Starmer has a problem.  And that problem has a name.  Its name is Rachel Reeves.

One suspects that Starmer never had any great interest or knowledge of how an economy works.  That was something he left to others to understand.  Reeves was useful because the economic ideas she was promoting about fiscal rules, low debt, low taxes and high growth were acceptable to the voters who Starmer felt he needed to win over, if he was to get an overall majority in the 2024 general election.

But the political implications of Reeves’ economics are dawning on the Parliamentary Labour Party (PLP).  The main political implication is that Labour will lose the 2029 general election.

In her 30^th July statement to parliament, Reeves claimed that she had found a £22 billion black hole in the government finances.  According to Reeves if a government wants to spend it must get the money to finance that spending either from taxes or by borrowing from the private sector.  Reeves divides spending into two categories, current spending (salaries for public sector employees (doctors, teachers, civil servants etc), pensions and welfare payments etc) and investment.  Reeves has a very arbitrary fiscal rule which requires that current spending must be financed only from taxation while public sector investment can be financed by borrowing from the private sector.

Reeves has found that the amount raised in taxes for 2024-2025 was less than the amount of planned current spending to the tune of some £22 billion.  Her fiscal rule would require her to increase taxes or cut current spending.  She cannot finance it by raising income taxes because her election mandate stated categorically that there would be no changes in income taxes or national insurance.

Reeves decided to make clear her ‘iron chancellor’ mettle by cutting planned current spending.  The politically most damaging cut she chose to make was to end the £200 winter fuel payment to all pensioners not receiving pension credits.  Reeves is also demanding that the various government departments find cost savings.

There is in fact no reason why current spending should be limited to what is raised in taxation.  During Covid, the government paid the salaries of workers on ‘furlough’ out of money that was created by the Bank of England (BoE).  Some £400 billion of such money was created to finance current spending.  There was no increase in taxes.  The government did issue bonds to match this increased spending but these bonds were largely bought by the BoE in the secondary bond market.

Reeves fiscal rule has resulted in an amount of entirely unnecessary austerity for pensioners and severe political damage.

Apart from cutting current spending, Reeves also announced that she was cancelling investment spending because it was not funded.  Cutting current spending had a certain logic within Reeves’ ridiculous fiscal rules.  Cutting investment spending is much harder to explain.  Here’s what Reeves said about some levelling up projects that would have to be cut:

“The previous Government claimed they were levelling up the country. They made promise after promise to the British people, but the spending audit has uncovered that some of those commitments were not worth the paper that they were written on. At autumn statement last year, the former Chancellor announced £150 million for an investment opportunity fund, but not a single project has been supported from that fund.

So following discussions with my right hon. Friend the Deputy Prime Minister, I am cancelling it today, because if we cannot afford it, we cannot do it.”

In what sense could the levelling up project not be afforded?  It’s an investment project so, according to Reeves, will be funded by borrowing from the private sector.  The government issues bonds which are bought by the private sector.  The government now has the money to carry out the levelling up project.  Is Reeves suggesting that the private sector might not be prepared to buy government bonds?  That seems unlikely.  The commercial banks still have huge reserve accounts at the BoE on which they are earning interest at the Bank rate, currently 5%.  Why would they not be prepared to buy government bonds if these bonds have a yield higher than expected future interest rates.  For instance, on 7^th August the government sold bonds to the value of £4 billion at a yield of some 3.85%.  

Another investment project put on hold by Reeves was the building of some 40 hospitals first announced by the Tories in 2020.  Reeves stated “it has become clear that the previous Government continued to maintain their commitment to 40 hospitals without anywhere close to the funding required to deliver them.”  Apparently funding was short by some £4 billion.  From Reeves’ perspective she would need to borrow this money from the private sector.  She gave no explanation why she was not doing that.

The only sense we can make of her actions is that investment projects, by Reeves’ logic, lead to an increase in the national debt.  That increase is in conflict with a fiscal rule that Reeves has arbitrarily adopted that the ratio of national debt to GDP, the debt/GDP ratio, should fall within 5 years.   Why not 4 years or 6 years or 10 years?  Why calculate the debt/GDP ratio at all?  It is difficult to see what other reason Reeves might have had for cancelling investment projects other than that they would increase the debt/GDP ratio which her fiscal rule does not allow.

If Reeves’ fiscal rules have caused her to cut both current spending and investment spending, alarm bells will be going off in the cabinet.  She has announced that she will hold a budget on 30^th October.  The cabinet will be feeling very nervous indeed and wondering if it was really necessary to grovel so much to the Tories on economic matters to win the election.  The big question on everyone’s mind will be how to get out of the corner into which the Tories have so effectively put Labour.

How should the left respond to Reeves’ economics?  On July 30^th, Reeves repeated the mantra ‘if we cannot afford it, it cannot be done’ several times.  This gives the left a perfect opening to challenge Reeves’ economics. That mantra should be directly challenged with Keynes’ mantra that ‘if it can be done, it can be paid for’.  There are 5 years until the next general election.  That’s 5 years to establish the idea that money is not the problem, that resources, workers and raw materials, are the problem.  

Whenever Reeves cancels an investment project because it cannot be afforded, her whole framing of the problem should be challenged.    Reeves should be asked are the resources for the project, like building the 40 hospitals needed by the NHS, available to be hired by the government?  If they are, why is she not buying them?  If they are not, how does she propose to get them?  If the left wing parties, like the Workers Party, don’t challenge Reeves’ framing of the problem, they will be ineffective in opposing her new round of austerity.