Assume that the opinion polls are right. Suppose that, at some point in 2024, Sir Keir Starmer wins a three-figure majority. What then?
The laws of economics are as cold and inexorable as the laws of mathematics. At some point in the next Parliament, Britain seems likely to face a budget crisis. Nearly two years after the lifting of the last Covid restrictions, it is plain that we are never going to return to pre-lockdown spending levels. Government expenditure, which was below 40 per cent of GDP in 2019/20, is now closer to 50 per cent. We spend more on servicing our national debt than on defence.
No one thinks this is sustainable; but no one is brave enough to do anything about it. Most MPs, including many Labour MPs, vaguely acknowledge that what were supposed to be emergency spending levels cannot carry on. Yet propose any specific cut and they howl with rage. Even boosting growth without cutting spending – by, for example, removing regulations – is politically unacceptable. Ask Kwasi Kwarteng.
But the laws of economics don’t care about public opinion. If something can’t carry on, it doesn’t. Sooner rather than later, the money will run out, and Britain will find itself in a full-on sterling crisis. Cuts which were considered unthinkable will turn out to be inescapable.
To find a comparable moment, we need to go back to 28 September 1976. The then Chancellor of the Exchequer, Denis Healey, was sipping a large gin and tonic in Heathrow’s VIP departure lounge when he learned that sterling was plunging. He rushed back to the Treasury to announce that Britain was applying for a record $3.9 billion IMF bailout.
While Healey negotiated terms with IMF officials, the Prime Minister, Jim Callaghan, tried to make his party understand the gravity of the situation. “For too long this country has been ready to settle for borrowing money abroad to maintain our standards of life,” he told stony-faced Labour delegates in Blackpool. “We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists…”
Only when Britain was, as The Economist put it, “bust”, did spending cuts become feasible. Even the NHS saw its budget cut in 1977, after the bailout – by 3 per cent in real terms.
People the world over vote for free stuff for as long as they believe it is there. It takes a cataclysmic shock to convince them that there really is nothing left in the kitty rather than the problem being with greedy politicians or rich tax avoiders.
Argentina went through a century of decline, yet kept voting for conmen who claimed that there were painless solutions. Since 1980, inflation there is believed to have run at an average annual rate of 206 per cent. Only now, after trying everything else, have Argentine voters accepted the need for smaller government.
Last week, their new libertarian president, Javier Milei, announced spending cuts equivalent to 2.9 per cent of GDP, reducing energy and transport subsidies and the state pension, and abolishing nine of Argentina’s 18 federal ministries.
If his people can hold their nerve, growth will return.
If you think Argentina is too distant to be of much relevance to us, consider our closest neighbour. Ireland was so badly hit by the 2009 euro crisis that it had no choice but significantly to reduce public spending.
The 2010 budget saw a four per cent reduction in welfare payments, a €16 a month cut in child benefit and a lowering of Jobseeker’s Allowance. Government employees took pay cuts of between five and ten per cent. All this after the already tough 2009 budget, which had seen cuts in everything from ministerial pay to university tuition.
In Britain at that time, the mild restraints imposed by the Coalition government were howled down as a return to Dickensian workhouses. Yet Ireland, which made big cuts, rather than simply offering smaller than expected increases, was positioning itself for a strong recovery. It has grown significantly faster than the UK since 2012.
Sir Keir, though cocky about winning office, knows that our economy has never properly bounced back from the financial crisis, let alone the lockdown. He grasps that taxes cannot go much higher. Sure, they give a government immediate cash, but they shrink the revenue-producing part of the economy, so reducing its future income. Which is why, other than its raids on private schools and non-doms, Labour proposes no new taxes.
What, then, can Starmer do to avoid the fate of Callaghan? In theory, he could make measured and judicious cuts early in his term to avoid more severe ones being forced on him later. He could also find ways to stimulate growth, so that the proportion of the economy controlled by the state can fall in proportionate terms, even while stable in absolute terms.
Labour has historically found it hard to do these things. Even if it wanted to – and few Labour candidates go into politics to scrap regulations – the party comes under far greater pressure than the Tories on public sector pay. That is why Labour tends to leave office with the public finances in a worse state than when it arrived.
Yet there are things that Starmer could realistically do to stave off the financial crisis. I don’t expect him to contract out his thinking to a Sunday Telegraph columnist but, in the spirit of Christmas, let me suggest three policies that I think he could get away with in a way that the Conservatives cannot.
First, he could bring the NHS into line with European healthcare systems, where public and private provision coexist. The NHS is arguably the single biggest drag on our growth, both directly and indirectly.
Directly because it soaks up around a tenth of our GDP, and the huge increases in its budget over the past 20 years have not been matched by commensurate improvements in performance. Indirectly because it produces poor outcomes, keeping an unusually high proportion of our population off work.
Labour recognises the problem. In October, the Shadow Health Secretary, Wes Streeting, said, “Pouring ever-increasing amounts of money into a system that isn’t working is wasteful in every sense.” Yet it seems his only hard policy commitment is to spend even more on reducing waiting lists. If he has plans to expand the Blair-era internal market, he is keeping quiet about them.
Second, Labour could build more houses, offering an immediate GDP boost through construction and making the whole country more productive by lowering the cost of housing, giving people more disposable income. This is the one suggestion that I think Starmer intends to pursue. He has promised to build one-and-a-half million new homes and to lift the nooses from around our cities that are misleadingly called “green belts”.
Third, Labour could cut benefits without being accused of murdering the poor. It could even tackle the single most unaffordable aspect of our welfare state, namely the triple-locked state pension. Successive governments have refused to allow the retirement age to rise in line with longevity, as happens in Sweden. Given the demographics of their base, the Tories’ timidity might arguably be politically (not economically) justified. Labour would find it much easier to make the case for ending this generational bias against the young.
Doing these things would allow Starmer to get in front of events, avoid the economic meltdown and so increase his prospect of re-election. But the likelier scenario is that, like every Labour leader before him, he will leave things until too late. Then, and only then, will public sector unions and Uncut activists understand what actual cuts look like.
