By six o’clock yesterday morning, with many seats still to declare, weary pundits could already be heard predicting that when Labour failed to deliver real change it would suffer a populist beating of the sort Emmanuel Macron is currently receiving in France. The logic for this is that Labour is inheriting a dire economic situation: debt is around 100 per cent of GDP, growth is stagnant, public services are desperately in need of investment, councils are going bankrupt and much of the new government’s spending power has been curtailed by the partisan chicanery of the previous chancellor. In this line of thinking, Labour will only be able to begin cleaning up some of the mess before it’s time for a new political crisis.
It might not be as bad as all that, however. One under-appreciated point proved by last night’s results is that despite all the energy the Conservatives spent telling voters that they pay too much tax (and that they will pay still more under Labour), the electorate generally did not seem to mind. A poll conducted by the asset manager Abrdn in the final week of the campaign found that tax raises (to pay for public services) were twice as popular as tax cuts. An earlier poll by Ipsos had found that 60 per cent of people would accept higher taxes to pay for NHS funding. Even in wealthy constituencies (Chelsea and Fulham, Hemel Hempstead, Aldershot, Basingstoke) in which the threat of VAT on private-school fees or higher rate of capital gains tax would actually impact people’s finances, Labour took seats from the Tories. The party has a mandate to raise taxes, because voters were well aware they were likely to do so; the Tories reminded them at every opportunity.
Labour may also benefit from the fact that its approach is fundamentally more interesting to investors. Every party manifesto had its own dodgy arithmetic, but the dodgiest sum of all was the claim that a pound borrowed for public investment is equivalent to a pound borrowed for a tax cut. This is very much not the case. Business investors see the former as much more encouraging (we’ll build the new offices near the new train station), as do the bond markets from which the government borrows (countries that build train stations reliably pay their debts). Using debt for investment rather than giveaways incurs benefits that aren’t factored into the crude arithmetic of a manifesto.
There’s also the question of timing – spectacularly ill-advised on Sunak’s part, but possibly just right for Labour. The most recent monetary policy report from the Bank of England predicts that inflation will increase slightly this year and then fall below target for years to come. It is likely the Bank will cut interest rates – slowly and incrementally, as it raised them – which should help consumer sentiment. Lower inflation also reduces the UK’s debt burden; the interest on our national debt rose sharply with inflation because so much of our debt is index-linked, but it works the other way.
The debt burden might also be reduced by some rearrangement of the losses the Treasury is currently incurring on QE (a plan I’ve done my best to make interesting here). Last week, analysts from Barclays and other banks predicted Labour could save £20bn by tinkering with the interest it pays on these reserves. There are serious problems with this idea, but the willingness of banks to talk about it suggests they may be interested in negotiating with a reasonable government now, rather than waiting for Nigel Farage to force the issue in future.
The very high levels of immigration and inequality that led four million people to vote for Reform will not be cheap or easy to address, nor will the finances of local authorities or water companies or universities. But Labour is not without options, and the economic picture could be a lot worse. The IMF has described the UK’s trajectory as a “soft landing”; it is in the new government’s power to turn this into a bounce.
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