Why condemning austerity won’t be enough to restore Labour to power

Faced with a more interventionist Conservative Party, Keir Starmer needs to deliver a more fundamental critique of British capitalism.

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Keir Starmer’s speech this morning was billed as his first major intervention on the economy and a defining moment of his leadership. Cleverly framing Labour’s economic programme around security, the speech's references to technology and the future are reminiscent of the party’s most successful election-winner, Harold Wilson, rather than its second-place contender, Tony Blair.

Starmer rightly identified a decade of austerity as leaving the UK underprepared for the Covid-19 pandemic, citing the Marmot Review. Austerity hurt the economy and society, and damaged public health. Starmer’s attacks were sharp and the policy divide with George Osborne made obvious. Labour has a clear route to victory in the general election of 2015.

Alas, cruel fate has determined the party has to fight an election in 2024 instead, and against Boris Johnson – a frighteningly adept politician who, on three occasions, has won major elections – twice as London mayor, once as Prime Minister – by failing to live up to the left's Thatcher-worshipping stereotype. Starmer correctly recognised that the pandemic has “shifted the axis” of belief about what government can do – but Johnson has spotted the same. He and those around him are starting to lay out a programme for a reinvigorated, economically interventionist and environmentally-tinged Conservatism, which, if they pull it off, could plausibly cement the party in power for the next decade.

[See also: Keir Starmer has an economic policy. What he doesn't have is a strategy

Labour’s aim should be to disrupt that effort as far as possible – not to goad them into making it happen. But the problem with claiming that your opponents are small-state Thatcherites, ideologically driven to impose spending cuts, is that it lowers the bar for them demonstrating otherwise. If Labour are insisting the Tories are going to slash public spending, Rishi Sunak needs to loosen the purse strings only a little to disarm the attack line.

As it happens, even ahead of lockdown, Sunak’s first Budget raised day-to-day public spending by around £18bn. Johnson’s first act, upon becoming Prime Minister in 2019, was to promise to reverse cuts to schools funding – a specific, damaging weakness for the Tories in the 2017 election. Everyone from the OECD to the IMF to the Financial Times has turned against austerity; it is unlikely that a Conservative government is going to move too far away from the elite consensus. This should be taken as a warning about the future. It’ll be even more difficult if, as some Tories are now urging, Sunak introduces a version of a wealth tax.

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No part of the left, including Starmer’s most vociferous critics, is well-prepared for Red-Green Toryism. Our intellectual armoury is depleted. The 2019 campaign did much damage to the left, at least some of which was through a manifesto which confused more public spending with greater economic radicalism. Labour’s default setting is to try and offer more spending. Ed Ball’s time as shadow chancellor, when he failed to fully oppose cuts, was a strange deviation, and John McDonnell a return to the norm.

If the Tories pursue “conservative social democracy”, Labour will have to deliver a more fundamental critique of British capitalism. There is a pressing need for the party to pull the left out of its collective comfort zone – not only promising higher public spending, but detailing a new political economy for the country. The British Recovery Bond offered a glimpse of the form this could take.

Sunak’s Treasury and the Bank of England are betting on a sudden rebound in consumer spending as social distancing restrictions are eased. The governor of the bank, Andrew Bailey, and its chief economist, Andy Haldane, have made some strikingly optimistic claims about an imminent spending spree on the basis of £120bn of savings that some households have accrued over the pandemic.

There’s no doubt that a loosening of social distancing will see some return to economic growth. But a closer look at the figures shows that growth at the end of last year was mainly due to the test-and-trace programme – that is, to government spending. The Bank of England’s own surveys suggest that only a small number of these mostly middle-class savers intend to splurge. Understandably, people are worried about the future and looking for security.

But let’s say these savers do rush to spend. Given the pattern of the last few years, one that has accelerated dramatically during the pandemic, this will increasingly mean spending online. That does nothing for the high streets that have been struggling for years. Simply expecting people to spend their savings would mean reinforcing the economic problems that the pandemic exposed.

Instead, recovery bonds, aimed at these savers, backed by government and promising longer-term returns could be used to turn household savings into actual investment. I’ve previously suggested this should be done at a local or regional level: with local and Combined Authorities still constrained in their borrowing, but with large sums now held by at least some households, there is a potential to mobilise these savings for the recovery. The funds could be used for local infrastructure investment or, with the right institutional framework, for investment in local businesses.

Handled correctly, the recovery bonds proposal could, perhaps, point to an alternative political economy for Labour. In his speech, Starmer spoke of the role of businesses in the recovery, and of the “partnership” between businesses and employees. This is standard social democratic rhetoric: every Labour leader, and every Labour shadow chancellor, including Jeremy Corbyn and McDonnell, has said the same thing.

The political gains for Labour will be in starting to define how that partnership might operate at a local level, in opposition to Tory centralisation: how small businesses, performing essential services for the community, can be sustained and supported; how investment capital can be delivered by innovative means such as recovery bonds to smaller enterprises; how industrial strategy, instead of being defined by the biggest exporters and the largest employers, can be turned towards supporting smaller businesses in essential sectors such as care work. Support can and should be shifted towards employee and co-operatively owned enterprises.

Starmer’s speech moved him beyond the purely reactive mode on the economy he has occupied so far, and laid some directions for future travel. But Labour needs to concentrate squarely on the political economy of 2024.

[See also: In an era of crisis, Conservative MPs are embracing the state]

James Meadway is an economist and Director of the Progressive Economy Forum.

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