UK at 'a fork in the road' between renewal and decline, PM warns

U.K. Prime Minister Keir Starmer warned Tuesday that Britain stands "at a fork in the road" between renewal and decline amid rising political divisions in the country.

"We can all see our country faces a choice, a defining choice. Britain stands at a fork in the road. We can choose decency or we can choose division, renewal or decline," Starmer told the Labour Party's annual conference in Liverpool.

Starmer's keynote speech comes at a moment of both national tension and rumblings of discontent within Labour as it has fallen behind Nigel Farage's right-wing outfit, Reform UK, in the polls.

Ahead of this year's annual conference, Starmer told party members that Labour faced the "fight of our lives" against Reform UK, which has risen in popularity on the back of an anti-immigration manifesto.

That message has chimed with sections of the public who feel the government has not done enough to stop illegal immigration to the U.K. but has posed a problem for parties to the left of the center, like Labour, who fear appearing out of step with public sentiment while being wary of a kneejerk lurch to the right.

Starmer on Tuesday called for the party faithful to unify around a "shared destination for the U.K., calling for a country that was "proud of its values" rather than one, he said, "that succumbs, against the grain of our history, to the politics of grievance."

Turning to the economy, which has been somewhat languishing in the doldrums in recent months and expected to slow further this year, Starmer said reform, wealth creation and growth was needed as he called for "mindless bureaucracy" to be removed.

"We need to be clear that our path, the path of renewal, it's long, it's difficult, it requires decisions that are not cost-free or easy. Decisions that will not always be comfortable for our party," Starmer said, adding that the result of hard work would be "a new country, a fairer country, a land of dignity and respect."

Starmer is undoubtedly under pressure given Labour's falling poll ratings but division within the party's rank and file means his leadership appears to be under increasing threat, with Andy Burnham, the current Labour Mayor of Manchester, seen as the main potential challenger.

It's a significant fall from grace for Starmer after his party won 34% of the vote in the July 2024 election. The party's support has slipped to 21% while Reform UK is seen with 27% of the vote, according to the latest YouGov poll, meaning a Reform UK government would be a "near-certainty if an election were held tomorrow," according to YouGov.

Secretary of State for Work and Pensions Pat McFadden told CNBC Monday that Labour had to face up to the threat posed by Reform UK.

"I was a campaign coordinator at the last election and I said within days of it that we would be facing different opponents on the right next time. I think what it really comes down to is a fight between opportunity and grievance and I'm very happy to stand on [the] side of opportunity," he told CNBC's Ritika Gupta on the sidelines of the conference. 

Aside from external threats, there are internal divisions, with wrangling among Labour lawmakers limiting the ruling party's ability to change policy, with several significant U-turns on welfare spending reforms in recent months.

As such, anticipated spending cuts have not materialized and British Chancellor Rachel Reeves is expected to announced tax hikes in her next Autumn Budget to fill a yawning fiscal hole that could be as much as £50 billion ($67.2 billion), although estimates vary.

Reeves has repeatedly refused to break self-imposed fiscal rules that constrain borrowing and aim to balance the budget and reduce debt by 2029/2030.

In another potential blow to the Labour leadership, Reeves could be forced to break a Labour manifesto pledge to not raise taxes on working people, specifically National Insurance contributions (which fund social security and pensions), Income tax thresholds, or VAT.

In last year's budget, businesses bore the brunt of £40 billion worth of tax hikes and since then, industry heads have pressed the government to resist another tax raid that they say has harmed jobs, investment and, ultimately, growth.

In her own conference speech on Monday, Reeves hinted that further tax rises could be on the horizon but gave little detail on where the axe might fall, saying, "in the months ahead, we will face further tests. With the choices to come made all the harder by harsh global headwinds and the long-term damage done to our economy, which is becoming ever clearer."

Secretary of State for Business and Trade Peter Kyle, told CNBC Tuesday that the "manifesto stands" but that the party was "very clear that these decisions are made at the point of the budget," he told CNBC's Ritika Gupta.