Labour have talked a good game on growth, but all their early actions seem precision calculated to deter investors, says James Price
I’m not sure if Rachel Reeves is a fan of musical theatre, but going into her economic statement on Monday, she would have done well to heed the words of George Washington in Lin-Manuel Miranda’s Hamilton: “Winning was easy… governing’s harder”.
Her logic was understandable, for a first draft; “We (Labour) always have to bow to our real bosses (the trade unions) and offer enormous public sector pay increases. So why don’t we blame the Tories for the weakness of the economy and hide these hikes in an attack on them?”
This may be satisfactory thinking when in opposition, and it was sufficient to blame Sunak’s tired Tories during the campaign. But governing’s harder. Inflation busting pay rises for teachers and NHS workers will cost £9bn, nearly half of this supposed black hole. And it’s unlikely to be the last time Labour bows to its union paymasters
These early steps from Labour are hardly creating confidence that they will make good on their pledge to be pro-business. For all their talk about growth their actions seem purposefully directed at driving away wealth creators and investors.
Chief amongst them is the increase in Capital Gains Tax. The usual suspects will trot out some massive number it could raise (£16.7bn, by one study) in a static calculation. And just as with Labour’s VAT hike on independent schools, they haven’t bothered to dynamically model the effects elsewhere. The hyper wealthy have incredibly mobile capital and don’t need many more excuses to leave, especially as Labour are targeting non-doms.
The state takes much more now than it ever did when Reeves’ Labour predecessor Denis Healey said he wanted to ‘squeeze the rich until the pips squeak’.
Why does this matter? Well, Labour pledged over 50 times in the election not to raise taxes, and claim they meant only income, NI and VAT. But now we see them licking their lips on spending, and throwing money into a national wealth fund (and whatever the hell GB Energy is supposed to be) when we are borrowing tens of billions a year just to pay interest on our colossal debt. Oh, and cancelling infrastructure projects and defence spending while they’re at it.
This is all so frustrating because Ms Reeves had genuinely worked to build a reputation for prudence and discipline within the City and markets more broadly. Her efforts at the G20 in Brazil recently were laudable, and international factors could make this a brilliant moment for UK Plc. France, Germany and the US are all looking much less stable, Britain is the fastest growing economy in the G7, inflation back at 2 per cent and unemployment still very low.
Even with all that – and a massive majority – Labour’s addiction to tax and spend may drive investment away at precisely the time we need it most.
Goodness knows the Tories didn’t handle the economy nearly as well as they were supposed to, and their messaging was even worse. The cost of Covid and the energy bills after Putin invaded Ukraine has been brutal to our finances. But Jeremy Hunt had begun an impressive turnaround before Rishi Sunak called an early(ish) election.
We are all very lucky that Hunt won his seat and is sticking around to speak truth to the power that used to be his. Both Labour, the Conservatives, and the country owe him a huge debt for steadying the ship and giving the economy a fighting chance. For all our sakes, we should hope Reeves doesn’t squander it.
James Price is a former government advisor