Martin Seale

The speech by the Shadow Chancellor, Rachel Reeves, to the 2023 Labour conference shows that a Starmer government could rapidly become dysfunctional.

In her speech to the 2023 Labour Party conference, Rachel Reeves stated “Today, I make this commitment to you, and to the country: Out of the wreckage of Tory misrule, Labour will restore our economic stability; We will lift living standards.  Make work pay.  Rebuild our public services. Invest in homegrown industries in every corner of our country. And together, we will get Britain its future back.”

In his speech, Keir Starmer said “It’s time to build one and half million new homes across the country.”

One would expect these commitments to require huge increases in government expenditure.  Reeves believes that if a government wants to spend money, it must get that money via taxation or by borrowing it from the private sector.  One would therefore expect Labour’s commitments to lead to increased taxes and/or increased borrowing.

However, in the same speech, Reeves states “I didn’t come into politics to raise taxes on working people.  Indeed, I want them to be lower. “.

Reeves mentions some tax increases, presumably not on working people, that she intends to implement: ending non-domicile tax status, removing vat exemption for private schools, increasing stamp duty for foreign purchasers of UK properties.  

These tax increases would give the government some scope for action. However, It is clear that these tax increases would not free up the resources that a Labour government would need to reverse the effect of 40 years of small-state economics and to ‘rebuild Britain’.

One might therefore conclude that Reeves proposes to get the required money by borrowing from the private sector.  But here we again hit a problem.  Any such borrowing would lead to an increase in the national debt.  Since Reeves says that the ratio of national debt to GDP should fall over a parliament, she has effectively removed the option of substantially increased borrowing from the private sector.

By refusing to raise taxes or increase national debt, Reeves is sending a clear statement that the proposed rebuilding of Britain will be outsourced to the private sector.  A Labour government under Starmer will not be reclaiming the role of the state in important areas like NHS, education, housing water, energy, transport and general infrastructure.  Rather, it proposes to create the conditions that will make it attractive to the private sector to invest in this work, despite its poor record in many areas. 

Reeves make this clear when she states:

“You cannot tax and spend your way to growth.  The lifeblood of a growing economy is business investment….. But we know too that asking business to do all the heavy lifting, while government steps back, is not an option.  As our competitors understand, there is a role for government in encouraging and de-risking investment in new and growing industries.”

So that’s the role for government in Reeves’s model for rebuilding Britain – encouraging and de-risking investment in new and growing industries.  All this is reminiscent of Gordon Brown’s PFI schemes for building hospitals.  Basically, the hospitals were built by the private sector in return for guaranteed very profitable future income streams.  That allowed Brown to keep the national debt low while the taxpayer paid much higher amounts to those who financed this work than would have been the case had the government chosen to finance it by increasing the national debt or increasing taxes.

Reeves appears to be following a similar strategy but in every area of social infrastructure, not just hospital building.  This strategy will lead to work being done that maximises the profits of private sector companies, not the social infrastructure.  For example, in housing, building corporations always attempt to minimise the amount of social housing in their building commitments.  Furthermore, the private sector will attempt to maximise, through subsidies and government guaranteed loans, the de-risking of whatever projects they undertake.

When Thatcher came to power in 1979, her long-term plan was to reduce the role of the state in economic affairs and to limit the power of Labour in the Capital/Labour conflict.  This policy on the limited role of the state was largely continued by the Blair government.  Also, no attempt was made to reverse the anti union laws enacted by previous Conservative administrations.

Labour should reclaim the role of the state in the provision of social infrastructure rather than rely on and subsidise the investment decisions of private enterprise.

Reeves’s strategy will quickly lead to tensions and frustrations in Starmer’s first administration.

The Tories are delighted that Reeves has, with her iron fiscal rules, painted herself, so diligently, into a corner.  They will be waiting quietly while Labour’s failure to deliver on its promises becomes clear.

How will Labour respond to this crisis as it emerges?  That is when Labour Party politics will again become interesting.  If Reeves does not find some way to ditch her pre-occupation with low taxes and low national debt and to reclaim the state as the main guarantor of social infrastructure, Starmer’s administration will be short lived.