Let’s say, hypothetically, that it is Labor that will form the next government in six weeks. What will Sir Keir Starmer and Rachel Reeves inherit from the Conservative Party?
I’d say it’s more bad than good. And these are not problems that a simple change of government can solve.
A record NHS waiting list, out-of-work benefits for 5.6 million Brits: this is the legacy of the lockdowns launched by the Conservatives and supported by Labor every step of the way.
Tackling these crises will again require a willingness to embrace the kind of radical reforms that no party wants to admit are necessary. Saying these things out loud means action is needed. This will consume a lot of political capital and will also require some unpopular decisions.
But the legacy won’t be that bad. Many economic indicators show that Britain is ready for better times. We should by no means expect to see rapid economic growth or rapidly rising standards of living. This requires politicians to do things like, God forbid, make it easier to build houses. Labor says it wants to do this but has not convincingly explained how it will do it.
Still, there are good reasons to think people will take notice: Inflation will return to its target for a significant period of time, increasing confidence that the price crisis is over. Wages must continue to stay above inflation. The latest data shows inflation-adjusted wage growth at 1.7 percent, the highest in two years.
That remains the biggest conundrum of this summer’s election: While some metrics may have worsened, most economic metrics may have improved, including those that answer the election’s central question: do you feel better?
There’s a good chance the Conservative Party will not only hand over the keys to No 10 to Labor, but also a quietly improving economy. This won’t solve nearly all of the problems Starmer will inevitably face, but it will make his political descent a little smoother and make early decisions a little easier.
But this is by no means the greatest gift the Conservatives can give Labor.
The Treasury is subject to a very loose fiscal rule: This debt must fall as a percentage of GDP on a five-year rolling basis. This has never been a secret, but it has also escaped serious scrutiny.
This rule may soon tie new hands, but does it actually restrict spending?
When Jeremy Hunt was appointed Chancellor by Liz Truss, he had one task: to restore the financial credibility that the then prime minister had lost almost overnight. Hunt did this by reversing almost the entirety of Truss’s so-called mini-budget. Markets responded positively.
By the time Rishi Sunak entered Downing Street with Hunt, both stellar yields and the market’s expectations of interest rate peaks were well established. The pair became a symbol of renewed stability (at least for the markets), and this presented an opportunity.
From time to time it is stated how much the fiscal rule has been relaxed; We are often reminded, around financial statements, that the chancellor’s spending plans are tied to major spending cuts over (another) five years.
In his last Budget, for example, Hunt managed to raise totals including a further 2p cut on employees’ National Insurance, based on the idea that he would solve fuel duty within five years. Technically his numbers had improved and he was making good use of his fiscal rule to reduce debt in the medium term: but on the assumption that such a tough political decision would actually be taken within five years.
Does anyone think this will actually happen? Of course not. But this is no problem for the Treasury. Thanks to the floating aspect of the fiscal rule, spending cuts (or tax increases or whatever is promised to reduce the debt-to-GDP ratio) can be pushed back each year until the end of that period. The hypothetical five-year spending period rule is met.
It was indeed a strange move for the government to make one of its five promises to “reduce debt”. This was never going to happen: public sector net debt continues to rise with the leeway allowed by the fiscal rule.
Despite the improvement in the fiscal rule, debt figures will rise from £2.5 trillion at the end of this year to over £3 trillion by March 2029, according to current forecasts.
This isn’t such a terrible mistake: It’s exactly what the rule is designed to do. It’s not often that politicians get away with this situation.
It’s no surprise, then, that Rachel Reeves has announced that she’ll stick to this financial rule if she makes it to No. 11.
It’s not a burden, it’s a free pass he will inherit: the ability to borrow more and accumulate debt, but still be able to argue that debt remains a serious concern.
So will this free past last? Regardless of party, the ridiculous nature of this rule would be revealed at some point. Disciplinary plans can only be pushed back many times until market confidence begins to wane.
Any assessment of Labour’s economic agenda will likely include how they use this fiscal rule. This is exactly the kind of flexibility a heavy-spending government dreams of. If Labor pushes its limits, it could face market backlash. But that doesn’t mean the party won’t try.
So why not? Starmer and Reeves have made clear many areas they want to invest in (green infrastructure, the NHS) but are very hesitant to say where the new money will come from.
“Borrow to invest” is a phrase we have heard many times from Labor: we know it is on their minds. The Conservative Party’s use of a rather reckless fiscal rule means this could also be on the cards.