Safety first is usually a good strategy in politics as in life, so Keir Starmer and Rachel Reeves are sensible to adopt the same cautious approach to taking power as Tony Blair and Gordon Brown took in the 1990s. Their commitment to avoid any sudden changes in economic management is psychologically as well as economically reassuring after the extreme turbulence and damage of the last decade—most of it self-inflicted by five failed Tory prime ministers: Cameron (austerity plus Brexit), May (hard Brexit), Johnson (even harder Brexit, during Covid), Truss (hard Brexit plus wild unfunded tax cuts) and Sunak (sticking to hard Brexit, although sorting the Northern Ireland crisis).
The question is what comes second for Starmer and Reeves after safety. In the case of Blair and Brown, a strongly growing economy and low government debt enabled them to fund the transformation of public services by the simple device of not cutting (most) taxes and putting the government’s extra tax income from the proceeds of growth into the welfare state. This enabled health spending to treble, education spending to double, and public services at large to increase substantially across the 13 low inflation years of New Labour government. Boldness also came in public service reforms instituted alongside this new investment, like academy schools, university tuition fees and more patient choice in the NHS.
By contrast, Osborne and Cameron threw caution to the wind in their approach to austerity on taking office, savagely cutting their inherited public service and welfare programmes, and cutting income tax on the wealthy. Then their second act in 2015 was announcing a crazy Brexit referendum which produced both a sudden shock and even greater cumulative economic damage under their successors.
With the economy on the edge of recession, and government debt roughly doubled since 2010 and now larger than annual economic output for the first time since 1961, it doesn’t look as if Starmer and Reeves will be gifted any fruits of growth for their second act. So their boldness needs to come from elsewhere if they are to fund their (albeit now scaled back) £28bn annual green investment ambition let alone the investment needed to rescue the NHS and state education systems.
The question is whether Starmer and Reeves can do things beyond mere stability which are big and positive to boost growth and increase tax revenue.
The temptation will be taxation of the very wealthy to fund health and education. VAT on private school fees and the end of non-dom tax status will produce welcome but comparatively small sums. Is there a bold yet beneficial tax reform which could prove transformational? I believe it lies in property taxation, which could capture substantial income from huge pools of largely unproductive and untaxed property investment by the wealthy.
A successful reform of council tax to achieve this goal would yield a huge boost to the public finances over time. The main casualty would be today’s inflated house prices, especially at the top end of the market, a long overdue corrective which the increase in interest rates has already started. It can probably only be done successfully by stealth, with changes phased in over many years. So too with planning reforms to boost housebuilding nationwide. The important thing is to start both these changes soon after taking office, and not to make any election pledges which hinder progress thereafter.
The other obvious and huge economic win would be to reverse Brexit. This too needs to start by stealth immediately after taking office, with changes to Boris Johnson’s Brexit deal to promote trade and pan-EU travel and business, if not residence.
The problem is that stealth alone cannot achieve transformational change on Brexit, and Labour’s manifesto is likely to rule out anything really transformational like rejoining the single market.
So Labour’s second act remains problematic. I can see what it might be, but only a partial strategy for getting there. But it is still more than a year before Labour is likely to take office, and as I remember very clearly from 1996, there wasn’t much vision then of the reforms to come. Just a direction of travel. It is the same today.
