Labour’s spending habits are no match for Britain’s fiscal straitjacket
Eir Nolsoe
6 min read
keir starmer
Sir Keir Starmer will feel Downing Street edging closer after decimating the Scottish National Party in the Rutherglen by-election on Friday, achieving a 20-percentage point swing.
Yet even if Starmer does sweep into Number 10, he faces the same problem as Rishi Sunak: money is tight. For a party usually associated with higher spending, that may prove a challenge.
“If you want giveaways, you’re going to have to pay with some takeaways,” says Carl Emmerson, the deputy director of the Institute for Fiscal Studies.
Any grand election promises will have to be accompanied by equally grand spending cuts. Starmer’s challenge is how to present a unique pitch to voters and convince them that such fiscal restraint does not mean Labour and the Tories are “two cheeks of the same a—”, as the SNP’s Chris Law claimed in parliament last month.
The biggest problem is the mountain of public debt, which eclipses nearly the size of the entire economy at 98.8pc of GDP.
Like incumbent Chancellor Jeremy Hunt, shadow chancellor Rachel Reeves has committed to reducing the ratio of debt-to-GDP within five years.
“It’s really quite challenging to get debt falling at the moment because we have a lot of debt, it’s more expensive to finance and we don’t have great growth prospects,” Emmerson says.
“Whoever is Chancellor after the election will be battling that.”
Hunt is currently only meeting this aim by “a hair’s breadth”, even with taxes on working people and businesses at their highest level since the Second World War. The Chancellor has only given himself £6.5bn to spare in order to meet his fiscal targets – the slimmest headroom of any chancellor since at least 2010.
It means there is little space for Reeves to do things differently if she becomes chancellor: there is no spare money to spend and it is not clear that the country can bear higher general taxation.
“The obvious way to give themselves wiggle room is to announce more painful policies to pay for the things they want to do,” Emmerson says.
“Those three tax rises are not huge, and therefore there’s only so much of a spending increase you can get from them,” Emmerson says.
By themselves, the policies won’t generate enough revenues to make a serious dent in the spending required to follow through on key Labour pledges. The party has promised to improve the NHS’s performance, make streets safer and boost education.
If the money to fund these policies isn’t coming from taxation, another option would be to borrow. However, Labour said it will only borrow to fund infrastructure spending. That means Starmer and Reeves could borrow to fund the construction of schools and hospitals, but not to pay the wages of the teachers and doctors who staff them.
Even here, the options are limited. Government bonds are soaring. The cost of borrowing over a 30-year term is now the highest it has been for the UK since 1998.
Starmer has been forced to adapt to the worsening macroeconomic picture and has already watered down Labour’s flagship policy of borrowing £28bn a year to invest in net zero, which it had initially said would purely consist of “new” money and kick in immediately.
Instead, the party will only borrow £20bn to invest in net zero and will do so gradually.
“I did not foresee what the Tories would do to the economy, maybe that was foolish of me,” said Reeves when she announced the delay.
In an effort to help it hit its target of reducing debt-to-GDP within five years, Labour also plans to lean on some accounting tricks.
When calculating the country’s debt figure, it plans to look not just at liabilities but also public sector assets – such as schools, hospitals and roads.
Labour argues that this will remove incentives to sell off assets to “massage public debt lower” by raising cash and paying down debt.
However, Labour’s proposals arguably do some massaging of their own by making the net debt figure look lower.
In other words, if the Government judges that its assets have become more valuable, it should not be used as an excuse to borrow more. Debt is still debt and will have to be repaid one way or another.
The only sustainable way to pay for giveaways will be to get the economy growing again.
“I think you’ll see a real focus on the economy and on stability and a much more future focused, grown up approach to politics,” a Labour source says.
With little scope for giveaways, Starmer will seek to present Labour as a steady hand on the tiller during a financial storm. In fact, Labour’s fiscal straitjacket could even prove to be a vote winner in some quarters.
“People who voted for the Conservative Party in 2019 are not frightened by the prospect of a Labour Government and don’t think that things would change all that much,” says Josh Simons, the head of independent think-tank Labour Together.
“In 1997, the scale of our Labour’s victory was as much to do with Conservative voters staying at home, as it was to do with people turning out to vote Labour and Liberal Democrat.
”I wouldn’t underestimate the importance of essentially de-risking a Labour government.”
Labour also appears to be gaining traction with businesses, the traditional stronghold of the Conservatives.
“I think annual conference will be a very visual representation of how in touch with the people who generate money in this country Labour is,” says a party source.
“Every business leader we speak to is clear that they want some certainty and some stability. The thing that really annoys them is they make plans, and they cost those plans based on a set of policies and then those policies change.”
Still, elections are not won through the support of businesses. With mortgage shocks in the post for millions of families and little to offer in the way of support, Starmer will have to hope his vision for the country resonates.
Simons at Labour Together says: “I think Labour will really try to appeal to the kind of emotional possibility of hope and stability and the idea that families can start going out for a pint on Friday, going to the cinema on Sunday with the kids - these tiny things that so many millions of people in this country cannot do.”
