Rachel Reeves still has much explaining to do

In all likelihood, Britain is only seven months away from a general election that the Labour Party will almost certainly win. It is now too late for any Conservative leader to salvage the situation, simply because of that time constraint.

Inflation is dropping towards the official 2 per cent annual target; the economy may well be out of its shallow recession by now; more tax cuts are on the way. But the voters are no longer listening. They made their minds up long ago.

The reasons for the Tory defeat will mostly not be found in what happens over the next few months, but what has happened in the last few years – and, indeed, since the first Conservative-dominated administration was formed in 2010. Change feels inevitable.

Therefore, it is all the more disappointing that the Labour Party – in all probability the next government – continues to be so opaque about its intentions, and in particular about its economic policy, sometimes to the point of obfuscation.

The prestigious annual Mais lecture to the banking industry, for example, was an opportunity for the shadow chancellor Rachel Reeves to set out precisely what the principles guiding her during what she optimistically terms will be “a decade of renewal” – presumably, and presumptuously, two terms of Starmer-Reeves administrations.

Worryingly close to a general election, and the fiscal rules that Ms Reeves says will be so impressively “iron-clad” are still looking decidedly rubbery – and rather thin elastic at that.

In her lecture, Ms Reeves states that she now won’t follow the government’s present, simple policy of reducing the overall level of national debt as a proportion of national income over the medium term (five years). She rightly points out that that approach tends to deter borrowing by government for investment in public infrastructure which, if done wisely, can yield a return in higher economic growth over many decades – “and that is why our borrowing rule targets day-to-day spending”.

Instead, she will permit borrowing for investment projects. But with what limit – if any? If there are enough such sound schemes, then borrowing to invest could easily push the national debt on a much higher trajectory, at least until the benefits of the investment feed through into a faster-growing, higher productivity, higher wage economy and the bountiful tax revenues that would surely then ensue.

Borrowing to invest on any meaningful scale, sound and beneficial as it may be, is probably not compatible with getting the overall national debt (relative to GDP) down in the medium term. Ms Reeves almost makes this explicit but, seemingly wary of the propaganda the Tories would make of it, shrinks back into a meaningless formula that sounds very much more like Jeremy Hunt’s status quo: “We will prioritise investment within a framework that would get debt falling as a share of GDP over the medium term.”

She does hint at a new fiscal measure, introducing what we might term the “national balance sheet”, setting public debt against public assets but this fresh dimension to policy is alluded to, rather than developed. She also wants a stronger Office for Budget Responsibility to say things about trends in investment, and gently point them towards validating the government’s pet schemes.

However, such novelties do not amount to new fiscal rules, and it doesn’t make her fiscal rule about the trajectory of overall debt any clearer or, indeed, “iron-clad”. For Ms Reeves’s approach to make sense, she would need two debt targets – one derived from day-to-day “current” spending, which should be near zero when cyclically adjusted; and the other related to debt earmarked for investment. Maybe that is what she expects from the new public sector balance sheet approach. Maybe not – she isn’t yet saying.

This apparent evolution in Ms Reeves’s thinking, with that unexpected return to a more permissive attitude to infrastructure investment, makes the recent U-turn on the green prosperity plan all the more puzzling. She was spooked by the way the Tories were attacking her on the £28bn a year the green energy investment would add to the national debt; but she now implies that she is willing to borrow perhaps even more to invest because that kind of borrowing doesn’t count against the medium-term aim to get debt down.

Now, the green prosperity plan does suffer from an unfortunate weakness. It is sadly true that only some of the benefits of investing in cheap, clean energy would accrue back to the Treasury, as most of the benefits are felt by consumers in lower bills, and to “the planet” enjoying a brighter future. Yet some way could be found of accounting for such communal benefits to the nation – and it is plainly in the national interest, as Ms Reeves used to think, and Ed Miliband still does.

So, we are left a little bewildered about whether Labour is going to think big on investment or not, and how it can be made financially prudent; Ms Reeves will also have to explain how her plans to borrow for investment, which will push aggregate demand higher, won’t thereby accelerate inflation and raise interest rates.

The electorate is not being told how much Labour will spend on productive infrastructure, on improving services with more day-to-day spending, such as on nurses’ pay, reducing the burden of taxation (another declared aim), and taming the national debt. This is, again, subject to two confusingly contradictory fiscal rules – borrow to invest but within an overall target (which is just like the Tories).

The standard response of Labour spokespeople on this and all such conundrums is that they will set out their plans more clearly near the election. Yet we are already near an election, and the country is none the wiser about how and why it will become better off at the end of the next parliament than it is now, let alone at the conclusion of the hoped-for “decade of national renewal”, in around 2034.

If Labour is serious about renewal, then – given the reluctance of the private sector to invest in post-Brexit Britain – it will need to be much bolder about pushing public investment, and much more serious about restricting day-to-day spending on public services to contain the threat of inflation and higher rates.

As the Mais lecture proves, much of this is technical, and the success of any economic strategy also depends on external events, trends in the global economy, and some luck.

Labour also plead that they will only be able to set out plans and figures when they can see the books, which means when they take power. However, that is all the more reason to set out rules and principles with much more transparency in advance – all the better to provide an understood and accepted framework for action. That has not yet been achieved. Ms Reeves has some more explaining to do.

Following Ms Reeves’ Mais Lecture and the publication of this article, The Labour Party has asked us to clarify that the Shadow Chancellor did confirm in her lecture that under a Labour government’s fiscal rules “debt must be falling as a share of the economy by the fifth year of the forecast” and that there would be limits to borrowing to ensure “debt [is] falling as a share of GDP over the medium term.” We are happy to set the record straight.