What every Labour MP should know

While in opposition, Rachel Reeves and Sir Keir Starmer spoke of the need for a decade of national renewal; and since they have taken office, the evidence of the need for that renewal has grown even stronger.

They have also spoken about a “financial black hole, the £22bn of unfunded spending commitments, concealed from our country by the Tories” and the Chancellor  has talked about the need for “iron discipline.” She said,

“But, Conference, because of that legacy left by the Conservatives, the road ahead is steeper and harder than we expected.  You don’t need to take my word for it. Figures released only on Friday showed another month of record borrowing. Debt at 100% of GDP. That is the inheritance that they left, in black and white.”

Until we see the Budget, we cannot be sure what Reeves and Starmer plan to do, but this language suggests at least some risk that their concerns about the financial legacy left by the Conservatives may prevent Labour from tackling the real needs of the country:

• Starmer and Reeves are right about the scale of the rebuilding needed; but
• The ‘state of government finances’ is a red-herring that must not stand in the way of that rebuilding; and
• Success will require rewiring some of the UK’s institutions which, over the last 14 years, have become wired for regress.

This will require bold action; but the alternative is failure, for the Labour Party and for Britain.

They are right about the scale of the rebuilding

Median earnings are lower today than they were in 2007; our public services – including the NHS – are gravely weakened, the economy has been weak, and there has been no effort to protect the environment.

Our household finances are in almost unprecedentedly poor shape: real (adjusted for inflation) wages are lower today than they were 17 years ago – you would have to go back to the 1920s to find a comparably bad period.

Our public services have been badly hit by austerity. Even the supposedly ‘protected’ NHS is close to breaking point. As Lord Darzi’s recent report said,

“Austerity: The 2010s were the most austere decade since the NHS was founded… Until 2018, spending grew at around 1 per cent a year in real terms, against a long-term average of 3.4 per cent. … In 2018, for the service’s 70th birthday, a more realistic promise was made of a 3.4 per cent a year real terms increase for five years in revenue spending. … The 2018 funding promise was broken. … Capital: The NHS has been starved of capital and the capital budget was repeatedly raided to plug holes in day-to-day spending.”

He concluded that, “the NHS is in critical condition, but its vital signs are strong.”

Restoring the NHS (and other public services) is vital for the UK and for the economy, as our report The Rational Policy-maker’s Guide to the NHS explained and recent data have confirmed.

Although the Conservatives constantly claimed – and still claim – that the economy was exceptionally strong under their watch, the data show otherwise, particularly since Brexit.

On the environment, the news is no better: the last government supported fossil fuels at the expense of renewable sources of energy – and imposed lengthy prison sentences on those who protested against their policies. And they allowed water regulation to become so toothless that many of our rivers and coastal waters now flow with sewage.

The toxic mix described above is the real inheritance left by the last government; and is what this government should focus on fixing.

The ‘state of government finances’ is a red herring

There  has been a host of recent scare stories about government debt: the BBC said, as if this makes it a problem, “UK government debt highest since 1962.”  A poor quality, but awkwardly timed House of Lords Inquiry said, “We conclude that without an appropriate fiscal policy that addresses the challenges the UK faces, there is a risk of the debt becoming unsustainable.” This sounds very scary, but it is nonsense.

Governments are simply not like households.

Any argument that governments should run like households would need to explain why, given the huge and undeniable differences shown above, they should. No such argument was made in the House of Lords Inquiry but its arguments implicitly assumed that they should.

Even more simply, 100% debt: GDP is not a particularly poor legacy, and it does not require panic. It is simply the average level of debt over the last 300 years.

Despite what the Lords’ Inquiry suggested, our history shows that high debt does not imply spiralling out of control, and it does not prevent strong economic performance.

Our debt: GDP was over 200% after the Napoleonic wars; and once they ended, it fell rapidly. Economic growth was not constrained: we enjoyed the Industrial Revolution.

Our debt: GDP was over 250% after WWII; and once it ended, debt:GDP declined rapidly. Economic growth was not constrained: we enjoyed the Golden Age of Capitalism – one of the most successful periods in the last 800 years.

Even better, around 25% of today’s ‘debt’ is – thanks to the Bank of England’s Quantitative Easing programme – owed by the Treasury to its own subsidiary, the Bank of England (BoE). In the corporate world such debt would have automatically been cancelled already. Our true debt is around 75% of GDP: well below the long-term average.

“Ah, but wait!” you may be thinking, “Haven’t we just seen what happens when you borrow too much? Look at what happened to Truss’s mini-Budget.” Our submission to the Lords’ Inquiry showed that, despite what we often hear, inflation, not debt – is what killed Truss’s premiership. Johnson and Sunak had borrowed far more, far faster than Truss was planning. But Truss increased the deficit during an inflationary period without thinking through the inevitable BoE response: to raise interest rates. There is an important lesson there, but it is about inflation, not debt.

A group of economic grandees including Lords Gus O’Donnell and Jim O’Neill and Professor Mariana Mazzucato recently wrote an open letter saying that UK national renewal requires a step change in public investment and must not be constrained by the fiscal rules, a point with which the OECD agrees. We recently showed how government can invest despite the rules if it is bold and creative. And there are signs that Rachel Reeves is aware of some (maybe all) of this potential: she recently signalled that she would modify her fiscal rules to prevent losses from the BoE’s Quantitative Easing programme being counted as part of debt:GDP. That alone is worth £17 billion.

Allowing ‘the state of government finances’ to stand in the way of national renewal would be a profound mistake.

Success requires rewiring the UK’s institutions

Avoiding a Truss-like experience will need rewiring for success and serious thought about inflation management.

We wrote about the risks that – if they follow their current remits – the BoE, the Treasury and the OBR would stifle any attempt at national renewal. As we said,

“HM Treasury (HMT) has long been famous for “The Treasury view” – a view not too far from market fundamentalism. This means that, for example, HMT does not believe that the government should provide anything that the market could provide and should seek to spend as little as possible in discharging its legal responsibilities so as not to crowd-out private spending.

The Bank of England (BoE) has a remit to keep inflation close to 2% and a single tool at its disposal to achieve this aim: interest rates. As the recent round of inflation has demonstrated, this can have a damaging effect on the economy and on household finances.

The Office for Budget Responsibility (OBR) was set up with a narrow definition of Budget responsibility: its job is to assess whether the Budget meets the Chancellor’s self-imposed fiscal rules and the long-term impact on the debt:GDP ratio. Other aspects of responsibility/irresponsibility like underinvesting in critical national infrastructure or public services are considered only if they will impact on government debt. We are in the strange situation where the OBR highlights a risk that in five decades time our debt may be too high for comfort while not calling out the risk of the NHS, schools and local authorities failing within this decade.”

That article showed that if the government is to deliver on its promise, it will need to take steps now to prevent these institutions from destroying its chances.

The Truss experience also shows that, in an inflationary environment, running a larger deficit risks increasing inflation. To prevent that, the government will need to take money out of the system by taxation or what we termed ‘leakage prevention.’ There is enormous scope for doing this over time – we identified over £200 billion of long-term potential – and tax specialist Dan Neidle has identified smaller but still very significant ‘quick wins’ totalling £22 billion.

It is vital that the government does not take its eye off inflation because of concern over an imaginary debt problem.

Conclusion

Budgets set the financial framework within which government departments seek to deliver against the needs of the country. Reeves and Starmer’s first Budget is critical to the success of the government’s entire renewal project. If, because of perceived fiscal  constraints, the government does not deliver an improvement in living standards and the public services, it is also unlikely to deliver economic growth. Growth requires increased demand; and where will the demand come from if not households or the public sector?

If there is no economic improvement, then all the reasons for not investing in renewal today will be at least as strong at the time of the next Budget. The government will be left with a choice between a 180° U-turn in both policy and rationale or continued failure.

But why does every Labour MP need to understand all this? Most are not involved in the Budget process. Well, we do not know what kind of Budget is in preparation:

• It may be that Reeves and Starmer are fully aware of and planning to act on all the points raised above – if this is the case, they will deliver a strong Budget. And they will immediately face a barrage of negative publicity from almost all our media, claiming that “the country is being bankrupted”, that “Reeves is the worst Chancellor in history”, that “Starmer must sack her or stand down himself”, etc. In this case, Labour will need every MP to be as active and well-informed as possible in combatting that narrative;
• Alternatively, Reeves and Starmer may be preparing an over-timid Budget, in which case MPs should make the case internally for a Budget that provides a foundation for a decade of national renewal, rather than one which will almost guarantee that it will not be delivered.

Either way, MPs need to know this. So we are arranging an event in Parliament, sponsored by Barry Gardiner MP, to give them a chance to explore these issues in more detail. An expert panel including Polly Toynbee, Will Hutton, Mark E Thomas and Martin Wolf will discuss these issues with the MPs on Tuesday 8 October.

If you think this is important, please share using the buttons below. If you have a Labour MP and would like to make sure your MP is thinking about these issues, looks out for the official invitation and attends the parliamentary event, this website will make it very easy for you: https://www.writetothem.com/

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