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16 January 2025

Rachel Reeves will soon need to pick a side

The Chancellor is caught between the neo-Croslandites and the neo-Blairites.

By George Eaton

It’s been a better week for Rachel Reeves. On Tuesday, the Chancellor comfortably dismissed the shadow chancellor Mel Stride’s cod-Shakespearean performance in the House of Commons. (“You can see what happens when the leader of the opposition tells the shadow cabinet that they shouldn’t have any policies,” Reeves quipped.)

Then yesterday an unexpected fall in inflation to 2.5 per cent saw UK bond yields plummet – reducing the government’s borrowing costs – and raised hopes of a cut in interest rates by the Bank of England next month.

Finally, figures released this morning suggest the economy – just – returned to growth last November (having contracted by 0.1 per cent in the two previous months). But output of 0.1 per cent was still below forecast growth of 0.2 per cent.

That’s a small instance of a familiar story – the UK underperforming expectations. Though the Office for Budget Responsibility has a reputation for being gloomy, its forecasts have actually tended to be over-optimistic.

The UK’s anaemic performance has led to an increasingly existential debate. The charges are varied: that Labour lacks a theory of growth, that it lacks a growth plan, and that Britain itself lacks a “growth preference”.

Reeves’ view is that last autumn’s Budget was “balanced”. Some wanted her to be more radical on taxation – equalising capital gains tax rates with those on income, say – while others wanted her to be more conservative. She ultimately sought to strike a balance between the needs of public services and the needs of business (the two, of course, overlap at times).

But this balancing act becomes a lot harder if growth disappoints. Reeves risks finding herself caught between two Labour tribes: the neo-Croslandites and the neo-Blairites (to borrow David Klemperer and Colm Murphy’s useful typology).

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The first – named after the pioneering late cabinet minister Anthony Crosland – would like to see Reeves focus on repairing public services in this June’s Spending Review (even at the cost of raising taxes again). They want her to scrap the two-child benefit limit as part of an anti-poverty strategy. They favour an increased focus on income inequality as well as economic growth. They hated the winter fuel payment cuts (and privately warned her against them).

The second – the inheritors of the Blairite tradition – have different priorities. They argue that by raising taxes by £40bn – and concentrating the burden on firms – Reeves has created a negative environment for business. They fear Labour’s workers’ rights measures will have a similarly chilling effect. They worry about waste in public services and “producer interests”. They would like to see a fuller embrace of AI, the private sector and, in some cases, the EU.

Economic growth helped the last Labour government to manage such tensions. A booming City of London delivered the tax revenues that the Croslandite Gordon Brown used to fund anti-poverty programmes. Labour was able to deliver higher public spending while also keeping taxes low by European standards.

But the 2008 crash destroyed this bargain. Brown broke Labour’s pre-election promise by raising the top rate of income tax to 50 per cent (at 45 per cent it remains higher than the Blairite norm) and introduced a marginal rate of 62 per cent on earnings over £100,000. Public spending cuts would have followed under a Labour government in the next parliament (as Brown eventually conceded).

All of his successors have faced a version of the same dilemma: how do you manage a stagnant or shrinking economy? This is precisely why Reeves sets so much store by economic growth – to avoid grim fiscal choices. It’s also why, unless output improves, the Chancellor will be forced to pick a side.

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

[See also: How damaging is the Tulip Siddiq affair for Labour?]

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