Balancing the books – what is Labour’s economic offer?Balancing the books – what is Labour’s economic offer?

8 min read57 min

As the cost of living crisis bites, Labour could enter government facing the most challenging set of economic circumstances for a generation. Chaminda Jayanetti explores the party’s offering as it heads towards the next election.

In the aftermath of the 2008 financial crisis, government debt reached 60 per cent of Gross Domestic Product (GDP). This rather dry statistic formed the root of what many on the left viewed as a full-blown propaganda war by the Tories against public spending, that cleared the way for devastating funding cuts which wrecked public services and stifled economic growth.

This rather dry statistic formed the root of what many on the left viewed as a full-blown propaganda war by the Tories against public spending, that cleared the way for devastating funding cuts which wrecked public services and stifled economic growth.

What austerity did not do was bring the debt-to-GDP ratio down. In fact, by the time of a 2024 general election it could reach 120 per cent of GDP, according to economist and author Duncan Weldon – and unlike the early 2010s, government borrowing rates are rising.

“For the last 15 or so years, it’s been really easy to look at the macroeconomic environment in the UK and say, ‘look, macro policy is too tight, the government should be spending more, the government should be borrowing more’,” says Weldon. “That call is much more finely balanced now.”

Britain’s macroeconomic malaise improves Labour’s chances of winning power – especially if the current gloom deteriorates into full-blown crisis. But as the party prepares to outline more of its policy agenda at its annual conference, it leaves Keir Starmer and shadow chancellor Rachel Reeves with a trilemma – balancing the books, holding down taxes for most people, and adequately funding public services. Voters want all three. Logic suggests Labour can do any two of the three, but not all three at once.

Strong economic growth would allow Labour to break the trilemma, providing increased tax revenues without raising taxes. Labour’s big climate investment pledge may make a difference. Reducing Brexit border issues could also help. Ex-shadow chancellor John McDonnell’s former adviser James Meadway says Starmer appears to be an admirer of German corporatism. But there is scant evidence of a fleshed-out theory of what drives economic growth.

There is little question within Labour that more public spending is desperately needed. Every public service is starved for cash – some frontline operations are in a state of near collapse.

Weldon says infrastructure spending makes sense even at current borrowing rates, but spending on day-to-day services is another matter.

“The space for borrowing to spend on current spending will almost certainly not be there. So it’ll be a straightforward choice of ‘do you want to put taxes up or do you want public services to collapse?’”

The “big three” revenue-raisers in the tax pantheon are income tax, National Insurance and VAT. Jeremy Corbyn’s two manifestos froze all three for anyone earning under £80,000 a year, with substantial spending pledges to be funded by taxing the rich and corporations.

But the required spending rises are arguably now bigger, and Liz Truss’s debt-fuelled tax cuts will further complicate matters for anyone committing, like Reeves and Starmer, not to borrow to fund day-to-day spending.

“They’re going to end up wanting to make some big spending commitments,” says Meadway. “To make those big spending commitments, they’re probably going to have to have a conversation now about what the tax and borrowing situation looks like.”

While polling suggests voters aren’t gunning for tax cuts, there appears to be little public appetite for middle-class tax rises either. Accordingly, the conversation Labour appears ready to have is focused on taxing the rich – but not all of them.

Reeves spoke at last year’s Labour Conference about the need to ensure “those at the top pay their fair share”. Proposals include abolishing non-dom tax status and axing the private equity carried interest loophole.

Reeves also alluded to the unfairness of capital gains – often accumulated by the richest – being taxed at a lower rate than working people’s income.

This strategy isn’t necessarily “soak the rich”; Labour isn’t pledging to turbocharge the top rates of income tax. The party is instead targeting – and defining itself against – profiteering and privileged gamesmanship, rather than high earners as a class. To misquote Lord Mandelson, Starmer is intensely relaxed with people getting fairly rich, as long as they play fairly.

But how much can Labour raise this way?

Tax expert Dan Neidle argues Labour should equalise the rates of capital gains tax (CGT) and dividends tax.

“The current diversity between the two rates is an enormous driver of tax planning and tax avoidance,” he says. “It’s ludicrous – 20 per cent versus 39.35 per cent. Come on.”

Equalising the rates might raise £12bn a year – around the same as was to be raised for health and care by the National Insurance rise, which the government is now set to fund through borrowing, and which Labour will presumably look to fully cost. But it leaves little left over – even if CGT rates are equalised not with dividends tax but with income tax, raising around £15bn a year.

Neidle thinks around £3bn a year can be raised by closing low-hanging tax loopholes, such as imposing stamp duty on commercial property investment vehicles and capping inheritance tax relief for business property and agricultural property.

More contentious would be making partnership-based professional services firms – such as law firms and accountants – liable for employers’ National Insurance, which could raise £4bn to £5bn a year.

“If you’re looking at a Blairite five pledges, each of which costs small single-figures billion, then it’s absolutely realistic to raise that by ‘closing loopholes’,” says Neidle. “But you cannot significantly raise state spending, you can’t move the bar, without taxing the normal person more.”

If Labour isn’t going to raise the median voter’s taxes and won’t borrow to fund services and benefits, it will have to prioritise – at a time when virtually every public service could legitimately call itself a priority. Labour has already moved away from the comprehensive independent living service for disabled people that Starmer backed in his leadership campaign, instead prioritising care standards and staffing levels.

Labour’s spending priorities will relate to its target voters. Chris Curtis, head of political polling at Opinium, has identified working-age voters without a university degree as the key demographic at the next election. More socially conservative than graduates, many voted Tory last time to secure Brexit – but now their priorities are economic.

“Childcare is a particular area to look at because there is a big set of voters there, many of which didn’t vote Labour in recent elections, who are just struggling to pay for the massive and increasing costs of childcare,” he says. “There’s a lot to be said about the world of work as well. Because this is an area which touches the lives of the vast majority of voters, and you can put in place solutions that can dramatically improve many people’s lives without costing the government direct.”

“The next Labour government has to abolish food banks. It is a disgrace that the UK has food banks, an utter disgrace.”

Labour recently committed to setting the minimum wage at a level that covers living costs – though without the attention-grabbing gloss of the union-backed £15 an hour. Childcare is also a known priority for Starmer’s team – but a big policy offer won’t come cheap. “You need to deal with the urgent, you need to deal with the pressing, and you need to deal with the structurally important,” says John McTernan, Tony Blair’s former director of political operations.

He agrees with Starmer’s focus on cost of living and climate change but adds another priority to the list. “The next Labour government has to abolish food banks. It is a disgrace that the UK has food banks, an utter disgrace, and that needs to be addressed directly by the Labour government.”

The solution is primarily to be found in the welfare system. Labour is no longer scared of voters’ anti-welfare sentiments, which have declined in recent years. The party is looking at replacing Universal Credit while keeping some of the core elements – a single benefits pathway, digital access and real time information on earnings.

Labour would ditch the five-week wait for a first payment, and attention is being paid to assessment and payment periods, the benefit cap and the two-child limit – all of which feed into the financial adequacy, or otherwise, of benefits. Sanctions are unlikely to be abolished outright, but levels since 2010 are seen as excessive.

But as Labour chase a large number of seats with a limited pot of money, welfare sits behind health, education and childcare in the party’s priority list.

And this may be the story of a Starmer government. Labour knows whose votes it needs. It has a developing sense of how to get them. But like rationing under Clement Attlee from 1945, the gloom of the age of austerity may loom long.

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