Investment in politics, like economics, involves risk and present sacrifice

 

Rachel Reeves is absolutely right to make investment her watchword as Chancellor. So many of our current problems come from lack of investment over the last fourteen years, particularly in areas like the NHS. While France and Spain have dozens of high speed rail lines linking the country together, we cannot seem to build just one.

Yet investment also applies to politics. Immediate political incentives encourage short term thinking and playing it safe, yet often better long term outcomes for political parties as well as the country can involve taking more risks and some current sacrifice in popularity. I do worry that in many areas the Labour government is not making the necessary political investment.

Let’s look at some evidence. Many would argue that we should start while Labour was still in opposition and the Conservative government cut employees NIC rates. By that time a Labour victory was pretty likely, and everyone including Labour knew that these tax cuts were completely unaffordable and were justified only by fantasy austerity. If Labour had committed in opposition to reversing these cuts they probably would have lost some votes, but the risk of losing the election as a result was small. The benefits of taking that stand in opposition would have been much more scope in Labour’s first budget.

I don’t know how strong that evidence is because I’m not a polling expert, but I do think Reeves’s first action as Chancellor is a good example of missing an opportunity to make a sacrifice for future gain. As I said at the time, her ‘the books are much worse than we thought’ statement was an opportunity to reverse those NIC cuts, and raise far more revenue than ending the winter fuel payment. The sacrifice was to go back on a pre-election pledge, but she had an effective political riposte. Any time the Conservatives used higher NIC rates to argue ‘Labour cannot be trusted’, it would allow Labour to remind voters of the mess the last government left the economy and public services in.

Another potential piece of evidence of political short termism is the budget itself. If you want to recharge the economy by expanding public investment you need to substantially increase public investment relative to the past. Yet after the budget the average share of net public investment in GDP over the next five years is projected to be 2.6%. That compares to 2.4% in the five years up to and including 2023/4. This will do almost nothing to boost economic growth or private sector investment. It is of course far better than the growth sapping plans left by the last government, but that measure will be quickly forgotten.

So why so modest on public investment, when both the public sector and the economy is so desperately in need of something more radical? The answer may be that the redefined falling debt to GDP fiscal rule prevented anything more. Yet Reeves could have been more radical on that rule, but she instead chose the option that would cause least offence in the short term.

Another example is in defending the budget, she implied that this will be her last budget where she raises substantial amounts of tax. That is an answer that is convenient to give in the short term, but it is also a hostage to fortune. If tax receipts are less than predicted, or public services clearly need more than she has provided, is this statement going to be another self-imposed constraint in the future?

Or take Labour’s current rhetoric on immigration, where they are stealing the Conservatives’clothes. That works at the moment because of the last government's record and because numbers are currently falling. While it may score political points right now, in the longer term numbers will depend on economic developments that can neither be foreseen nor, as Cameron found out, controlled. It might be far better to take the opportunity of bringing some honesty into the public debate, which would provide some cover if numbers rise again.

Finally there is the media. Right wing populism becomes a much more potent threat when half the media acts as its cheerleader. So far the media’s ability to lie and distort has gone unchallenged. If it is the case that Labour agreed to not press ahead with Leveson 2 in a deal with the Sun before the election, it was both a bad deal and another example of getting small short term gains at far higher long run costs.

Labour cannot be faulted for not having long term goals. Its missions do that, and in many cases they are pretty ambitious. My worry is that short term political pressures are preventing the actions needed today to meet those goals. Take economic growth for example. There is a real risk that growth in living standards will be lacklustre and well below what the government has promised and is aiming for. (The OBR expects an average of just over 0.5% annual growth in real disposable income over the next five years, with initial growth of around 2% tailing off in later years.) While Labour was entirely correct to highlight the terrible growth and living standards record of the last government, if in four years time it is felt to be doing not much better it will put itself at real risk. Even if that poor performance is partly due to the antics of President Trump, we know many voters will still blame the UK government.

Which brings us to Brexit. I think Labour was quite right in opposition not to reopen that debate, although Peter Kellner argues that Red Wall voters were not as important in Labour’s general election victory as many assume. Now Labour are in government the costs and benefits of being more radical on trade with the EU are very different. I argued here that there will be a tipping point where voters in Labour’s key marginals worry more about persisting with some key aspects of Brexit than sticking with the policy. While Labour are moving closer to the EU in minor ways, any major economic impact can only come from either joining the EU’s customs union or Single Market. For obvious political reasons it makes sense to do the former first.

The tipping point for public opinion will depend on events as well as demographics. As others have suggested, the election of Trump for a second term could be one of those events. Trump likes tariffs because they are a real threat that can be used to obtain deals that he can argue are favourable to the US. Other countries can either play along with that strategy, or call his bluff by threatening retaliatory tariff increases. The first option, particularly in countries that will give a lot of airtime to Trump’s boasting, carries high political risks.

Both the Conservatives and Farage will plausibly argue that in dealing with Trump Labour are at a natural disadvantage, and they would be much better placed. If Labour allows the political narrative to become one where making deals with Trump is the general presumption, they will suffer politically. By contrast, if they make it clear that protecting free trade is both in the UK’s interests and requires standing up to Trump’s threats alongside others like the EU, then trying to appease Trump can even be made to sound unpatriotic.

To join with the EU in calling Trump’s bluff on tariffs, Starmer does not need to be part of the EU’s customs union, but this is not the point. What Trump’s actions will do is give Starmer a perfect opportunity to argue the situation has changed, Labour’s previous policy on the EU is not enough and we now need to substantially strengthen our trading links to the EU to weather the Trump storm. Of course this will have some short term political costs, but with longer term political and economic benefits for both Labour and the UK economy. Avoiding any short term political pain and passing this opportunity by means Labour will once more make things difficult for themselves in the longer term.