Will Labour listen to plea from economists to reverse Tory tax cuts? Don’t bank on it

Alarmed at the increasingly ardent devotion to economic orthodoxy by Labour leaders, some 70 eminent economists have written to implore Keir Starmer to think again. The academics –  all respected, and some with a long association with the left – warn that Labour’s fiscal policy will damage the economy and the social fabric of the nation, and will “deepen the poverty and hardship many are already facing”.

Why are they concerned?

In recent weeks Rachel Reeves, shadow chancellor, has indicated that she will not reduce Tory cuts in child benefit, and has more or less ruled out a raft of potentially redistributive tax measures such as hiking capital gains tax. The substantial spending and borrowing proposed in Labour’s Green New Deal has also been scaled back. She also seems set to adopt Tory spending plans and fiscal rules. As a Bank of England-trained economist she is as keen as any of her Labour predecessors to reassure the capital markets that the party can be trusted. Innovation might be in order, but experimentation definitely not. If successful, she will be the most ‘small-l’ Labour chancellor since Philip Snowden, a flinty deflationist,  betrayed his party in the slump of 1931. Starmer is closer to Reeves than anyone else in the shadow cabinet and is inclined to defer to her judgment.

Has this sort of thing happened before?

Plenty of times. The most celebrated precursor was the open letter signed by 364 economists condemning the deflationary, anti-Keynesian, ‘pro-cyclical’ Tory budget of 1981. The assembled practitioners of the gloomy science – many based in the Keynesian stronghold of Cambridge – predicted that Geoffrey Howe’s measures would turn a bad recession into a full-blown slump. In the event, the economy embarked on a prolonged recovery in which unemployment remained above three million for many more years. There was much sense in what the 364 economists said, and the consensus now is that the Thatcher administration overdid the monetarist squeeze, but the timing of their letter was poor and they were mercilessly ridiculed.

What do you call a politician who ignores economic advice?

‘Liz Truss’. Her innocuous-sounding but disastrous mini budget hatched with Kwasi Kwarteng proved what can go wrong if ideology trumps economics, and sound advice isn’t even sought let alone heeded. It was a fiscal event that still haunts the Sunak government, but has obviously had a salutary effect on the opposition too. Starmer and Reeves aren’t going to blow up the gilts market in the name of social justice.

Who will they listen to?

By convention, Starmer will probably have an economics adviser – but he seems content to allow Reeves to fulfil much of the role for the time being, which will make for harmonious relations between No 10 and No 11, always a bonus for investors. Reeves will inherit Jeremy Hunt’s balanced team on the independent Economic Advisory Council, and in time appoint her own advisors, as well as having the Treasury at her disposal. Unlike Kwarteng she’ll also work closely with the Bank of England and the Office for Budget Responsibility. With the partial exception of the Green New Deal, in style and substance Reeves may well turn out to be indistinguishable from Hunt.

What are the politics of this?

Even if the latest dissident economists are right, Labour cannot politically afford to say anything on public spending or borrowing that gives the Tories ammunition for a fightback. Tory propagandists are already recycling the note left behind by a Labour Treasury minister in 2010 – “I’m afraid there is no money” – and there will be plenty more distortions. Reeves’ job is to pre-empt them. Given the present fiscal predicament, the ironies are painful and Labour’s economic record in government is stronger than the mythology; but Labour still needs to win the confidence of a nervous electorate. That’s why she’ll ignore her fellow economists and why she’s not going to spend much time on the single biggest factor that has uniquely damaged Britain’s economic potential: Brexit. Something for the second term, maybe?