Labour must prove it can be trusted on the economy

Labour’s most pressing task is putting public finances on a sustainable footing. Far away from the noisy culture wars about race, flags and swans, in recent weeks bond markets have shown some more disturbing trends in terms of the interest rates the UK government must pay to raise the long-term money it needs to keep going.

Without completing that task of “fixing the foundations”, as the PM often terms it, the government is hamstrung and, in extremis, its failure could generate the kind of severe fiscal crisis that will threaten the stability of the government, with huge ramifications for wider society, according to The Independent.

Global inflationary concerns have hampered most advanced economies in recent years, but the UK seems to be coming off worse than most. Virtually every political party during this conference season agrees that too much is having to be spent on debt interest — on the “national mortgage”, as some put it, much of it taken out during the pandemic — and all fear a debt-tax-debt “death spiral”. So minds in government circles are, rightly, focused on the chancellor’s options for the Budget next month.

As The Independent reports, there remains within the cabinet a group of ministers who have kept the New Labour faith, and who fear the party’s leftward drift towards ever-heavier taxation could prove counterproductive in more ways than one. Economically, care always has to be taken to ensure that taxes on wealth, broadly speaking, do not lead to unintended consequences, and remove incentives to save, invest and build businesses — thus depressing revenues as well as longer-term growth.

In the first place, there is the continuing risk that taxes on the former “non-doms”, those with considerable fortunes, could drive them out of the country, with a consequent loss of the tax take. Evidence, seen by HM Revenue and Customs, has mounted this year that this is exactly what has been taking place, with capital flight principally driven by new inheritance tax rules, which have since been relaxed. The Treasury has already had to adjust its plans accordingly.

The second danger is more purely political. As one unnamed minister puts it, the abolition of non-dom status and VAT on private schools is “anti-aspiration” and “harming this country”. One of the great lessons that the Labour Party had to learn the hard way — through multiple general election losses — is that attacking the “rich”, rarely defined, often backfires. It repulses people who are not “rich” but would like to think that they too might one day be able to enjoy a degree of financial independence. Too much perceived “punishment” for hard work, ambition and aspiration could cost Labour yet more support, even if it succeeded in raising some extra funds.

The problem for Labour is that in the past few months, it has undergone a “soft left” revolution. Even if Andy Burnham’s attempted coup had to be abandoned, there is plainly a move afoot to introduce more wealth taxes, including a terrifyingly audacious scheme to ram stamp duty and council tax together in some new property tax, which is bound to be hated. On the other hand, the parliamentary Labour Party has effectively vetoed cuts to social security, an unsustainable and expensive gesture that will not help Labour win a second term. That leaves ministers with no choice other than to hike existing taxes, invent new ones or extend others, notably VAT.

Traditionally, the Conservatives were the default party to be trusted with running the economy and rewarding graft and entrepreneurship. Towards the end of their last long run in office, it became a bad joke. Yet the party is showing small signs of recovering its poise at its conference this week. The shadow chancellor, Mel Stride, has been positively fizzing with ideas in recent days. Not all of them have merit, or credibility, but the £5,000 subsidy for working first-time buyers is at least inventive, as is the plan to scrap business rates for smaller shops and public houses. There is insufficient detail to say whether the overall £47bn in cuts to public expenditure he proposes are feasible, let alone desirable. But at least he’s trying to talk to the voters about things other than immigration.