Why following the path of the last Labour government will not work this time

 

The Blair/Brown government waited until they had won a second general election before raising taxes ‘on working people’ to accompany a significant increase in the proportion of GDP spent on public services. In the initial years after becoming Chancellor Brown stuck to Tory spending plans, which together with unexpectedly buoyant tax receipts meant debt to GDP fell substantially. This was despite eighteen years of Conservative government leaving public services in a very poor state. Many argue the reason why the last Labour did this was because they felt they needed to demonstrate prudence to the media and markets.

Are Starmer and Reeves following a similar path? In one sense not: Reeves increased tax significantly in her first budget and was therefore able to substantially increase public spending relative to the previous government’s plans. In terms of aggregate numbers rather than previous plans total current public expenditure fell from 33% of GDP to 32% in the first two years under Brown, whereas under Reeves it is projected to be slightly better than roughly flat.

Unfortunately keeping public spending roughly flat as a share of GDP when starting from a position which is awful (and arguably considerably worse than the one Brown inherited) is not going to please anyone. Does Reeves, like Brown, feel constrained because she worries that more substantial increases in public spending and taxes will upset the media and markets?

The Rock and Roll politics podcasts of Steve Richards are always worth listening to, and recently he suggested an alternative Labour government that we could compare today’s to. Not Harold Wilson’s, but that of MacDonald (PM) and Snowden (Chancellor) of 1929-31. He is not predicting the Labour party will split in the same way it did back then. Instead he points out that the 1929-31 Labour government, in the face of an economic crisis, chose to stick to economic orthodoxy because it wanted to appear ‘economically responsible’, even though it had promised voters change. This was despite a clear but radical (at the time) alternative path available, and in retrospect one far superior, which was the Keynesian path that the New Deal in the US eventually took.

He suggests that Starmer and Reeves also hunger to appear economically responsible by following orthodoxy, and that this is preventing them fulfilling their promise to voters of change, just as it did for MacDonald and Snowden. Once again economic ‘respectability’ defeats real ambitions for change.

It is a very provocative comparison, but one that loses some of its appeal once it is examined in more detail. Reeves is indeed insistent that her fiscal rules are not negotiable, just as Snowden insisted on a balanced budget, but today we do not have a global recession caused by inadequate aggregate demand. A balanced budget made no sense in the 1930s depression, just as Reeves’ golden fiscal rule wouldn’t, but we are not in or close to that kind of recession today. The golden fiscal rule does make sense in the situation the UK is in today where demand is strong and inflation is above target. In other words it was George Osborne, not Rachel Reeves, that was making the mistake that MacDonald and Snowden made.

Perhaps this is taking the comparison too literally. The current UK economic crisis is a dual one of crumbling public services and stagnant growth, and a key mistake the Labour government is making is keeping taxes too low. But is their reluctance to raise taxes primarily due to a hunger for economic respectability? It seems to me it is more about a hunger for electability, and thinking (incorrectly in my view [1]) that higher taxes will lose them votes because it will add to the current cost of living crisis.

Perhaps a better way to make the comparison work is not to think about particular types of economic issues, but think instead about radical change versus incremental change. Here orthodoxy means incremental, slow and hardly noticeable change, of the kind that the MacDonald government did do. Change that will not upset the horses of the establishment media and the markets. That might include one-off but not so great tax increases, of the kind that Reeves made in her October budget. It is also consistent with modifying the dreadful falling debt to GDP supplementary fiscal rule rather than abolishing it completely, as she should have done.

Where I do agree with Steve Richards is that incremental change is not what most people want. Voters recognise the huge hole the UK is in, both in terms of living standards (past and prospective growth) and public services, and they are impatient to see a government leading the way out of that hole, rather than just ensuring the hole doesn’t get any bigger. This is why the Labour government has become so unpopular so quickly, because it has shown no sign of the radical actions that voters were looking for.

But I still think the more relevant comparison is with the last Labour government, because the question those like myself, who want something more radical in terms of tax increases and additional public spending, have to answer is why incremental change worked (in electoral terms) for Blair and Brown but cannot work for Starmer and Reeves. Here Steve Richards makes the key point. In 2001, when Labour won a second term, there were effectively only two alternative parties: the Conservatives and the Liberal Democrats. The continuing problems with public services did cost Labour in the run up to the general election, where they lost many votes to the Liberal Democrats. But they lost far fewer votes to the Conservatives, because the opposition was the same party offering similar policies to the one Labour had replaced, and it made little sense to replace Labour with the party that had run public services down in the first place.

In addition, two other factors meant that in 1997 Labour could get away with keeping to Tory spending plans in the first years of government. The first is that obviously Tony Blair had more charisma and better presentational skills than Starmer, and arguably a better communications team behind him. The second is that Labour’s inheritance on growth and living standards was far better.

Economic growth, and therefore growth in living standards, was steadily rising during Labour’s first term, after stalling in the mid-1990s following the ill-fated ERM entry and subsequent recession. [2] In that context. Blair and Brown’s argument that they were ‘fixing the foundations’ in their first term to prepare for better public services later on made some sense to voters. In contrast Labour’s growth inheritance from Sunak and Hunt has been dire, so they will be very unlikely to replicate what happened in the first term of the last Labour government. Forecasts show very modest growth in living standards over the next four years. [3]

So the key differences between the 1997-2001 Labour government and now is that today Labour’s inheritance on growth is very different, and voters today can vote Reform. [4] This helps explain why, while Labour held its 1997 vote share for the first two or three years in government, Labour today have very quickly lost theirs. While xenophobia may represent the core of Reforms popularity, right wing populism generally only wins when that is combined with economic disenchantment. Incremental change will still leave Labour at the next election defending weak growth in living standards and seriously underfunded public services, and those are the conditions in which right wing populism thrives.

[1] The ‘cannot raise taxes because of the cost of living crisis’ idea is fundamentally flawed because it misunderstands that crisis. The UK savings ratio, the average proportion of income UK consumers are saving, has been steadily rising since mid-2022. That indicates that plenty of consumers are able to buy what they need and still increase their savings. The rising cost of food and energy has created a crisis for those poorer voters who are not able to save. There are plenty of consumers who can easily bear higher taxes, while still avoiding increasing taxes on those who cannot.

[2] GDP per capita growth exceeded 2% in every year from 1993 to 1996, following the large devaluation and lower interest rates as we left the ERM. Initially the devaluation hit living standards because of the higher cost of imported goods, but this effect was largely over by 1997.

[3] The first term of the last Labour government also saw a concerted effort to reduce poverty, but that didn’t really start until 1999.

[4] The threat on the left is probably not very different. It is true that the Greens are now a more feasible choice for those on the economic left, while social liberals can still vote Liberal Democrat. However the LibDems in 2001 were more left wing in economic terms than they are now.