Every Labour chancellor has a primal fear of falling foul of the financial markets – and with good reason. Stretching all the way back to Philip Snowden’s currency crisis in 1931, the party’s history is studded by run-ins with the massed forces of capital in which capital has invariably emerged victorious.
The devaluations of 1949 and 1967, together with the sterling meltdown of 1976 and the “cap in hand” International Monetary Fund humiliation, are an indelible chunk of Labour’s collective memory. Gordon Brown is unusual in being chancellor for so long and not to have experienced the sinking feeling that accompanies a run on the pound – but that was only because he moved from 11 to 10 Downing Street a few weeks before the global financial crisis started to unfold in the summer of 2007.
If Rachel Reeves imagined her repeated insistence that Labour’s “iron-clad” commitment to sound public finances would spare her the fate of Stafford Cripps, Jim Callaghan and Denis Healey, she had another thing coming. It has come as absolutely no surprise to find her coming under pressure to impose austerity measures on an already weak economy – either through higher taxes or through cuts in public spending – simply to keep the markets sweet. The only surprise is the speed with which Labour’s brief love affair with bond traders – hardly a redoubt of socialist principle – has cooled.
No question, Reeves has made some bad decisions. It was foolish to means-test the winter fuel allowance for pensioners, a move that the Treasury found impossible to get past chancellors more attuned to the political risk involved. The governor of the Bank of England, Andrew Bailey, was sufficiently alarmed by the negative impact on business and consumer confidence of the Chancellor’s repeated pronouncements about Labour’s dire fiscal inheritance that he advised Reeves to restrain her rhetoric, but the damage had already been done. One reason the markets are so jittery is that the economy has stalled since Labour’s election victory.
All that said, Reeves deserves some sympathy. She is unlikely to get it from her critics on the right, who need no encouragement to give Labour a kicking. But those on the left, such as Yanis Varoufakis, who have already decided that Reeves is at best useless and at worst a reincarnation of the original turncoat, Snowden, should get some perspective.
For a start, it is far too early to make definitive judgements. Labour’s inheritance was poor – a fact all too quickly forgotten during the pile-on of recent weeks. The economy has moved sideways for the past decade and a half, with flatlining productivity and nugatory growth in real wages. Reeves certainly overdid the doom and gloom, but – as in 1964 and 1974 – Labour is being asked to clear up a mess not of its own making.
Secondly, the UK is not alone in feeling the heat from the markets. The main reason for the sharp increase in bond yields (the price of servicing the government’s debt) is that stronger than expected growth in the US has made investors less confident about the pace of American interest-rate cuts. Fears that Donald Trump will cut taxes and impose tariffs on imports – possibly beginning very soon – have added to the sense that the world’s biggest economy has not seen the last of inflation.
A slowing economy and rising gilt yields have led to speculation that the Office for Budget Responsibility will use its forthcoming March update to say that Reeves is on course to break her fiscal rules (specifically, the rule that day-to-day public spending should be covered by tax revenue). This would be a grievous wound for a woman who has worn personal austerity as her signature – up to and including making her own packed lunches. But there are plenty of reasons for expecting the economic outlook to improve in the coming months. Wages are growing faster than prices, which means consumers have more money to spend. Our current weak growth will speed up the pace of interest-rate cuts from the Bank of England. The budget increases in public spending will boost activity.
Removing spending power from the economy would impede recovery and could even push the economy into a mild recession, leading to a bigger budget deficit and – inevitably – calls for spending cuts. As George Osborne found after the 2010 election, cutting your way to prosperity doesn’t work. Keynes said that if governments looked after the economy the public finances would look after themselves, and he was right.
There is, finally, a more genuinely political reason Reeves should be cut some slack, relating to what this government truly stands for. In all the furore from business about the increase in employer National Insurance contributions, it has somehow been forgotten that the tax rises were for a purpose: to fund better public services and a bigger role for the state. Business, incidentally, has long complained about the need for a healthier, better-educated workforce. These things have to be paid for.
That is not to say this is an exemplary entrepreneurial state. There has been a lot of talk about how the government is “laser-focused” on growth, but not a lot of substance to back up the rhetoric. It is good news that the party is committed to a modern industrial strategy – something Britain has been crying out for. Yet the decision to scale back the ambition of the Green Prosperity Plan while still in opposition was a bad omen. It has left the impression that Labour wants to reboot the economy on the cheap. If this is the case – if Reeves’ plan simply amounts to Bidenomics without the money – then her authority will wither.
But Britain’s economic problems – weak investment, a colossal trade deficit and a widening north-south divide – have been evident for 50 years. The idea that Reeves could put everything right in six months is nonsense. These things take time. She deserves the opportunity to make her mark.
[See also: Rachel Reeves will soon need to pick a side]
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