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20 March 2024

Can Rachel Reeves escape austerity?

Labour’s decision to accept the government’s debt rule means a brutal spending squeeze unless it can deliver growth.

By Freddie Hayward

Last night in her Mais Lecture, Rachel Reeves gave us the most comprehensive glimpse yet into what she would do as chancellor. But there’s a mismatch at the plan’s heart. 

Reeves has set herself an extraordinarily high bar. She wants to build a new economic consensus, reverse national decline and achieve the highest growth in the G7. In her speech, she defined herself not only against recent Tory chaos, but the Thatcherite paradigm that has ruled since 1979. “Ever closer global economic integration” was dismissed as “economically naive and politically reckless”.

As George points out, attacks on New Labour were also laid on thick. She criticised its insecure and regionally unequal economic model that pumped the City and then distributed the proceeds to the poor. Such models are inadequate in the face of what she calls our new “age of insecurity”. And the stakes are high. She turned to the political economist Karl Polanyi to argue that restoring economic growth is central to containing populism. Reeves cast herself as the chancellor to bring about a new economic system that would fix Britain’s fundamental problems such as low growth and inequality. 

At the same time, the means by which Reeves intends to achieve these goals are extraordinarily familiar. Her central idea was that Labour would provide economic growth through stability. Talk to any business and they will tell you how damaging the disruption of the past five years has been. But stability is arguably the baseline from which change occurs, not, as Reeves claimed, change itself. It is hard to argue that there was not relative political stability before 2016. Ditto her plans on pro-union measures. She acknowledged her plans will only reverse changes since 2010 (although they will go further on workers’ rights).

Reeves went on to confirm that Labour would retain the government’s fiscal rule that debt should fall in the fifth year of the forecast. The decision piles pressure on Labour to deliver immediate economic growth. This is because the spending cuts the government’s fiscal rules imply are brutal. By signing up to the government’s fiscal rules, Labour has signed up to this problem. Reeves’ solution is to grow her way out.

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Where will that growth come from? Some in Labour are banking on a “stability premium” from business investment triggered by the end of Tory chaos. Others mutter sceptically about whether whittling down the planning process can deliver growth quickly enough to stave off these difficult cuts. However swift the planning approval, they note, the houses and infrastructure themselves must still be built. Throw in concern around the supply of materials and labour, and the party’s quick fix looks uncertain.

At the same time, Reeves has pivoted from advocating mass public investment to creating the conditions that boost private investment – a theme of Rishi Sunak’s own Mais Lecture in 2022. This has its roots in her response to the mini-Budget of September 2022. Back then, she chose not to rally behind public investment by arguing that investment leads to growth which, in turn, rebalances the public finances. Instead, she claimed that higher interest rates and debt levels made public investment less necessary. The mini-Budget caused Reeves to drop the £28bn green commitment and instead promise to unlock billions in private investment.

This lecture was the behind-the-scenes script, the first principles she would turn to when taking decisions as chancellor. Gone was the thunderous flair she displayed at conference. In came a studied, 7,895-word exposition of her economic vision, replete with quotes from Bernard Williams. It was a comprehensive rejoinder to the government’s accusation that Labour has no substance. Reeves rejected the status quo and yet retained key aspects of the current fiscal framework. We know her stated preferences. (Though we might not know her revealed preferences for a few years.) The question is not what Labour plans do in government. The question is whether it will work.

[See also: Among Conservatives, the mood has never been so grim]

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