The crucial context for Starmer’s speech today, and the budget Rachel Reeves is expected to deliver in late October, is the debate over the size of the hole in the public finances left by the Conservatives.
Reeves (pictured above) said last month that while she understood that she would face a rough economic legacy, the Tories had “covered up” a £22bn gap between Jeremy Hunt’s stated budget and the reality of government spending plans.
The Tories say they left a much rosier economic legacy than Labour claims, and note that the largest single factor in that “black hole” is Reeves’s decision to give striking public sector workers a pay rise.
Others argue that, whether the Tories hid anything or not, the single year £22bn figure is a significant understatement of the problem – with political analyst Sam Freedman suggesting that (£) the reality over the next five years is more like £60bn, for example. And then there are the arguments about whether the medicine Labour proposes will be effective anyway.
What is Starmer’s strategy?
Well, it’s not subtle, and it’s not unexpected. “We reported during the campaign that this is roughly what they would do,” Kiran Stacey said.
In one sense, every government tries something like this: front-load unpopular measures, blame their predecessors and hope that the payoff will be visible to voters in a few years’ time. “They think they have a brief window, while the Tories are in the middle of a leadership campaign, to convince people that anything unpopular is the Conservatives’ fault,” Kiran said.
The elaboration from pre-election strategy is the message that the Tories lied about the scale of the problem. “Before the election, I said we would face the worst inheritance since the second world war,” Reeves said in July. “Upon my arrival at the Treasury three weeks ago, it became clear that there were … things that the party opposite covered up from the country.”
Starmer’s speech is a bald reiteration of the same point. Meanwhile, he will try to mark a symbolic shift, framing his speech by inviting an audience of “people who serve our communities and our country into the rose garden at Downing Street”. That is the same garden, he says in the Times this morning, that “became a symbol of the rot at the heart of [Boris Johnson’s] government” when it was used to host a wine and cheese party during the pandemic.
Is it true that Labour has a worse legacy than expected?
To support their case, Starmer and Reeves can point to the Office for Budget Responsibility’s assessment that the £22bn gap “would constitute one of the largest year-ahead overspends … outside of the pandemic years”.
Similarly, the director of the Institute for Fiscal Studies, Paul Johnson, wrote last month that “the extent of the in-year funding pressures does genuinely appear to be greater than could be discerned from the outside”. He pointed to the “astonishing” £6bn cost of housing asylum seekers as an example.
“There definitely appears to have been some double counting that people hadn’t quite understood,” Kiran said. “It’s not unfair to say it’s worse than expected.”
On the other hand, Johnson also said that, as a whole, the dire state of the public finances “has been perfectly evident for a long time”. “The real, knowable scale of the problem is not some unaccounted for black hole,” Kiran said. “It’s that Labour didn’t want to say it would reverse Conservative tax cuts. So they can rightly say that some things were hidden, but they can’t say they didn’t sign up to much of it.”
What does this mean for tax and spending policy?
This is the corner that Labour has boxed itself into: it knows that it needs to find more money to spend on public services, and it has already committed about £10bn a year to increased wages for public sector workers. But it has ruled out any increase to the biggest revenue-raisers at its disposal – national insurance, VAT, and income tax. That means it will have to find what it can from a very narrow section of the UK’s economic base – or make painful cuts elsewhere, even just to stay still.
“It’s an incredibly difficult circle to square,” Kiran said. “They think they can say that the Tories are to blame for a couple of years, but there has to be genuine improvement after that” – and if any changes are to be noticeable to the voters by the time of the next election, they need to make a start now.
Reeves can increase taxes that don’t affect the UK’s fabled “working people”, like capital gains tax and inheritance tax, without breaking her election pledges. “There would be an economic argument that they just have to bite the bullet and do something on income tax or national insurance,” Kiran said. “But I just don’t think they will break their biggest promise when they’ve spent so long painting the other side as crooks and liars.“
How will the Tories respond?
Since the election, many Tories have bristled at Labour’s characterisation of their economic legacy: as Nick Timothy, the MP and former adviser to Theresa May, wrote in a column for the Telegraph, “[Labour’s] claim that the new government ‘has inherited the worst economic circumstances since the war’ is nakedly political and deeply dishonest.”
He pointed to a lower unemployment rate than when Labour last left office, lower borrowing, and inflation under control. Similarly, Jeremy Hunt said earlier this month that better-than-expected GDP growth figures were “further proof that Labour have inherited a growing and resilient economy”.
“It is credible to say all that,” Kiran said. “Low inflation, low unemployment, and high growth are all things you would want coming into government.”
But they only tell a fraction of the story: “The problem is that long-term damage to the public sector is baked in, and it will take time and money to undo. And the forecasts only look good if you accept that a 1% increase in real terms to government departments across the board will be enough – once you say that that isn’t possible, and you’re going to have to put £20bn or £30bn into public services, it all looks very much harder.”
What other pressure will Starmer and Reeves face?
The Tories aren’t likely to be the only source of criticism: already, seven MPs have lost the Labour whip after rebelling over the two-child benefit cap, and there are many more who are dismayed by the prospect of new limits on pensioners’ eligibility for the winter fuel allowance.
“There are people against that who still hope they can get, if not a U-turn, some mitigation – for example, tapering the change rather than having a cliff edge in eligibility,” Kiran said. “But my guess is that Reeves will see this as an early test of strength and hold her ground. The payoff might be a change to the two-child benefit cap.”
Part of the problem is that Labour’s massive majority is built on many victories by small margins, which means that others could rebel if they think it’s going to help them hang on to their seat at the next election.
“In the short term, they can probably dissuade most people from rebelling in a serious way,” Kiran said. “But if Starmer’s ratings start to fall and they don’t see themselves winning next time anyway, the ones who are vulnerable could start to get a lot louder.”
