Starmer is caught in the same mud that has swallowed every government of the last decade
Rachel Reeves sought to project strength on Wednesday in her annual Spending Review. The language was bombastic: “I have made my choices. In place of chaos, I choose stability. In place of decline, I choose investment. In place of retreat, I choose national renewal”. The contents were no less hard and steely. There were few soft social democratic edges to the promises of substantial investment into nuclear, infrastructure, technology, security and defence. But beneath Reeves’ hardwoman image, a glass jaw was lurking. The economy had shrunk by 0.3 per cent in April, and 69 per cent of Britons think Labour is doing badly.
Despite the attempt to come out swinging, this was a government on the defensive and backed into a corner. In interviews on the following day, Reeves’ was reduced to saying that being Chancellor is not about “trying to win a popularity contest”. The thing about making tough, unpopular choices, is that eventually, having paid the price, you’re supposed to be in a position to make easier, more popular ones.
I was struck by a segment from Tom McTague’s recent profile of Keir Starmer:
Once again, Starmer’s role is to defend the existing order through retrenchment and steady reform. Aboard HMS Prince of Wales he had told me he wanted to bind Trump’s America into European defence by increasing spending. But what if he is wrong about the old order and the possibility it can be fixed, abroad or at home? “I just don’t accept that sort of doomsday scenario or that defeatism,” he replies. Starmer believes that those who say otherwise are wrong, and that he will prove them wrong by making the country work.
So much of what Labour is doing feels like tinkering with a machine on the point of breaking down — one in need of overhaul or replacement, not careful maintenance. The spending review was a case in point. It was admirably long term and invested in strategic areas, but it was a bit like an alcoholic planning for his retirement; a perfectly sensible idea, but not much good unless he gives up the bottle.
Rethinking our entire economic model is a task that Labour is neither psychologically nor ideologically equipped to embark on
And in terms of what is wrong in the body politic, retirement is an all too relevant example — Britain is facing a balance of payments crisis as an aging population and retiring public sector workers claim generous state pensions paid for directly out of taxation. These are unfunded liabilities, and contrary to the myth of “paying in all your life”, previous generations of taxpayers were funding their parents’ retirements, and not storing up treasure in heaven for their own. Migration has been pushed by many in academia a policy as a fiscal panacea; an easy lever to pull to provide new taxpayers and key workers. Yet as research has shown, many migrants, especially outside of the EEA, are net recipients, not contributors, in terms of their tax contributions.
This basic structural issue is the real hard, unpopular choice, but as the winter fuel allowance furore showed, there is little popular appetite for making it. The one route to salvation from this nightmare decision might be serious GDP growth, but no amount of fine tuning can make the sputtering economic engine thrum into life. Rethinking our entire economic model is a task that Labour is neither psychologically nor ideologically equipped to embark on.
Even though Reeves had found a bit of give in her fiscal rules for some Keynesian stimulus, Labour is still caught in the terrible logic of the trade-off. Defence and security spending is welcome, but major cuts to the Home Office are likely to see already reduced police numbers be squeezed further. There’s a tough choice — should we stop suicide bombers or stabbings? Fight Russia or robberies? Reopening swimming pools and libraries is good news for our desperately struggling local government, but it’s going to come at the cost of higher council taxes.
The current trade off being made seems to lead straight to disaster. Tax as a share of GDP is set to reach a record high of 37.7 per cent by the 2027-28 tax year. It’s not just that tax is high in Britain, but that it seems to be going up even as the quality of public services decline. Not only are taxes more burdensome and less rewarding, but they often feel irrational and punitive. Council taxes vary widely by area, but are equally unmoored from the quality of services experienced by taxpayers. Bizarre anomalies like the rules around tax free allowances have created a uniquely high marginal tax rate of 60 per cent for earnings between £100,000-125,140.
Lower earners are taken out of tax more than in the past, but this relief effectively compensates for an economy that is not paying sufficiently high wages relative to the cost of living. Free government services in areas like health, housing and education are often poor quality, hard to access and subject to lotteries and delays.
Even if Labour were to generate higher GDP growth, the current economic structure distributes the rewards inefficiently. The top 1 per cent of earners pay 30 per cent of all income tax revenues, representing a massive increase over the past 20 years. This top-heavy retributive system reflects not success, or unfairness to top earners, but an economy in which only a tiny minority can win big. This is partly a problem of unfair pay scales within large companies, and of any increasingly non-unionised workforce, but it has just as much to do with the kind of industries Britain has fostered and encouraged. As I’ve written previously, our deindustrialised economy is increasingly comprised of a high end service sector, which provides a lot of the taxes and high incomes for a few, and a huge low quality, low productivity service sector, which has low wages except for a few figures at the very top. This latter sector is effectively subsidised by the state benefits and tax relief paid out to the working poor, which keeps the lowest paid workers from falling into extreme poverty.
Britain needs a generational economic settlement, in which welfare is restored to its reciprocal foundations, the young are reprioritised in policy, and new, more productive and highly paid, modes of employment are systematically encouraged. But we are so very far away from getting one. At present no political party has even admitted the scale of the problem, let alone proposed a commensurate solution.
