There was no screeching U-turn in Rachel Reeves’ speech to delegates at the Labour party conference. But make no mistake, the chancellor is changing course. Earlier this month she had warned of a “painful” budget. In Liverpool, Rachel Reeves said her “optimism for Britain burns brighter than ever”. In a matter of weeks, the tone has gone from doom to dreaming. This was necessary because Ms Reeves had, as the former Bank of England chief economist Andy Haldane noted, erred by creating a sense of “fear and foreboding” which threatened to undermine a potential economic recovery. Consumer confidence was sinking. Labour’s poll lead over the Tories on the economy disappeared. Something had to be done.
But it is unclear whether Ms Reeves has done enough. She did reiterate that Tory overspending meant “tough decisions” lay ahead. It appears a self‑fulfilling prophecy is at play here. When people hear that economic conditions are expected to worsen, they may delay activities that stimulate the economy. While the nuances in the chancellor’s speech might be missed, Ms Reeves must hope that voters hear her promise of “no return to austerity”.
Ms Reeves’ speech was a political triangulation: pro‑growth but fiscally disciplined. The Tories reasoned that cutting public spending encouraged business expectations with the prospect of lower taxes and higher profits, which would result in economic growth that would offset the drop in demand caused by the fiscal contraction. Labour’s analysis is that public spending cuts were necessary to avoid inflation and maintain international confidence but insufficient for economic expansion on their own. What’s needed, said Ms Reeves, is an interventionist state. Strong government is needed to save capitalism from its failures and excesses, but it must also spend money on public services, which have been starved of cash under the Tories. Ms Reeves’ claim that a real-terms increase in government spending would avoid austerity is not borne out by the facts. Under the previous Conservative government’s plans, overall public spending was set to grow in real terms while some departments faced deep budget cuts. Withdrawing winter fuel payments to 10 million pensioners to save money is a false economy if the result is more elderly admissions to hospitals.
These sorts of arguments can be found in Ms Reeves’ new council of economic advisers. On entering office she hired two economists who co-wrote a report for the London School of Economics that warned Labour’s planning reforms and an end to political chaos would not be enough to persuade the private sector to invest in Britain. Instead the economists argued Britain needed to invest to grow, focusing on the threat of the climate emergency. Spending £26bn of public money would generate almost twice as much private investment.
Under the current fiscal rules, which require that daily spending is funded by taxes and debt falls within five years, the necessary money is unavailable. The chancellor suggested in her speech that she may change them to allow more capital investment. If the fiscal rules aren’t changed, it is difficult to see how the government can achieve its ambitions. The consequences of continued fiscal restraint include stagnating innovation and growing joblessness. Failing to recognise the need for increased public expenditure could leave the UK missing critical opportunities, resulting in long‑term economic stagnation.
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