Your support keeps us publishing. Follow this link to subscribe to our print magazine.

Labour’s Limited Ambition

By refusing to borrow or raise taxes, Labour is betting all its chips on growth to fund public spending — with no credible plan to stimulate it.

(Photo by Ian Forsyth/Getty Images)

When it comes to the limits of Labour’s ambitions for economic change, it is hard to know where to begin. In just a few weeks leading up to the Labour conference, the party has backtracked on three fundamentals that once underpinned its programme: green industrial investment, reforms to workers’ rights, and tax justice. In all likelihood, it won’t end here. We are headed into the next general election with the least ambitious Labour Party that Britain has ever seen.

Despite extensive criticisms from the Left of Starmer’s leadership, that wasn’t always the case. As recently as earlier this year, there was much to hope for in Labour’s £28 billion green energy pledge — a plan which, while overly reliant on the private sector, would still have seen significant expansion of the public role in the economy and represented a semblance of an attempt to tackle the climate emergency. The same could be said for the intention to introduce a single status for workers, a genuine blow to gig economy profiteers who have taken advantage of Britain’s lax labour laws to pilfer millions from workers.

Retreats on these issues were not isolated, of course, but formed part of an overarching logic. Rachel Reeves, Labour’s shadow chancellor, has made it clear that, when it comes to a choice between spending or sticking to Labour’s self-imposed fiscal rules, the rules would take precedence. The same determination underpins Keir Starmer’s refusal to commit to free school meals for primary schoolchildren or the 6 percent pay rise for teachers (in fact, party spokespeople have briefed viciously against even moderate Labour figures who supported these policies). This zealous adherence to fiscal conservatism comes at a time when food costs in the UK are continuing to rise rapidly, pushing an alarming 3.2 million adults and around 12 percent of children into food poverty.

Labour justifies its austere position by blaming the economic fallout from the short-lived Truss government. It claims that Kwasi Kwarteng’s mini-budget is the reason for higher interest rates and higher government borrowing costs, which is restricting its fiscal space — but the reality is far more complex. Most of the negative consequences from the shambolic Kwarteng mini-budget, such as a depreciation of the pound sterling and sell-off in the gilt markets, have already been reversed. The pound’s exchange rate against the US dollar has recovered; and yields on gilts stabilised once Truss was forced to row back on her unfunded tax cuts for the rich in order to protect the solvency of pension funds.

A run on the gilt market is the main justification for Labour’s anxiety surrounding borrowing to spend. That is a weak enough argument in itself — but becomes even more starkly right-wing when combined with a refusal to raise any taxes at all on the wealthiest in society. Rachel Reeves was definitive on this point in late August, ruling out everything from wealth taxes to mansion taxes, capital gains tax increases, and even higher income tax for the top earners. If the party isn’t willing to borrow to spend, and won’t increase taxes to spend, surely it is simply committed to the continued emaciation of public services and immiseration of workers?

Not so, says Labour. And here we get to what can best be described as the ‘magic beans’ of the party’s economic prospectus. Instead of borrowing or raising taxes, Keir Starmer hopes to raise funds by stimulating growth. How, you might ask? Well, no clear answers have been forthcoming. Instead, there have been vague gestures to the Blair government’s record. Unfortunately for Starmer and Reeves, and their colleagues, conditions for growth today are far more challenging than when the previous Labour government came to power.

Zombie Blairism

There is still contention over the extent to which the period of strong growth during the previous Labour government’s tenure was a result of its policies or its ‘free ride’ off the back of strong economic headwinds globally. The standard narrative is that growth under New Labour was fuelled by financialisation — in particular, unsustainable bubbles in the financial, property, and oil sectors. There is certainly an element of truth to this story, as financial services economic output in the UK increased from around 6 percent to 9 percent of UK’s gross domestic product (GDP) between 1997 and 2008. Equally, house prices during the period increased by around 55 percent, enabled by lax regulations on bank lending. In all, financial services accounted for nearly 20 percent of growth under New Labour.

But this isn’t the whole story: an even more significant contributor to growth during this period was distribution services, which deliver services from manufacturers to customers. The rise of distribution services coincided with the process of globalisation and, specifically, the offshoring of the more capital-intensive manufacturing activities to developing countries, allowing multinational corporations to access cheaper labour markets. Naturally, offshoring more labour-intensive industry resulted in higher productivity and allowed the UK (and other rich countries) to increase profit margins, create jobs in higher ‘value-added’ sectors, such as services, and subsequently increase tax revenues that could be used to implement policies like tax credits targeted at alleviating child poverty. This was a feature of not only the British economy but of most Western economies in the late 1990s and early 2000s.

But whichever angle you take on the successes of Blairism — whether it was financialisation or globalisation which delivered its growth — it is clear that these phenomena no longer yield the results that they once did. Britain now has one of the most financialised and globalised economies in Europe, but its growth remains anaemic. In fact, the Bank of England predicted this August that GDP growth would be just 0.8 percent this year, 0.3 percent the two years after that and just 1.1 percent in 2026. If that forecast is borne out, it would be the longest period of stagnation in the post-war era.

Add to this the fact that the world economy is, to some extent, de-globalising, and it becomes even harder to see how Blairism can be repeated. The Covid-19 pandemic highlighted the fragilities of globalisation, and, as a result, many companies and governments are making efforts to ‘re-shore’ production in an effort to create supply chain security. Climate change is, of course, adding to this problem, with higher temperatures disrupting manufacturing and crop yields falling across the globe, increasing costs for businesses and consumers.

Lurch to the Right

Despite this, Labour has committed to ‘secure the highest sustained growth in the G7’ during its first term in office. But, unsurprisingly, the document in which it makes this commitment contains precious little explanation of how such an outcome could be achieved. In place of clear policy proposals, it introduces five ambiguities: providing certainty and stability; seizing new opportunities; ensuring all parts of the country contribute; giving working people skills and opportunity; and building a resilient trading economy.

It’s a useful rule in politics to assume that a statement is meaningless if you can imagine it being uttered by any politician, regardless of their persuasion. These five vague gestures towards a better Britain fall perfectly into that category. Remember ‘strong and stable’ government? What about the ‘levelling up’ agenda? And ‘Global Britain’? We’ve heard all this before from the Tories — and not long ago either, but in the past five or six years. What’s to say that Labour’s commitments to these ideas are any more serious?

If Labour was genuine in its plan to outstrip other G7 nations in terms of growth, you might expect the party to have rigorous plans for boosting public investment. As research from the Institute for Public Policy Research (IPPR) think tank recently showed, Britain has lagged disastrously behind other G7 nations on this score. In fact, if the British government had even invested on par with other G7 nations between 2006 and 2021, it would have injected an extra £208 billion into the economy — enough to build another thirty Elizabeth lines.

The argument that Britain’s anaemic growth is tied to rock-bottom levels of public investment shouldn’t be alien to Rachel Reeves. In fact, it was an argument she herself once made. In 2010, shortly after being elected MP, she laid out her cure for the country’s economic ills in the social-democratic journal Renewal. She was clear about the solution: ‘We need a strategy to get the economy going again,’ she wrote, ‘and by more than the 1 to 1.5 per cent that is forecast for this year. This requires a government that actively intervenes: it means investment in infrastructure.’ And how would this investment be funded? ‘The banks and those earning more than £100,000 could quite easily contribute a little bit more — and unless they do, inequality and poverty will inevitably soar in the months and years ahead.’

To Reeves’ credit, that article was penned thirteen years ago. Plenty of her colleagues have achieved similar about-faces in thirteen weeks or thirteen days in more recent times. But it is still a remarkable passage because it poses the obvious question: when did she change her mind about what the British economy needed — and why? When the entire economic establishment, from the Organisation for Economic Co-operation and Development (OECD) to the IMF and even the Institute for Fiscal Studies, is now in favour of increasing tax on wealth and property, why has Labour suddenly veered dramatically to its right? This is a question that will haunt many advocates of the Starmer government as it fails to come to terms with the scale of Britain’s economic malaise in the years to come.

Bleak Future

When it comes to tax increases, Labour will point to plans to abolish the non-dom scheme, or end the carried interest tax loophole for private equity firms. But these would raise at best a few billion pounds. This is nowhere near the amount needed to finance a serious industrial strategy, for example, nor is it enough to fix Britain’s broken public services and provide the NHS with the funding it needs to retain staff and reduce waiting times.

In response to criticisms of Labour’s tax policy, Keir Starmer argued that he wants to ‘grow wealth’ in the UK — but the UK is already ranked sixth in the world in terms of GDP. The issue is how that wealth is distributed. The top 1 percent of the population in the UK accounts for around 8 percent of the total income. A significant portion of the top incomes comes from ownership assets such as shares, which pay out dividends that are taxed at a lower rate than wages. Equalising the rate of dividends and capital gains tax with income tax, and charging National Insurance contributions on those incomes, would raise around £35 billion annually — more than enough to cover Labour’s green energy pledge and give public sector workers the pay rise they need.

Even with taxation, some amount of borrowing for investment would be necessary to stimulate growth. As Labour acknowledges in its five-point plan, private sector investment in research and development is among the lowest in the G7. That is despite years of slashing corporation tax and giving businesses generous tax credits. Part of the issue when it comes to government borrowing is the bogus Treasury accounting conventions, which recognise the liability side of the government balance sheet but not the revenue-generating assets which the debt is used to purchase.

While there are reasons to be cautious about borrowing, Labour is going out of its way to overstate the case for these concerns. While the cost of government borrowing has shot up recently, it is still relatively low by historic levels. According to Alistair Darling, former Labour chancellor, borrowing for capital investment in a strategic growth plan shouldn’t cause the same kind of panic in markets that the mini-budget did.

One caveat often cited with the ‘borrow and spend’ growth strategy is that it may contribute towards inflation. But this could be counteracted by a Labour government making good on its promise to strengthen collective bargaining rights to ensure that wages keep pace with or exceed inflation. If wages increase in line with inflation, but asset prices remain stable, this effectively redistributes wealth from asset owners to wage earners. It would be a powerful pro-worker policy befitting a Labour government. Getting the policy balance right to achieve that outcome could be tricky, but there is a growing body of evidence that businesses have capacity to absorb higher wage costs.

A recent report from the IMF found that nearly half of all euro-area inflation was attributable to corporate profits. This trend may be even worse for the UK, where profit margins for British firms have risen by nearly a quarter since 2019. Despite this evidence, the Bank of England continues to punish workers for inflation, adding to the cost-of-living crisis with higher debt-servicing costs. Its aim is to bring inflation back to the 2 percent target by increasing unemployment and therefore weakening workers’ ability to bargain for higher wages. The purpose of this policy is not to protect ordinary people from inflation, but to protect financial profits.

In this context, Labour’s retreat from its New Deal for Working People agenda is even more damaging. In recent weeks, it has watered down its commitment to transformative collective bargaining policy: where once the party proposed to roll out ‘Fair Pay Agreements’ across the whole economy, now it only promises them for the social care sector. This, in addition to backtracking on a single status for workers, amounts to abandoning the most transformative aspects of the early Starmer programme. And doing so while almost every other economic lever is being levied against workers.

It is worth remembering — as Labour regurgitates the Cameron–Osborne era pablum about ‘reckless spending and borrowing’ and ‘ironclad discipline’ — that austerity failed even on its own terms. It saw government debt increase from 65 percent of GDP to over 85 percent. This year the debt to GDP ratio reached over 100 percent, the highest level since 1961. As far as these policies are concerned, the verdict is in. We know where they lead: a guaranteed path to economic decline and social decay.

But Labour will plough ahead regardless, offering the country the magic beans of growth without public spending or investment. Our only hope is to provide an alternative when it fails once again.