Keir Starmer appears destined for Downing Street. Even so, as the election campaign rumbles on, his party will be challenged to articulate a compelling platform that secures not only the keys to Number 10 but also the economic stability that has eluded every UK government since the 2008 financial crisis. That will demand fiscal discipline delivered not only through a prudent approach to public spending but also fundamental reform of our tax system.
In headline policy, Labour is committed to fiscal rules on spending and debt. Rachel Reeves promises to move towards balanced current spending and to secure a falling debt-to-GDP ratio by the fifth year of the forecast. As her speech on Tuesday argues, Labour believes such rules will underpin “stability” and “growth”.
The logic is twofold. Economically, the environment is perilous. Low growth and structural shocks from Brexit to Covid have left the UK in a “parlous fiscal position”. Electorally, Labour has struggled in the past to establish its credentials for economic “competence”.
Yet we know the country must address at least a decade of sustained underinvestment. That’s why the May and Johnson governments eschewed Osborne-era austerity in the wake of the Brexit vote. It’s why Corbyn’s Labour party generated initial enthusiasm with its strident condemnation of austerity, even if the project ended in acrimony.
Critics have condemned the Labour leadership for cowardice and ideological treachery. Across Europe, social democrats have been warned of the electoral dangers of “austerity from the left”. Some academics suggest that Labour should reject economic orthodoxy. In the 2010s, when interest rates were at historic lows, the anti-austerity argument for borrowing had salience.
However, times have changed. Inflationary volatility and uncertainty over future interest rates make the argument for more borrowing without caveats (or “rules”) less credible. So too do supply-side constraints after Brexit that deplete the economy’s productive capacity.
That does not mean Labour should merely embrace “austerity-lite” policies. Addressing the key challenges of our era – from the green transition to a shrunken public realm – requires major investment. The task is to forge a politics of prudence that blends the commitment to social justice with a disciplined approach to the public finances.
How? As academics who study Labour’s history in opposition and power, we advocate two key proposals.
First, stick with fiscal rules. Fiscal constraint has long been central to Labour in government and is compatible with the party’s ideological inheritance. The obvious example is Attlee’s “hairshirt” chancellor of the exchequer, Stafford Cripps. In the 1948 budget, Cripps ran a budget surplus to constrain inflation. Gordon Brown dramatically increased spending on health, but only after raising taxes in 2002. “Prudence,” Brown would say, “with a purpose.” Reeves’s fiscal orthodoxy is a legitimate position for a social democrat.
Our second proposal is that Labour needs an agenda in government that confronts the urgent imperative of raising resources through major UK tax reform.
We must break with the assumptions of the post-2008 era, which confused fiscal orthodoxy with slashing public spending and reduced state intervention. Crucially the forms of prudential politics embraced by past Labour chancellors were radically different from the “austerity” with which we are familiar. After 2010, Osborne’s Treasury cut public spending, swerved major tax hikes, froze public sector wages and decimated capital investment while the Bank of England boosted private consumption and asset wealth with ultra-loose monetary policy. The outcomes were starkly regressive.
In contrast, past Labour ministers squeezed wealth and private consumption to enable public investment. Taxes were an essential tool. In the late 1940s Cripps imposed a one-off capital income levy, calling on the public to “subordinate our personal interests to the greater good of our country”. Even Brown restrained the growth of personal income, albeit in rosier times, to invest in public services. Both used “prudential” politics to further the egalitarian goals of social democracy.
Reeves’s preferred way of meeting her fiscal rules is to avoid costly promises, understandable in the heat of an unforgiving election campaign. But a Labour government will still require a strategy for tax reform – not least because current plans rely on higher growth, which (as successive prime ministers have discovered) may never materialise. A major lesson of the 2008 crisis is that the UK needs a more resilient tax base. That entails shifting the burden of taxation from income and employment to unearned wealth and capital.
Voters, of course, don’t like tax rises. As a result, Labour avoids tax pledges like the plague. But while the tax burden on working people is at a historic high, taxes on wealth and capital remain comparatively low. And taxes can become, if not popular, then less unpopular if framed as “necessary” to fulfil progressive ambitions such as a “citizen’s endowment” for every young person to invest in education or a future home, alongside funding services that give children a fair start in life.
A newly elected Labour government should launch a commission on UK tax reform. There is an overwhelming economic and ethical case for higher taxes on wealth and for taxing capital gains at the same rate as income, not least the soaring levels of wealth inequality in Britain.
Previous research indicates such a reform could raise at least £10bn a year and is relatively popular with voters. The tax commission would engage directly with citizens to work through key choices on tax prior to any final decision by ministers. In addition, reform of council tax through a revaluation of tax bands based on current property prices should be linked to a new devolved funding settlement for local authorities, boosting investment in local services.
There is a radical course open to Labour in power that entails neither risky borrowing nor mindless cuts and kneecapped investment. The momentous challenges of our era should encourage Labour to reclaim the half-forgotten but deeply compelling tradition of economic prudence from the left.
