If it wants growth, Labour will have to break the rules

Sir Keir Starmer, the Prime Minister, and Rachel Reeves, the Chancellor
The new Prime Minister and Chancellor should enjoy something of an economic bounce as they start their new jobs - Stefan Rousseau/PA

Bliss was it in that dawn to be alive ... OK, so even for committed Labour Party supporters, this is not exactly a Tony Blair moment.

The new Government’s majority is slightly bigger than Labour’s landslide victory of 1997, but to win with a lower share of the vote than Jeremy Corbyn achieved in 2017 – and which is actually rather less than the Tories and Reform combined – is hardly a ringing endorsement of either the leader or his stated aims.

This should come as no great surprise; from the start, Labour’s policy agenda has lacked both ambition and detail. Labour has successfully ridden the anti-Tory wave, but there is not much more to its victory than that.

Presumably Sir Keir Starmer, the new Prime Minister, has got a plan that goes beyond the thin gruel of his manifesto pledges, but thus far there has been little evidence of it. The proposition is instead simply that of governing a little bit better than the last lot, which is hardly a high bar after the chaos of the last eight years.

From Brexit onwards, the history has been one of repeatedly broken promises, deteriorating public services and abject failure to face up to harsh economic realities.

The pandemic and the subsequent energy price shock would admittedly have tested the capabilities of even the most accomplished of governments. It is the Tories’ misfortune that they happened to be in power when these events took place.

Yet in responding to them, the Government broke the bank and has now suffered the consequences. It would be nice to think that Labour offered solutions, but if they do, it’s hard to figure out what they are.

Even its promised bonfire of planning laws, so as to galvanise a housebuilding and green energy transition boom, lacks the substance needed to give it legs.

The Tory post-mortem after last week’s wipeout is going to be long and bitter. Yet the overriding lesson is simple enough: it is that promising things that cannot be delivered, and then expecting the voters to forgive you, doesn’t work.

The initial such disappointment was Brexit itself. This was at least executed as pledged, but has so far failed to provide a single discernible benefit beyond a few relatively trivial trade deals. Immigration has gone up, manufacturing exports have fallen, inward investment has collapsed and what little regulatory divergence from the EU there’s been has mainly added to costs rather than subtracted from them.

Promises of more hospitals, a brand new fleet of nuclear power stations, levelling up, Britain’s own space programme, world class public services, lower taxes and much else besides – they’ve all fallen by the wayside.

The hopeless, the helpless and the left behind are even worse off today than they were 10 years ago, with many of Britain’s towns and cities left stranded in time, having long ago outlived their economic usefulness. Angry and alienated, their inhabitants live on a subsistence diet of hand me downs and increasingly unaffordable handouts.

That voters have decided to punish this history of neglect and broken promises cannot have surprised anyone. Now it’s Labour’s turn – but it is hard to be optimistic.

Sir Keir Starmer is obviously correct in thinking that salvation lies in economic growth. Greater economic activity is the elixir that eventually cures all things. It should be front and centre of all that Labour is trying to do. But where exactly is the pro-growth, pro-enterprise agenda?

We hear a lot about redistribution and of getting those with the broadest shoulders to cough up more. We also hear a lot about beefing up workers’ rights and restoring union power.

None of these things is conducive to growth. Once the Government turns up the heat in its hunt for taxpayer pounds, there is a real risk of talent draining away. At the margins, there is already quite a bit of evidence of it. Wealth is voting with its feet.

As luck would have it, Labour ought initially to enjoy something of an economic bounce. Much of the heavy lifting in restoring a degree of economic stability has already been done.

Loss of reputation for economic competence was plainly a large part of the Tories’ undoing, but the ship has been steadied since the debacle of Liz Truss’s mini-Budget, and the economy is now very definitely on the up.

Inflation has returned to target, real wages are growing again and both consumer and business confidence has revived. The economy should also benefit from investment decisions gummed up in the works by the impending election.

Falling interest rates should bring further relief, especially for the public finances, which have been badly affected by rocketing borrowing costs.

In other words, things are not as bad as Labour makes out. It is customary for incoming governments to blame their predecessors for all the obstacles they encounter. Years after the event, Blair’s Labour was still harping on about a poisonous Tory legacy by way of excuse for its own growing list of failures.

The same was true of the Cameron/Osborne government, which repeatedly blamed Labour for the financial crisis and the medicine of austerity the coalition subsequently imposed.

Rachel Reeves, the new Chancellor, is getting her excuses in early; hers is the worst economic inheritance since the war, she claims. It’s certainly not as good as the economy Blair inherited in 1997, but nor is it a complete train crash either.

Labour’s election strategy was to promise as little as possible, but to commit to the same fiscal straitjacket as the Tories. This might have helped Sir Keir win the election, but it has considerably limited his scope for action now he’s in power.

From capital gains to inheritance tax and pensions tax relief, there are lots of small tax rises that the Government could and no doubt will do to help pay for its spending ambitions. But all of them are likely to be negative for growth.

Similarly, with Europe – where the ambition of improved trading relations with the EU clashes with the new Government’s commitment not to rejoin either the customs union or the single market.

To believe Brussels is about to offer concessions on trade with nothing in return is delusional, and also quite close to the “cakeism” that characterised Boris Johnson’s approach to Brexit, disingenuously sold on the basis that the UK could have many of the economic benefits of EU membership but without any of its obligations.

In order to win the election, Labour has built some high fences around itself, only to find that it has built itself a prison.

There’s no chance of the new Government reaching its 2.5pc per annum growth target without abandoning the self denying ordinance of the fiscal rules, and instead reintroducing something like the old Brownite contract of borrowing to invest. Whether the bond markets will weather it is another matter.

Good luck, Sir Keir; you’re going to need it.