It suits each and every incoming government to claim that their economic inheritance is worse than anticipated in order that it can blame its predecessors for any early tough decisions it is forced to make.
So the new Chancellor of the Exchequer, Rachel Reeves, in her first major parliamentary speech in office, was arguably doing little more than following a much travelled traditional path. But for a number of reasons there was more to it than that.
One of the curiosities of this month’s General Election was how little scrutiny was paid to any aspect of the programme that the Labour Opposition was proposing. The former government’s calamitous and error-strewn election campaign arguably crowded out much other meaningful coverage. Labour’s slogan was ‘Change’ but most voters seemed happy that this applied simply to the personnel in government; after the political dramas and turbulence of recent years there was arguably little appetite or enthusiasm for radical policy reversals. Nevertheless the general election campaign was when Starmer and Reeves ought to have set out their stall – it is worth noting that the single biggest item making up the £22bn black hole they now complain about arises from their decision since 4 July to honour in full the recommended public sector pay awards.
The one economic message that the Starmer/Reeves government has been keenest to get across is that it is not hostile to capitalism. Meanwhile one of its key insights is a determination to tackle what it describes as ‘market failure’, especially in those privatised industries (such as the water utilities and the railways) where regulation has fallen short. Expect to see in the months ahead much more about protecting and enhancing consumer rights. The Financial Conduct Authority has already hit the ground running as it seeks to intensify Consumer Duty as the first anniversary of that initiative approaches; it would come as little surprise if this concept became a cornerstone of legislation well beyond the world of financial services.
But back for a moment to the politics of the blame game. One of the key lessons that the Starmer administration has learned from the last change in government in 2010 is the importance of controlling the narrative. The then incoming Chancellor George Osborne held an emergency budget within six weeks of assuming office where he set out a damning critique of the previous government’s spending record and laid out a strategy of austerity across much of the public sector. It mattered little that until the very eve of the financial crisis, Osborne had pledged to keep to the very same spending plans that he now condemned as ruinously profligate. What mattered at the time (and it should be noted that having gone into Opposition the Labour Party, like today’s Conservative opposition, immediately embarked upon a protracted and distracting internal leadership election, which gave the new government a virtually free hand) was that Osborne’s narrative became the accepted conventional wisdom.
As it happens there were a few of us in the Noughties making the case that for all of Gordon Brown’s talk of ‘investment’ in the public services, government spending at the time had risen in line with the rapidly increasing tax-take from the financial and professional services sector, and that it was unwise to assume this would go on for ever. But it was at least arguable that the seeds of the global financial crisis arose from an overheated US property market and the explosion in risky derivatives and other forms of financial engineering.
There is an equivalent counter-attack to the incoming government’s claims that its Conservative predecessor has failed recklessly to make proper provision either for those public sector pay settlements or the redress for a succession of high profile public scandals such as over contaminated blood, the Post Office….with presumably Windrush and Hillsborough, amongst others, to follow. However, the risk for the Conservatives is that their justifiable defence that the state of the public finances owes much more to the costs of the pandemic and the energy crisis since the invasion of Ukraine will fall on deaf ears.
If Rachel Reeves can indeed control the narrative in this way then we can confidently expect her to signal increases in the rates and extent of Capital Gains and Inheritance Tax as well as paring back on tax and pensions reliefs at her first budget on 30 October. That will also be the platform for the new government’s growth agenda with expectations already high that supply side reforms in planning, managed migration and lighter touch regulation are in train. But the flip side of aggressive accusations about fiscal black holes in the public finances is a clear warning to the restless backbenchers in her own party that there will also be some very tough spending decisions ahead.
It is worth pointing that there is one key difference between 2010 and today. The establishment of the Office for Budget Responsibility took place under the coalition with the intention that all aspects the public finances should be more transparent and open. So it really is rather absurd to suggest that an incoming government has as little idea about the state of the public finances as a hapless accountant grappling with due diligence on the acquisition of a dodgily run private company.
A final thought or two in this briefing about the General Election earlier in the month. Political historians will, I suspect, conclude that the results were some of the strangest in British electoral history. Voter volatility and demographic change means that almost a quarter of the seats that the Conservatives won on 4 July were not held by the party even in their 1997 defeat (and by the same token some 60 of today’s Labour constituencies had never previously been won by that party). Yet the Labour Party in securing only 34% of the vote ended up with a massive landslide victory second only in the post World War Two era to Tony Blair’s first triumph. I reckon that the universal confidence that it was heading for a massive victory saw some of its prospective voters in safe Labour seats either stay at home, vote Green or support a variety of Leftist independent candidates (five of whom also got elected). The Labour vote rose more consistently in seats previously held by the Conservatives; it is also worth remembering that the Tory vote share rose at each of the next three elections after its return to office in 2010, so the 34% base-line may prove to be a more solid foundation of Labour support than it seems.
For the Conservatives with an all-time low of 23% of the national vote and 121 seats there were painfully few straws of consolation – other than their success in the Hindu community which resulted in an unexpected gain in Leicester East and swings in it favour in parts of North West London. As the election approached I reminded a few old political friends of the gallows humour doing the rounds in East Prussia exactly eighty years earlier, ‘Enjoy the war, because the peace will be terrible’. Much will now depend on holding the party together with a credible agreed policy platform during and in the aftermath of its current leadership contest. It will also need to develop a narrative in its relations with Reform UK that does not lead to a prolonged split in the right-of-centre vote.
For the Liberal Democrats the election was a triumph and the party now has its highest seat count since 1923. It benefited from ruthless targeting and often industrial levels of tactical voting in the constituencies it won. The Party has a tremendous track record at embedding its incumbent MPs (as was evidenced by the increased majorities won by each of their four unexpected by-election victors) and without the need to defend a record in coalition there is every reason to believe that the Liberal Democrats can do do even better in 2028-29. Ditto the Greens who now have a four-strong phalanx of MPs and an array of urban Labour constituencies in their sights.
Even if Keir Starmer holds to the view that he wants politics to get a little less dramatic. I am sure public policy will be anything but boring in the years ahead!
Written on 30 July 2024 by The Rt Hon Mark Field, former Member of Parliament (MP) for Cities of London and Westminster and Consultant at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.