Labour’s current fiscal rules prevent the investment sorely needed for public services

Mike Buckley

18 September, 2024 

Left Foot Forward

This week a group of eight senior economists echoed the unions’ warning, arguing that fiscal plans inherited by Labour will reduce investment spending as a share of GDP, repeat earlier mistakes, backfire and undermine growth.

Last week Keir Starmer was the first prime minister to address the TUC for 15 years. In different circumstances his recommitment to “the biggest levelling up of workers’ rights in a generation” would have brought down the rafters.

Few deny that this Government is different. Starmer’s presence was welcomed. The workers’ rights bill, championed by deputy leader Angela Rayner and business and trade secretary Jonathan Reynolds, goes further than many trade unions had dared hope for.

Much of the new deal is about enhancing individual workers’ rights but it will in addition create a historic opportunity by giving unions rights to organise in workplaces – something union leaders hope could mark a step change in union representation.

“The significance of the plan to make work pay and the employment bill cannot be underplayed,” said Mike Clancy, General Secretary of Prospect, “they are a once-in-a-generation opportunity to improve workers’ rights in this country.”

Last month’s above inflation pay awards – averaging 5.5% – for many public servants, including teachers and NHS workers, were welcome albeit essential to draw a line under strike action and tackle recruitment and retention issues.

But in the context of his and Rachel Reeves’ almost daily reminder that cuts are more likely than increased spending in this October’s budget, many present expressed concern that public services, already stretched to breaking point by 14 years of Tory austerity and mismanagement, will be pushed to breaking point if the Government does not act.

“What comes next?” asked Fran Heathcote, the general secretary of the PCS civil service union, who said her members are keen to see a “positive alternative” to years of public spending cuts. “We want to engage with the government to try and make that a reality – and some of this stuff is not boding well.”

It’s not just money. Many delegates expressed concern that Labour has not yet set out its industrial strategy, expected to focus on creating hundreds of thousands of jobs in green technologies, with more detail on steel in particular expected soon.

Some unions – particularly GMB and Unite, with members in energy and manufacturing – are sceptical about whether new jobs will be created in the right places and at the right pace to replace thousands being lost elsewhere.

GMB general secretary Gary Smith acknowledges the Government was handed a “hospital pass” by the Tories, but does not conceal his anger the promise of cuts and the delay to investment announcements in key industries.

“Thousands of jobs will go; entire communities will be hollowed out,” he said last week. “We’re allowing our manufacturing sector to shrivel and die, but we’re not reducing our emissions – we’re just outsourcing them. It’s bad for communities, devastating for jobs and makes no sense for the environment. Labour urgently needs an industrial plan to create jobs and hope for working class communities.”

Unions are right to argue for a robust industrial strategy, albeit they may need to give what is still a very new government more time. Some of the demands of GMB and Unite – for example that there is no ban on new licenses for drilling before a fully funded workers’ plan guaranteeing commensurate jobs for all North Sea workers is guaranteed – are unlikely to get agreement from Government given its commitment to swiftly reduce emissions.

This does not mean the Government will not be mindful of the need for replacement jobs, as evidenced by the fact that GB Energy is to be headquartered in Aberdeen, while the roll out of on- and offshore wind in being greatly sped up by Ed Miliband.

In calling for investment above cuts the unions are making common cause with unusual partners. This week a group of eight senior economists echoed the unions’ warning, arguing that fiscal plans inherited by Labour will reduce investment spending as a share of GDP, repeat earlier mistakes, backfire and undermine growth.

They argue that current debt rules create an “inbuilt bias” against investment, and that “to follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability.”

One signatory, Lord Jim O’Neill, a former Treasury minister under David Cameron, argued on PM that while fiscal rules should be refined rather than ditched entirely, given a need to keep debt to GDP levels under control, the Government should make “transparent what the debt level is including public sector investment and without it.”

This, he argued, would send a strong signal to markets and private investors that the Government was committed to investment and, by extension, to growing the UK economy and fixing all too real drags on economic growth, including ageing transport and public infrastructure.

Rather than panicking markets as Liz Truss’ unfunded tax cuts did back in 2022, a Government making clear that it was investing now for long term growth later would give markets increased confidence in the UK economy, encouraging the inward private investment the Government knows to be essential.

Despite the promise of hard choices to come in the budget Rachel Reeves has given mixed signals on the permanence of current fiscal rules.

In response to this week’s letter from O’Neill and colleagues a Treasury spokesperson said Reeves “has set out her commitment to the current fiscal rules and will set out precise details at the Budget”.

However, in her Mais lecture in March this year Reeves highlighted both a lack of protection for capital spending and short-termism as issues with the current rules, suggesting she would adopt a new borrowing target that would only allow borrowing for investment.

We may get some indication of Reeves’ views in her Labour conference speech next week, although she will be loathe to give away too much detail ahead of October’s budget. But if she is to keep to current fiscal rules, widely regarded to prevent investment sorely needed for public services and the wider economy, she will need to silence critics from both unions and economics.