession – even a relatively short-lived and shallow one.