The Labour Party conference in Liverpool this week was a nervy business, party activists traipsing its corridors, all a little more glum than might have been expected. Labour almost never wins and secures landslide victories even more rarely, yet if a word summed up the mood it was anxiety. Angst, probably, about what is to come – a sense that this might be as good, politically, as it gets.
Political constipation among Labour activists, almost conditioned to assume the worst, is hardly new. But the inept response to the largely trivial stories that comprise “freebiegate”, coupled with a lack of political will among the Labour family to countenance more “difficult decisions”, has led to long faces and furrowed brows. Throw in the infighting reportedly gripping No 10 and a Tory press which has turned on this Labour administration even earlier than anticipated, and we had a conference which felt odd, even a little listless. Everyone, including broadcasters guided by the noisy, frenzied papers and their even noisier online pied pipers, distracted by ephemera.
It led too many to miss the real story of the week – a real and significant shift of emphasis on the most crucial domestic matter: economic policy. Because if Rachel Reeves and the Labour leadership went into this conference sounding dry as dust on the question of borrowing, they emerged if not quite as sodden as the party faithful, making their way through the endless torrential rain, then certainly much wetter than they were.
I wrote in these pages a month or so ago that the emphasis from Reeves and Keir Starmer on Osbornite precepts around spending – “if we cannot afford it, we cannot do it” – was a mistake. It was a mistake economically and politically because, unlike for Osborne, lower spending for Labour is not an inherent aim. Indeed, it’s something the party blames for the UK’s economic and social woes.
The real political dividing line, I argued, should be over borrowing to invest. In her conference speech this week, Reeves gave her strongest hint yet that the government may move on to this terrain. “It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too,” she said. “Growth is the challenge and investment is the solution.” Starmer, in an interview with Channel 4 News, backed his Chancellor, saying: “I’ve always and long believed in borrowing to invest. I think it’s important to grow the economy. Our number-one mission is to grow the economy, to make sure that by growing the economy, everybody is better off, living standards go up.”
As well as the shift in the general fiscal approach, these remarks are the best indication yet that Reeves might change Treasury accounting rules to exclude losses to the state from the Bank of England’s quantitative easing programme and/or move borrowing for the new National Wealth Fund and GB Energy off the government’s balance sheet. She may be more radical still and redefine how the Treasury considers debt for capital investment altogether.
Any or all of this is important for several reasons: firstly, it’s the right thing to do. The UK is a country with chronically poor infrastructure, which is getting left behind by its competitors (it has had the lowest investment in the G7 for 24 of the last 30 years). Adding fiscal firepower to supply-side changes – such as planning reform – is a necessary condition for long-term growth.
Secondly, the move could free up tens of billions of extra fiscal headroom, obviating the need for further tough decisions such as winter fuel payment cuts, which have proved so politically problematic for the government.
And thirdly, it resolves an awkward circularity to Labour’s political strategy. Until now, the government’s argument has been that Tory economic policy was a ruinous mistake and that therefore Labour would have to do… more of it. This muddle partly explains the government’s rhetorical incoherence since the election and must be avoided.
Labour MPs are quietly happy with the shift and a few have been in touch to say that it’s calmed nerves. There is an argument from some in Labour circles that this quiet, incremental shift is entirely deliberate and was always part of the plan. Whether that’s the case or not, I would be wary of being too quiet about it before the 30 October Budget. Market confidence is important, and though capital markets are sophisticated and will be able to understand a well-made argument for extra borrowing, those arguments must be made (given that Reeves largely mirrored Jeremy Hunt’s fiscal rules). We’ve seen what can happen when unexpected shifts in fiscal position emerge without the pitch being rolled.
This government is appropriately concerned about the threat of right-wing populism from the Tory party, Reform or both and needs a distinctive theory of change and a mechanism to deliver it. In an ideal world, in a country already highly indebted (the national debt stands at 100 per cent of GDP), that wouldn’t come from extra borrowing. But we are where we are, the victim of several decades of political and economic fecklessness. To defeat that right-wing threat, Labour’s best bet in the weeks and months ahead is to have the courage of its convictions.
[See also: Machine politics in the age of Starmer]
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