Starmer’s Moment of Weakness

Keir Starmer has been a very effective leader of the Labour Party in opposition.  At least by the standard that he set himself.  Starmer set out to construct a Labour Party that could win an overall majority in the 2024 general election.  In this he has succeeded.

Starmer decided that he could only achieve this objective if he managed to get many Conservative voters to abandon the Conservative Party or, even better, to switch their vote to Labour.  It was not enough to simply regain the ‘Red wall’ seats.  Starmer had to reduce the fear of Conservative voters of a Labour victory.  He did this by adopting foreign and economic policies that are acceptable to these voters. 

On foreign policy, Starmer has adopted the position of the current government on the big issues like Ukraine and Gaza.

On economic policy, Labour has adopted a set of fiscal rules that are close to those of the Conservative government.  Current expenditure will be financed by taxation.  Public investment may be financed by borrowing, subject to the proviso that the national debt to GDP ratio must be falling within 5 years.  Additionally, there will be no increase in income tax, National Insurance or VAT.

The results of the general election on 4^th July show that Starmer’s strategy has been very successful.  Few Conservative voters switched their votes to Labour.  But many felt indifferent enough about a Labour Party victory to abstain or vote for the Reform Party.  There was a large drop of 20% in the Conservatives share of the vote but only a very small increase of 1.6% in Labour’s share.  Despite getting some 3 million votes less than Corbyn got in 2017, Starmer won 412 of the possible 650 Westminster seats.  Such is the nature of First Past the Post elections.

This may seem like Starmer’s moment of greatest strength.  In fact it is his moment of greatest weakness.  Now Starmer has to deliver his much touted ‘change’.  Yet, the fiscal rules that he has adopted to win the general election have robbed him of the very spend and tax rules that are required to deliver this ‘change’.  The interesting political question is how will Starmer deal with this problem that he has given himself.  

On past performance, there are good reasons to believe that Starmer will not allow earlier commitments to restrict his freedom of action as Prime Minister.  In his Labour Party leadership bid, he had made whatever promises he felt would guarantee him victory.  Once elected, he reneged on these promises and set out to purge the party of its ‘Corbyn’ supporters, often relying on false charges of antisemitism.  We expect Starmer to behave in a similar manner now that he is Prime Minister.  

Having won in 2024, his new objective will be to win a second term in 2029.    To achieve this objective he will have to hit the various targets he has set for his government: to reduce waiting lists in the NHS, to build 1.5 million dwellings over the next 5 years, to rebuild national infrastructure and, more generally, to increase the economic growth rate.

We expect the fiscal credibility rules will be ditched or revised once Starmer sees them as a hindrance to achieving the changes that will be essential for him to win a second term in 2029.  It will be interesting to see if the new chancellor, Rachel Reeves, will insist on following the substance of her fiscal rules.  The first step in Boris Johnson’s failure as Prime Minister was when he failed to rid himself of Rishi Sunak, a Chancellor who favoured fiscal rules in preference to Johnson’s levelling up agenda.  We expect Starmer to be more ruthless than Johnson.  If Reeves does not abandon the substance of her fiscal rules, then her tenure as chancellor will be short lived.  We suspect, however, that she will also be amenable to finding some way to ditch the substance if not the form of her fiscal rules.  The new National Wealth Fund will likely feature large in avoiding the constraints of her fiscal credibility rules.  The spin will be that Labour’s spending will be paid for by the nation’s saving rather than by government borrowing.

Labour’s problem will not be where do they find the money to do the things that they want to do.  Rather, it is where do they find the resources.  Specifically where do they find the nurses, doctors, teachers, builders etc. that will be required to bring about real change.  If the resources were there and unemployed then Labour’s task would be simple, spend the money and hire/buy the resources.  When resources don’t exist they will need to be created through apprenticeship and training programs.  That will take time.  When the resources exist but are being employed by the private sector then Labour will need to devise a strategy to move them from the private sector to the public sector.  Taxation and regulation may be the tools to do this.  For example, VAT on private schools will likely force some private schools to become state sector schools

In this context, the new government’s ‘modern industrial strategy’ is advertised as the way forward, with the government ‘shaping’ markets.  It remains to be seen whether there will be any substance in this industrial strategy.  

In short, if Starmer is to win the 2029 general election, he will have to renege on the fiscal commitments that he made in order to win the 2024 general election.  There are good reasons to believe that his ‘will to power’ will allow him to do that.  However, abandoning silly fiscal rules will not be enough.  It merely removes a false constraint on his freedom of action.  His real problems then become evident.  Where does he find and how does he mobilise the resources to implement his much touted ‘change’ of British society?  It remains to be seen whether he has the ability to address this problem.