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  1. Election 2024
  2. Labour
30 January 2024

Labour’s strict spending rules could split a Starmer government

Without economic growth, tensions between the leader and Rachel Reeves could emerge.

By Freddie Hayward

Speculation over whether Labour will drop its commitment to spend £28bn a year on green investment has become a serious distraction for the leadership. This is partly because Westminster thrives off needling uncertainty and holding politicians to account for inconsistency. But the policy also infuriates some of the shadow cabinet. It is eclipsing Labour’s proposals on crime, health and infrastructure. At the same time, uncertainty over the £28bn figure feeds the perception that Keir Starmer does not have a plan for government, that he vacillates and abandons previous promises.

Why the controversy? Because Starmer’s and Rachel Reeves’s interviews in recent months have equivocated over whether they will spend the money – something Reeves first committed to in her 2021 conference speech.

The party line is that nothing has changed: that Labour will aim to invest £28bn a year by the second half of the next parliament – subject to the party’s fiscal rules. So what are those fiscal rules? Few in Labour could tell you. The Financial Times reports with certainty that Labour’s key fiscal rule is to ensure debt falls as a share of GDP within a five-year period. Hang on. Is that a fixed five-year period, as in debt must fall by 2029? Or a rolling five-year rule, in that debt must fall five years on from each year’s forecast?

Clarification is not forthcoming. Which is an interesting strategy: a party that wants to steady the gilt markets creating uncertainty over its borrowing plans. I think Labour’s policy is strategic ambiguity. I would not be surprised if it surreptitiously introduces a ten-year debt reduction rule. There is political cover: “a decade of national renewal” is central to party messaging now. And a Labour document – which, I must stress, includes the promise that “Labour will have a target to reduce the debt” without a time frame – also states: “Instead of the current five-year projection from government, we’d project public finances over ten years and provide estimates for an additional ten years.”

You might be asking why this is so important. The answer is simple: whether Labour can spend more money on your hospitals, whether it can increase defence funding in the face of Russian aggression, whether it can invest in our ailing transport system is determined by these fiscal rules. What dictates how a government changes the lives of those in this country is the fiscal framework it adopts. And to those who say the fiscal rules simply reflect the underlying ideological perspective of the government at the time, I would say that is the point. These fiscal rules are an insight into how a Labour Treasury would govern the country.

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I can already hear those who say a chancellor can change the fiscal rules at will. What better reason for them to be at the centre of political debate? If they are so easy to change why does Labour so devoutly cling to the government’s? Is it because Labour has accepted the fiscal framework the government created in the understandable hope that doing so closes down accusations of left-wing profligacy? Probably.

For now, Starmer seems happy to outsource economic policy to Reeves. But that might not last for long. Starmer is an institutional reformer. He will recognise that public services’ dire position requires more money. Labour’s response to any question over its fiscal policy is that future problems will be resolved by economic growth. But what if that doesn’t materialise? Tensions will arise. Here are some spending requirements a future Labour government might face: Ukrainian reconstruction, Gazan reconstruction, the green transition, oppressively high levels of regional inequality, rampant bankruptcy among local councils, a university system dependent on foreign students, an economy desperate for investment, a depleted armed forces.

The ongoing uncertainty around the £28bn pledge is more about politics than the policy itself. Whether Labour actually spends that money is dependent on economic growth and its fiscal framework – as the party says. Those in Labour fighting to retain the commitment might have a better chance of success, not by asking Starmer to commit to the policy in interviews, but by pushing for a change to the fiscal rules.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here.

[See also: Sunak’s smoking ban looks like legacy politics]

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