Revolutionary Socialism in the 21st Century
 
Revolutionary
Socialism in the
21st Century
Keir Starmer and Rachel Reeves at Tilbury in 2023. Image by Flickr. Photo used under CC BY-NC-ND 2.0

Is this the end of austerity? Making sense of Britain under Labour

Kate Deer

Labour promises an end to austerity while juggling market pressures and reforms. But can Starmer and Reeves deliver lasting change—or will their plans flop under scrutiny?

Remember Liz Truss? The short-lived prime minister who sent Britain’s bond markets tumbling and who had to resign only three weeks after taking office? Those who are fortunate enough to be homeowners will likely remember her as they will now be paying hundreds of pounds more towards the mortgage. Her economic policies of drastic tax cuts funded by a steep increase in government borrowing famously didn’t surpass the lifespan of an iceberg lettuce. 

This raises the question: which food item can the policies of Rachel Reeves and Keir Starmer be compared to? Are they an avocado, which if purchased perfectly ripe expires as soon as you turn your back on it?  Or perhaps they bear a closer resemblance to a McDonald’s burger, which might be underwhelming and lacking nutrition but allegedly does not rot?

If initial reactions are to be believed, Reeves and Starmer might be ranging much closer to a lettuce or avocado rather than a McDonalds burger. After her announcement, bond yields, which reflect the government’s borrowing costs, shot up whilst Labour’s rating in the polls dropped, highlighting the challenges the new government is facing.

In her budget, Reeves attempted to strike a difficult balance between simultaneously pleasing markets and breaking with austerity, which she rightly blames for much of the economic malaise Britain is facing right now. This didn’t go down too well. Can the Labour party tread the balance between pleasing financial markets and ending austerity at the same time?

A turning point

At this point, it is probably worth acknowledging that the election victory for the Labour party and Rachel Reeves’ budget marks a significant ideological turning point. Not only is Rachel Reeves the first woman to take charge of the nation’s finances (urinals had to be removed from 11 Downing Street), but the budget also marks the beginning of an acknowledgement among Britain’s ruling class that the decades-long attempt to cut public finances has had devastating consequences.

Just like the Tories, Reeves and Starmer believe in the importance of ‘balancing the nation’s books’, the idea that public spending needs to be balanced against income. But unlike the Tories, who have attempted to combine tax cuts with cuts to public spending, Labour is planning to increase some taxes whilst increasing spending on health and other public services. 

Labour has promised the most generous increases in spending on public services in twenty years over the next two years. The government is also avoiding cuts to so-called ‘unprotected departments’ such as justice and local government. This is important news for local councils, many of which are at the brink of default. This marks the first recognition that decades of austerity have failed Britain.

The debt challenge

But Reeves’ spending pledges come at a time when it has become much harder for governments to take on more debt. On the one hand, Britain’s total debt levels are at a record high, despite years of austerity. On the other hand, central bank interest rates have risen, making it much more expensive for governments to repay their debts.

The experience of the Liz Truss government has burdened Britain with some of the highest bond yields among Western nations. Yields on ten year government bonds rose to more than 4.63 points in the wake of Reeves’ budget announcement, which is comparable to Liz Truss levels and almost twice as high as yields for French and Greek debt, despite the fact that France, according to media headlines, is on the brink of a sovereign debt crisis. 

Meanwhile, the government is facing pushback from those impacted by tax increases. The CBI, the lobby group for British business, has attacked planned increases in employer national insurance contributions while farmers are protesting about planned changes to inheritance tax, which would see those farmers inheriting land worth more than £1 million facing higher inheritance taxes. 

Dodging confrontation

From a socialist perspective, both measures are a step in the right direction. They target employers, rather than workers, and some of the largest landowners in the country. In the case of farmers, it should be acknowledged that some are ‘asset rich, cash poor’. But it is hard to feel sorry for the likes of Jeremy Clarkson who sits on a net wealth of more than £5 million for having to fork out more in inheritance tax. 

However, Labour could have gone much further. It has avoided implementing several policies that would have received widespread public backing, like equalising capital gains tax to income tax, and increasing corporation tax. Starmer’s government has also completely abandoned the idea of a wealth tax, which could have raised tens of billions of pounds. 

Instead, the Labour government is largely seeking to dodge the confrontation with the richest and most powerful in society, banking instead on short-term borrowing in the hope that private investment will ultimately flow in.

A front-loaded budget – austerity through the backdoor

These pushbacks from organisations like the CBI and farmers illustrate that Labour is attempting to perform a delicate balancing act between reassuring financial markets and the richest in society whilst not reverting to austerity. 

There are plenty of economists who would challenge the notion of ‘balancing the nation’s books’ as a social construct. There is no hard law that forces governments to balance public sector borrowing against incomings. Indeed, Reeves even changed the definition of public sector liabilities slightly, allowing her to borrow more. 

But politicians do face a real challenge and ignore financial markets at their own peril, as the experience of the Liz Truss government has illustrated. Any chancellor who is seen to be reckless with public finances risks bond markets turning against them and borrowing costs shooting up, with devastating consequences for ordinary people. 

This is why Reeves has still been relatively timid. Rather than committing to increasing public spending significantly over the long-term, much of her spending is heavily front-loaded with most of the investment taking place over the next two years. After 2026, the local government and the justice system will again face effective cuts. Labour has also made odd choices on priorities, bolstering defence spending whilst failing to abolish the two-child benefit cap, raising the question of how many working people will really be better off in two years’ time. 

For the long-term, Labour’s financing plan is very much dependent on attracting private investment. This is why Labour was very keen to be photographed with some of the country’s most powerful institutional investors as soon as they took office. For the past few months, 11 Downing Street has had a revolving door with fund managers, insurers and pension funds queuing up to discuss reforms to attract investment. 

Dependence on investors

However, there is a fundamental issue with this reliance on private investment. In order to remain attractive to private investors, risks and returns must stack up. Investors who are being asked to commit to infrastructure projects, for example, would expect to see a return significantly higher than the risk-free assets, such as government debt. For example, if the government were to fund grid infrastructure by issuing long-dated bonds, it would face yields of around 4 per cent. However, if a private investor like a pension fund were to invest in grid infrastructure, it would expect to see returns of at least 8-10 per cent depending on the risk of the project. In other words, it becomes significantly more expensive for the government to fund infrastructure through private investments rather than through borrowing. 

There are nuances to this debate. For example, it matters whether the government is the owner of the underlying asset or if it remains fully owned by private investors. Yet Labour’s approach incentivises the state not to be the owner of assets, continuing the agenda of privatisation which has dominated Britain for the past decades.

The myth of the bond vigilantes

To avoid borrowing more, Reeves is now stuck in a long-term battle with the nation’s pension market. Her hope is that reform of the £2 trillion markets by making pension funds larger will generate economies of scale and make the funds more willing to invest in infrastructure. It is an extremely convoluted way of raising money which is by no means guaranteed to succeed. Perhaps worst of all, it risks gambling away the retirement savings of millions of workers who are not necessarily better off with having their pension savings invested in complex, illiquid private equity strategies.

Reeves is going through all this effort because she is afraid that bond markets might turn against her, further increasing borrowing costs. Investors in sovereign bonds that turn against certain governments because they don’t like their policies are sometimes called “bond vigilantes”. It creates this image of an anonymous villain who has extreme power over politicians without facing any accountability. For many poorer nations and even southern Eurozone countries, there is a degree of truth to this. Bond market investors have been allowed to wreak havoc on economies whilst facing zero accountability. So far, the hegemonic view is that these investors must be appeased at all costs, which could only be done through austerity measures. But by anonymising these ownership structures and dodging questions on policy alternatives, politicians are faced with enemies that are impossible to fight.

Once we shine a light on who actually owns the debt and start putting forward alternatives to austerity, we are able to flip the script. A closer look at ownership of British debt is especially revealing. Nearly 40 per cent is still owned by the Bank of England. While the Bank is planning to reduce this level, it is still the largest owner of gilts. A further 20 per cent is held by insurance investors and pension funds and only 25 per cent is held by overseas investors.

Source: ONS and Bank of England

Whether the Bank of England expands or reduces its debt stock is not just a macroeconomic but also a political question, it would be mistaken to describe the Bank as a completely neutral actor. The Bank is a powerful political force that can intervene in bond markets in times of crisis, as it did during the Liability-Driven Investment crisis prompted by Liz Truss. In theory, the Bank can buy unlimited amounts of government debt to stabilise bond yields. That doesn’t mean it is a wise thing to do or that politicians should bank on it, but it is simply not the case that there is a hard limit on government borrowing.

The other thing that’s worth noting is that recent British gilt auctions have been heavily oversubscribed, so it is certainly not the case that there is no demand for government debt. For British pension funds and insurers these gilts are a very attractive match to their liabilities.

Dependence on growth

At the heart of Labour’s government is a promise to ‘kickstart economic growth’ to the highest levels among G7 countries in order to lift working people out of poverty. There are plenty of things which could be questioned about this assumption. First, there is a reason why people have little faith in trickle down economics. Historically the link between GDP growth and declines in inequality is hotly contested and, despite having had relatively strong levels of GDP growth in 2021 and 2022, Britain remains one of the most unequal countries among high-income economies. 

Moreover, there are good reasons to believe that it is unlikely that the economy will ever revert to double-digit levels of growth as seen in the postwar era. Global GDP has indeed risen in the immediate aftermath of the Covid-19 pandemic but we all remember that this came at a huge cost of millions of deaths and countless people suffering with the long-term effects of the disease. 

Over the longer term, global growth is unlikely to pick up. This is in part because the system of capitalist accumulation is running up against its own contradictions, a trend Marxists describe as the tendency of the rate of profit to fall. In addition, capitalism is increasingly pushing up against the planet’s physical boundaries with further growth coming at a huge cost of environmental destruction and the exploitation of finite resources.

The bigger question is whether, in the age of almost unmitigated climate disasters, it still makes sense to define our economic model based on growth. For anyone with the slightest environmental consciousness, the prospect of strong growth driven by higher levels of consumer demand, building more cheap disposable goods whilst wrecking the planet should sound terrifying. It should be time for socialists to imagine a way of lifting people out of poverty without it leading to a climate apocalypse. 

What are the alternatives?

Labour’s limbo will ultimately be impossible to navigate. The party will have to pick a side, either please markets and revert back to austerity policies or adopt a much more aggressive stance on redistribution in order to secure the long-term funding the country so desperately needs. 

With Starmer and Reeves in power, it seems likely Labour will prioritise pleasing markets over tackling poverty. Coming back to the food analogy, Labour might turn out to be closer to a McDonalds burger: flavourless and pumped with preservatives, it would last for quite some time, but ultimately, it will still rot. 

The bigger challenge now is to fundamentally rethink our approach to economic growth. There are no easy answers while continuing to operate in a global economy where everything from sovereign credit ratings to bond market yields depends on GDP growth. This battle will have to be fought on a global level. But if we are serious about tackling poverty, inequality and climate change, this has to be the starting point. 

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