OK so what the hell actually is Labour's economic policy

Everything you need to know about the next five years of our economic life

Photo by Nigel Tadyanehondo on Unsplash

Trying to work out Labour's economic policy is a nightmare. Sometimes it sounds progressive. Sometimes it sounds conservative. Sometimes it sounds like the keeper of the vault has emerged to tell you your doom. Sometimes it is a sun-kissed vision of a brave technological future. Sometimes it’s all these things at once, with just enough of each to cancel the others out.

This piece is about what the hell its policy actually is. Is it coherent? What do they believe in? What are they likely to do? Will they deliver austerity? Can we avoid the doom loop of under-investment and sluggish growth? Is their rhetoric based on the real state of the economy or cynical party political strategy? Basically: What the hell is actually going on? 

It's long - you'll want a cup of coffee and a comfy chair. But by the end you should be equipped to fully understand the next five years of British economic policy.

In March, Reeves delivered the Mais lecture. It's very good. You can read it here and you probably should, because it is intelligent, insightful, literate and relatively plain-spoken. The single most convincing assessment of Labour economic policy is that Reeves believes exactly what she said in this speech, has never really said anything to the contrary, and is not planning on contradicting it. 

At one point she lists a bunch of priorities, but only the first two are pertinent to us here. The first is "stability" and the second is "investment". Those are the two key guiding values which dictate everything which follows.

Stability suggests fiscal restraint - reducing borrowing, cutting spending, sticking to fiscal rules. Investment suggests fiscal loosening - increasing borrowing, spending more, reforming the fiscal rules. Sometimes it seems as if they can both be delivered at the same time. Sometimes they feel mutually exclusive.

Why the focus on stability? Well, the thing about Liz Truss is this: she really did scare the shit out of Labour. 

The mini-Budget was a real-world demonstration of a nightmare the left has had many times before. It's the ghost story which progressive have always feared, the thing that keeps them up at night, flinching at shadows on the wall. You might want to borrow and invest, but eventually the lovely stable bond market will turn into a terrifying fucking monster which tears your goddamn throat out. And for many progressives, it was like: 'Huh. Turns out that stuff is true. That can actually happen.' It may have been the Thatcher-loving laissez-faire right which did it, but the broader lesson was delivered regardless.

The Truss debacle had several components. The first was that it was obviously insane, in terms of its base proposition. She cut lots of taxes, which stimulates demand. And she did this at the precise moment that the Bank of England were raising interest rates, which sedates demand, as part of their plan to kill off inflation. That's just an unbelievably weird thing to do. It means fiscal policy and monetary policy are working against each other. 

The second thing was how zany it was. It wasn't just the proposals themselves, but the madcap way they were delivered, like some kind of Benny Hill performance. She sacked the Treasury permanent secretary , she froze out the Office for Budget Responsibility (OBR), she launched one idea after another, watched it all implode before her very eyes, then sent out chancellor Kwasi Kwarteng to say "there's more to come", which freaked everyone out even harder. It was a batshit medley, served in a variety of different forms and textures, but all that unmistakable taste of political chaos. 

Both the manner and the substance of the Truss debacle contributed to the chaos which followed. It showed that sound financial management is not just about delivering sensible policy but also about presenting that policy in a reassuring, predictable way. This is why Reeves is setting down very clear reputational indicators: rectitude, discipline, tough times ahead. This narrative framework is for voters, sure, but it's also for markets. It sets expectations. It establishes stability and solidity. It provides some degree of predictability.

Why the focus on investment? Well, very quietly, without many people noticing, Keir Starmer's Labour has laid out a strikingly progressive investment agenda. Somehow, this aspect of the government's thinking is often ignored, despite being perhaps the most meaningful philosophical change in our economic policy for half a century. 

This is not about nationalising industries. It's not the state intervention of the 1970s. It is about acting in such a way that you encourage private investment - typically called 'crowding-in'. It recognises that the market fails, but organises state intervention to improve it, rather than replace it. It is interesting, non-ideological and pragmatic. The left and right will therefore hate it in equal measure.  

Here's an example. Back during the Coalition years, energy secretary Ed Davey did something clever. At the time, companies involved in building clean energy infrastructure, like an offshore wind farm, were struggling to secure financing. Private banks didn't like to lend to them, because it was all new and unpredictable and they might not get their money back. Initially the government offered subsidies, but these were ineffective. They cost a lot, for a start, and they reduced the need for innovation. Whatever the firms did, they got the money, so why bother to improve? 

Davey's solution - I'm simplifying a bit here, but we've all got places to be - was to introduce a guaranteed price, funded by the energy customer through levies on their energy bill. Let's say it's £50 per megawatt hour. If the price of power later falls to £40, then the company pockets the extra £10. But if it rises to £60, they pay back the extra £10 to customers. This secured the kind of stability and predictability they needed for massive clean energy projects to go ahead: cast iron reliable financial guarantees. The contracts are awarded through an auction, so the companies are under pressure to keep costs down, making the sector more dynamic and competitive. 

This was one of the greatest experiments the Conservatives oversaw during their time in office. Needless to say, they were deeply ashamed of it. They'd accidentally done something rational and socially beneficial and thereby betrayed the values of their members. In the ensuing years, they consequently allowed it to wither through negligence and stupidity. Sunak's government failed to award a single new offshore wind contract last year. 

But earlier this summer, Labour ministers approved a higher reserve price and increased the budget, resulting in a £1.5 billion auction which will support 131 new projects, including windfarms, solar farms and tidal power projects. There will be more. Future auctions will ramp up this process.

There are countless other ways to do this. Investing in port infrastructure can facilitate private investment for offshore wind farms. Investing in charging points can encourage people to buy electric cars, which makes it more likely that car companies will base factories here. Loan guarantees for projects like carbon-capture-and-storage can reduce the cost of capital, de-risk private sector lending and get things moving. 

The reason Labour is hard to read at the moment is simple: it is working its way through these two concerns of stability and investment. It wants both, but they sometimes play badly together. What we're seeing here is a classic muddle of competing priorities. Get it wrong and one will overwhelm the other, or they'll simply negate each other. 

The question is: Can we have both these things? Can Reeves ensure stability while still unleashing a new generation of investment? 

Many economists want Reeves to prioritise investment. It's not quite a consensus, but it's not far off. It's supported by some of the most authoritative and respected figures in the economic establishment. A recent letter to the FT warned that prioritising stability over investment would condemn Britain to a "vicious circle of stagnation and decline". It was signed by former Cabinet secretary Gus O’Donnell and former commercial secretary to the Treasury Jim O’Neill, as well as seasoned anti-austerity economists like Jonathan Portes.

The general argument for this position goes like this: We are not remotely in the same place as we were under Truss. Interest rates are not rising, they are falling. The shocks of the pandemic and Ukraine have worked their way through the system, leading to an approaching steady state. Unlike Truss, who planned huge levels of borrowing, an investment plan would be much more modest. And unlike her tax cuts, which can spike demand in the economy instantly, investment would raise demand much more slowly, thereby minimising any inflationary effects. 

Basically: allowing the Truss debacle to define your economic policy is like saying you'll never watch a film again because the last one had Jared Leto in it. Is Jared Leto dreadful? Yes, absolutely. The man has the acting skills of an ancient corpse. But is he a reason to swear off films for life? No, not quite, although the thought sometimes occurs.

Reeves is probably fairly open to this message, but she has a problem. That problem is the fiscal rules. 

The fiscal rules are a form of fantastical gibberish which gain credibility by the fact that people believe they're real. They're talked about with a level of seriousness which in no way reflects what they are. 

They are entirely invented, utterly political, and wholly arbitrary. One of the current rules, which Reeves is likely to maintain, is that debt will fall as a proportion of GDP in five years' time. The impact of this rule has been preposterous. In order to satisfy it, governments have cut investment spending that would have paid off in the long term, made policies less effective by fiddling with them to stay in the rule, conducted abrupt policy changes based on extremely uncertain five-year forecasts, and pencilled in utterly fanciful policies for five years time which they know they'll never deliver. 

You need to have some kind of fiscal rules. They keep ministers in check and prevent them from behaving too stupidly. It's just that these specific rules are very, very stupid indeed, as has been repeatedly demonstrated, for instance by these guys and these guys. 

Nevertheless, Reeves committed to these rules pretty hard ahead of the election. Presumably she knows they're nonsense, but she couldn't help herself. They're such an easy cut-out-and-keep demonstration of fiscal rectitude. Labour's manifesto simply said: "Our fiscal rules are non-negotiable and will apply to every decision taken by a Labour government."

What's the solution? Plainly it is to fiddle with the rules in a way that is too boring for most people to notice. But it's not too boring for me or you, of course. Our lives have so little meaning that we are prepared to take time out to understand these things. We are so fundamentally broken as people that we sometimes enjoy it.  

The most likely bit of fiddling is on the definition of debt. There are two different measures of government debt used in forecasting and policy making. The first is Public Sector Net Debt (PSND). And the second is Public Sector Net Debt excluding the Bank of England (PSND-ex BoE). That's an important distinction, because the Bank of England has been doing all sorts of wacky high-level interventions in recent years. It's been issuing loans to banks to encourage them to increase lending. It's bought loads of bonds as part of its quantitative easing programme and is now selling them for less than it bought them for. 

None of that really matters. All that matters is that the previous government calculated debt as PSND-ex BoE. But if the new one calculated it in terms of straight-up PSND, it would probably have more money to play with. Making the switch in the Budget last March would have secured the government an extra £16 billion. 

People call this 'headroom' because it sounds posh and suggests this is all terribly serious. It's neither. It's just fiddly bollocks. The debt would be the same as it ever was, but you'd shift the Excel document columns around a bit and - hey presto - you have more money now. 

If we're really lucky Reeves will do something more meaningful, for instance by getting rid of the five-year debt test and replacing it with a test for public sector net worth or public sector net financial liabilities. Either approach would be more conducive to investment and provide a more sophisticated test for government policy. 

There is also a second fiscal rule, which is rarely mentioned but in fact provides a very strong hint of how the next few years will play out. This is a new rule, which Labour is introducing. Or rather, it's an old Gordon Brown one, which it is reviving.

The rule is that the government will have a rolling target for the current budget balance. It means that day-to-day costs must be met by revenue, rather than borrowing. This is like the cash you use to pay for the shopping rather than the deposit you put down for a house. It includes all sorts of things - welfare, services, salaries. But crucially, it does not include investment.

That leaves us with a really quite striking conclusion: the government is establishing a set of fiscal rules which discourage borrowing for day-to-day spending, but encourage borrowing for investment. 

From a left perspective, we therefore have a really quite complex picture. On welfare and public services, it seems quite conservative. On state intervention and investment, it seems really quite left wing. But actually the picture is even more complex than that.

Undoubtedly, the need for current budget balance will require benefit cuts. The rows over two-child benefit caps and winter fuel allowances are just the beginning. There'll be more. People Like Diane Abbott, John McDonnell and Zarah Sultana will make a tremendous amount of noise about it and in many cases they'll be right to.

How necessary is all this? Well in a sense, not at all. Labour is simply incorrect to suggest there’ll be a bond market panic over a £1.4 billion saving like the winter fuel allowance. It’s preposterous tosh and everyone knows it’s preposterous tosh. But it is absolutely right to try and get day-to-day spending paid by revenue rather than borrowing. That is sound public finance and most radical economists would agree with it as a goal. They’re also right to worry about what happens if we don’t fix it before another crisis - another covid, another Ukraine - hits us. Then we’ll want to unleash the spending taps again, but the consequences of doing so at that point could be problematic.

The stories of individual cuts will dominate the narrative and it will be hard to discern the broader economic approach from the din. But there is one test, above all others, which really defines if we're back in austerity: the departmental budgets. 

The Conservatives pencilled in a one per cent increase in departmental funding. This is below inflation and therefore a real terms cut. Some departments are protected - health, education, defence and all that. But most are not. 

The Budget will provide our first glimpse of whether Reeves sticks to those plans. If she does, it'll be a godforsaken disaster. Certain departments will be pulverised. The knock-on effect on growth will be ruinous to Labours' overall economic plan. The abyss opens up: underinvestment leading to sluggish growth, leading to demands for even less investment, leading to even worse growth. The doom loop, with just enough of a gradient to deliver us into oblivion.

However, there are signs that Reeves is trying to avoid this outcome. Asked about the one per cent departmental spending figure on Radio 4 this week, she replied: "That was under the previous government. There will not be real terms cuts to government spending, but the detailed department by department spending will be negotiated." That's pretty mercurial - lots of semantic wriggle room there - but it suggests she wants departmental spending to at least match inflation. And given that her current account rule prevents her borrowing for it, a lot of that money is going to have to come through tax rises.

This is why the government has been issuing its doom-laden narrative to voters about the pain to come. It's because people react really, really badly to tax rises. They might tell pollsters that they're comfortable being taxed more, but when the individual tax is unveiled all hell breaks loose. I mean, look at the decision to apply VAT to private schools. The right-wing press has basically lost its fucking mind. How're they going to behave when it comes to the really emotive stuff, like inheritance tax? 

There therefore had to be a certain amount of pitch rolling and expectation management before the announcement. Did it go too far? Maybe. But you can understand why they did it.

So that's the lowdown. That's the most likely outlook for the Budget. Tightened belts in the short term to meet Labour's current spending fiscal rule. Higher investment in the long term as part of a reformed fiscal rule.

And what about the medium term? Labour will be hoping that the natural economic cycle returns us to growth. Interest rates will fall, which will help stimulate the economy and reduce the cost of national debt. The party's policy changes in planning and labour markets will stimulate the economy. Then, after a couple years, things will have improved, and there'll be money for more generous day-to-day spending on public services and welfare.

Labour will be mercilessly attacked over the next few years, in ways which make the current period seem innocuous. It'll be savaged by the right for tax rises and the left for welfare cuts. It'll be branded both socialist and neoliberal. 

None of that will be true. In fact, it is putting forward an interesting balance of traditionally right and left wing concerns. Some people will think it looks like a Frankenstein’s Monster. Some that it looks elegant and thoughtful. But whatever you think of it, there’s sound reasoning behind many of the judgements that went into it.

What’s lacking now is a clear communication strategy to actually explain it to people. That’s the real gaping hole in Labour’s economic policy.

Odds and sods

Lots of very clever people for helping me with this article, although the fact they did so doesn’t mean they agree with it - just that they were kind enough to talk me about it. If you want to keep up with this story, they are the best people to follow. 

James Smith, research director at the Resolution Foundation

Luke Raikes, deputy general secretary at the Fabians, who is on Twitter here and BlueSky here.

George Dibb, associate director for economic policy at IPPR, who is on Twitter here and BlueSky here.

Dominic Caddick, an economist at the New Economics Foundation, who is on Twitter here.

James Murray, editor of businessgreen.com and one of the most authoritative and plain-spoken figures on green investment. He’s on Twitter here.

John Springford, associate fellow at the Centre for European Reform and visiting fellow at the Institute for Policy Research in Bath University, who is one of the most reliable and thoughtful figures on these issues. He's on Twitter here but mostly BlueSky here.

And finally Jonathan Portes, who really needs no introduction. He's on Twitter here and BlueSky here.