It’s still the economy, stupid Labour has a fatal blindspot

“It’s the hit and hope brigade. Ironically like the last days of Corbyn.” The air of delirium at Labour’s annual conference this week was familiar according to one former Labour adviser. The 2019 conference saw a mad rush of policy proposals and ideas, all flung out in the hope of generating some media attention and distracting, however briefly, from the party’s central political problems. It didn’t work.

All the announcements only revealed Labour’s curious blindspot about how most people have to live their lives. Chancellor Rachel Reeves continues to make this clear. Her own checklist of achievements indicate just how distant Starmer’s strange, technocratic government is from New Labour. Where Blair and Gordon Brown sang the praises of unfettered globalisation, Reeves puffs up her interventions against the market, from British Steel to loans for Jaguar Land Rover. And though Reeves and others will praise New Labour, with creatures like Peter Mandelson and Blair circling the Government, Starmer’s party is far more prepared to intervene on the economy than its most recent predecessor.

But intervene for whom? Big numbers, big companies, big talk of economic growth: this is the tone Labour wants to set when doing economics, to the point of absurdity. A claimed £110 billion investment by mostly US “financial firms”, the centrepiece of last week’s Trump bootlicking, was to produce just 1,800 jobs — perhaps every lucky new employee will simply be given £61 million each? And so it goes for data centres, the shiny new toy for all parts of the party, including new Business Secretary Peter Kyle and even the leader-in-waiting Andy Burnham, with seemingly little thought as to what tangible economic benefits these resource-guzzling monsters actually produce. It’s all radically disconnected from the daily experience of life in Britain, which remains much as it did pre-Labour: a sense of everything being too expensive, and nothing really working properly.

It’s not too hard to guess where the real impetus for data centre enthusiasm has come from. Keir Starmer has been happy to pose with Palantir’s CEO, Alex Karp, a man otherwise given to pontificating about “the superiority of the West” and “scaring our enemies”. Perhaps Starmer was hoping some of Karp’s mildly unhinged confidence would rub off on him; sadly, the PM’s own enemies do not appear to be the remotest bit scared. Nigel Farage certainly isn’t.

Starmer’s government is shaped by one, overwhelming factor, something Burnham had the temerity to point at in an extensive pre-conference interview: “fear” of the bond markets. He wasn’t wrong: the Government has an increasingly fraught relationship to financial markets, as repeated mini-crises and the steady creep upwards of government borrowing costs suggest. The result has been a kind of economic paralysis in which the Treasury tiptoes as close as possible to the spending limits allowed by its own fiscal rules, in the hope of not frightening the bond markets, but never does enough to break out of the doom-loop. Attacks from the Left are starting to have some bite. Starmer has been unable to persuade his own backbenchers of further austerity, with messy reversals to at least some planned cuts (and rising interest rate charges) adding another £10 billion to expected borrowing, but his government is also tied, painfully, to pre-election promises to keep the main taxes untouched.

Add to that weak economic growth and rising demands from health and social care and you have a hole in the government’s plans that is likely to be somewhere between £30 to £50 billion. Reeves will find out the exact number at the end of this week, when the Office for Budget Responsibility presents its latest forecasts; leaks beforehand suggest a further reduction in Britain’s productivity growth is on the cards. We are rapidly approaching two lost decades for the British economy. And there doesn’t seem to be a way to square the circle of low growth and politically impossible tax rises and spending cuts that is generating this economic instability. There is no particular reason for anyone trading government debt to believe that this messy government will be able to either magic up chunky tax rises (which Chief Secretary to the Treasury Darren Jones hinted at over conference) or persuade its increasingly restless backbenchers of the need for more cuts.

This fundamental lack of confidence is causing a steady increase of borrowing costs. In a world already beset by multiple shocks, from the big and obvious like the Trump tariffs to the more subtle like the impact of extreme weather on harvests, Britain is particularly badly exposed. Not only because government debt hovers at around 100% of GDP, but because the economy is fundamentally, materially weak: importing about half the natural gas it burns for electricity and heating, and about half the food it eats. It’s an economy that now has no remaining fertiliser factories, relying solely on imports from an increasingly turbulent world. The obvious, immediate things to do — a wealth tax, and an end to the absurd Quantitative Easing-related payments to the Bank of England — have been proposed only by the Government’s opponents to its Left and Right respectively.

Starmer can and should call Reform’s plans to mass deport Indefinite Leave to Remain holders “racist”. Relative to the complete spinelessness Labour has previously displayed towards Farage, this is a step forward. It is useful when confronting a political enemy to be able to actually attack them for something. But it will prove no more successful a strategy, by itself, than the same trick did for Joe Biden. For sure, he could be rude about the unique threat Trump presented to US democracy — and his points, broadly, would be correct. Biden and his supporters could talk up the huge investments made through the Inflation Reduction Act, or the CHIPS Act. They were real cash and major interventions, far bigger than anything Labour has contemplated, that would, over time, deliver some manufacturing jobs. But if all Trump had to do was ask, repeatedly, at every rally, whether ordinary Americans felt better off now than they did four years before, it amounted to nothing. Worse, when the hapless Kamala Harris attempted to float a few mild proposals to restrain grocery prices, the hue and cry from the liberal economics establishment about the evils of “price controls” meant her campaign never touched the core issue of overpriced essentials, and corporate profiteering, again. Lacking any real ideological scruples on economic issues, Trump’s administration has proceeded to rip up much of the free-market rule book — imposing dramatic, politically motivated tariffs, and taking part of chip manufacturer Intel into public ownership, for example. Reform in the UK has shown a similar flexibility — Nigel Farage has pledged to nationalise British steel while Richard Tice has taken on the Governor of the Bank of England over the costs of Quantitative Easing.

Biden, Harris and the Democrats could go round and round the core economic issues. They could point to all their marvellous interventions. They could highlight the real dangers of their opponents’ plans. But if they did not address the central economic issue for millions — the cost-of-living crisis — it would all amount to nothing. And so they lost.

This should be taken as a warning for Labour. UK inflation remains above the Bank of England’s 2% target and, crucially, it is food prices that are helping to keep it there. Britain imports so much food that disruptions in the rest of the world (crucially now including extreme weather disrupting harvests) turn quickly into higher prices in the supermarkets here. Living standards have barely moved since 2019, creating fertile ground for the kind of resentments against migrants that Reform, and those further to the Right, to flourish.

Labour has dragooned more establishment economists into advising them, now including former Bank of England deputy governor, and former Columbia University President, Minouche Shafik. But their attachment to establishment economics is part of their problem: it means they will run scared of intervening on prices in the name of free-market economics, and it means they will duck out of taxing wealth — instead leaning still harder with Budget tax rises on the “working people” they once pledge to protect. Charges of “racism” against Reform will count for little if all Farage has to do at the next election is ask, like his mentor Trump, if people feel any better off.

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