Assume the polls are correct. Suppose that at some point in 2024 Sir Keir Starmer gains his triple-digit majority. So what?
The laws of economics are as cruel and unforgiving as the laws of mathematics. It seems likely that the UK will face a financial crisis at some point in the next parliament. It’s been almost two years since the last coronavirus restrictions were lifted, but it’s clear we’ll never return to pre-lockdown spending levels. Government spending, which was less than 40% of GDP in 2019/20, is now close to 50%. We spend more on servicing the national debt than on national defense.
No one thinks this is sustainable. But no one has the courage to do anything about it. Most MPs, including many Labor MPs, vaguely accept that the level of what was supposed to be emergency spending is unsustainable. Yet, when you suggest specific cuts, they bark with rage. Even promoting growth without cutting spending, for example by eliminating regulations, is politically unacceptable. Just ask Kwasi Kwarteng.
But economic laws don’t care about public opinion. If something can’t go on, it can’t go on. Sooner or later the funds will run out and Britain will be plunged into a full-blown pound crisis. Cuts that seemed unthinkable will prove inevitable.
To find a comparable moment, you have to go back to September 28, 1976. The then Chancellor of the Exchequer, Dennis Healy, was sipping a large gin and tonic in his VIP departure lounge at Heathrow Airport when he learned that the pound was plummeting. He rushed back to the Treasury and announced that Britain was applying for a record $3.9 billion IMF bailout.
While Mr. Healy negotiated terms with IMF officials, Prime Minister Jim Callaghan tried to get his party to understand the seriousness of the situation. “For too long this country has been content to borrow money overseas to maintain its standard of living,” he told stiff-faced Labor delegates in Blackpool. “We once thought we could get out of recession and create more jobs by cutting taxes and increasing government spending. Let’s be frank: That option no longer exists…”
Spending cuts could only be made once the UK was “broken,” as The Economist put it. Even the NHS had its budget cut by real 3% in 1977 after the bailout.
People around the world will vote for free things as long as they believe they are free. It takes a cataclysmic shock to convince them that the problem is not with greedy politicians and rich tax evaders, but that there really is nothing left in their kitty.
Even as Argentina experienced a century of decline, it continued to vote for fraudsters who claimed there was a painless solution. Since 1980, inflation in the region is thought to have averaged 206% per year. After trying everything else, Argentine voters finally accepted the need for small government.
Last week, new Liberal President Javier Millay announced spending cuts equivalent to 2.9% of GDP, slashing energy and transport subsidies and the national pension, and reducing nine of Argentina’s 18 federal ministries. Abolished.
If his people can remain courageous, growth will return.
If you think Argentina is too far away and not very relevant for us, think about our closest neighbor. Ireland was hit hard by the 2009 euro crisis and was forced to make significant cuts to public spending.
The 2010 budget included a 4% cut in welfare payments, a 16 euro monthly cut in child benefit, and a reduction in jobseeker’s allowance. Civil servants received pay cuts of 5-10%. All this came after an already tough 2009 budget that saw cuts to everything from ministerial salaries to university tuition fees.
In Britain at the time, the lenient restrictions imposed by the Coalition government were fiercely opposed as a return to the workhouses of the Dickensian era. But rather than simply offering a smaller-than-expected increase, Ireland made significant cuts and was poised for a strong recovery. Since 2012, it has grown significantly faster than the UK.
Sir Keir is cocky about his appointment as president, but he knows that our economy has never properly recovered from the financial crisis, let alone the lockdown. He understands that taxes cannot go up any further. Sure, they give governments instant cash, but they shrink the revenue-generating part of the economy and reduce future income. That is why Labor is not proposing any new taxes other than attacks on private and non-state schools.
So what can Starmer do to avoid Callaghan’s fate? In theory, he could make careful and smart cuts early in his term to avoid tougher cuts being imposed later on. You can do it. He could also find ways to stimulate growth so that it remains stable in absolute terms but proportionally reduces the proportion of the economy under state control.
Labor has historically found it difficult to do this. Even if Labor wanted to enter politics to deregulate, and its candidates are few and far between, it is under far greater pressure than the Conservatives on public sector pay. As a result, Labor tends to leave office with its finances worse off than when it took office.
Still, there are things Starmer can realistically do to avert a financial crisis. I don’t expect him to outsource his ideas to Sunday Telegraph columnists, but in the spirit of Christmas, I’m going to share three policies that I think he can get through in a way that the Conservatives can’t. I would like to make a suggestion.
Firstly, he could bring the NHS into line with European health systems, where public and private services coexist. The NHS is arguably the biggest obstacle to our growth, both directly and indirectly.
The immediate reason is that it absorbs about a tenth of GDP and has not seen performance improvements commensurate with the huge budget increases over the past 20 years. Indirectly, because it produces poor outcomes and an unusually high proportion of the population is out of work.
Labor recognizes the problem. In October, Shadow Health Secretary Wes Street said: “It is wasteful in every sense of the word to spend ever-increasing amounts of money on a system that is not working.” But his only tough policy promise appears to be spending more money on reducing waiting lists. He has remained silent about any plans to expand the domestic market under Blair.
Second, Labor could build more homes, immediately boost GDP through construction, lower housing costs, increase national productivity, and give people more disposable income. . This is one suggestion of his that I think Mr Starmer is going to pursue. He promised to build 1.5 million new homes and remove the noose around our cities in what is misleadingly called the “Greenbelt.”
Third, Labor can cut benefits without being accused of murdering the poor. It could even tackle the most burdensome aspect of our welfare state: the triple-locked state pension. Successive governments have refused to raise the retirement age as people live longer, as Sweden has done. Given the demographics of their support base, the Conservative Party’s timidity may perhaps be politically (not economically) justified. Labor will have a much easier time making the case for ending this generational bias against young people.
Doing these things would put Mr Starmer in front of events and avoid economic collapse, increasing his chances of re-election. But the more likely scenario is that, like previous Labor leaders, he will leave things alone until it is too late. Only then will public sector unions and no-cut activists understand what the cuts actually look like.