Labour’s annus horribilis

Just how early can one decide that a year has been a disaster for a government? At the end? Six months in? How about two weeks? Because fourteen days into the year, and five months after taking office, Keir Starmer’s government is utterly foundering. On grooming gangs, voters fundamentally disagree with Labour’s approach, with two thirds of Labour’s own voters backing a national inquiry into abuse. The decision to hand over the Chagos Islands projected weakness on the world stage, and the deal has already fallen apart. Likewise, the decision to appoint Sue Gray as chief of staff in Number 10 spectacularly misfired, with the erstwhile civil servant alienating most of the cabinet.

But the most shattering blow of all has been the state of the economy. Rachel Reeves’ autumn budget was already extremely unpopular, but its one alleged merit — that it was a fiscally responsible, hard-nosed agenda that would give Labour room to manoeuvre — has brutally imploded. Against a background of a global rise in the cost of borrowing, UK bond markets have reacted negatively to Labour’s leadership on the economy, eliminating at a stroke the “fiscal headroom” Labour was expecting, and raising the prospect of yet more cuts and tax rises. 

Keir Starmer now has the worst opinion polling he has ever had, in government or in opposition. If the results of one recent poll were to be reflected at the ballot box, Reform would take over 160 seats from the major parties, and Labour would lose its parliamentary majority. 

As I have previously written, we are starting to see the underlying thinking of the Labour leadership — this is a government which unthinkingly trusts institutions, no matter how ineffectual, flawed or discredited they have become. Rather than seeking to reform Britain’s crumbling, over-centralised state, Labour are determined to rescue it, even at the expense of national security, economic growth and the lives of ordinary people. 

The economic catastrophe of the budget embodies this failure-model. Rather than accepting the reality that both governance and markets involve rapidly evolving circumstances that require dynamic decision making, Labour extended its obsession with process into the realm of economics. Rachel Reeves imposed arbitrary self-constraints in the form of “fiscal rules”, committing Labour to balance the books in its mix of tax and spending. It’s these rules which gave us the Autumn budget with its “unpopular but necessary choices”, not any real world conditions. 

Nearly a century on from the great depression, the most basic lessons of Keynesianism have been forgotten

Alongside setting up these fiscal rules, Labour further legitimated and empowered a fiscal watchdog — the OBR (Office for Budgetary Responsibility), a quango set up by George Osbourne, and one that reflects both treasury orthodoxy and austerity economics. 

Here’s the problem with a process-led approach to the economy — reality quickly overtakes procedure. Despite getting a glowing report card from the OBR, the markets lacked confidence in the Chancellor and her budget, with the result that those fiscal rules are now moot. A week ago Labour was safely within them with billions to spare, today they are left with the choice of breaking their rules or imposing further pain on the economy.

If Labour sticks to its rules, as many believe they will, there is no guarantee that the markets will reward them. If tax rises and spending cuts further depress growth forecasts, the cost of borrowing may increase further, and tax revenues may not increase in line with increased rates, leaving the government in a doom spiral of fiscal constraint and stagnating growth. 

The mistake of a process-led approach to economics is that it treats a dynamic market as if it were static, and flattens different areas of spending, and sources of growth, as if they all had equal significance in the economy. Although Labour has theoretically committed to “borrowing to invest”, its fiscal rules constrain its overall borrowing as well, meaning that in real terms Labour has made it impossible under its rules to unlock billions to invest, say, in domestic gas storage, housebuilding, or a new generation of nuclear power plants. 

Nearly a century on from the great depression, the most basic lessons of Keynesianism have been forgotten. If the government had set an ambitious, growth-oriented budget, with tax cuts for businesses and borrowing to invest in strategic infrastructure, its cost of borrowing might have gone down, and its tax revenues could have gone up. 

Nor is it just a question of direct economic stimulus. Britain is also trailing in terms of private investment, with too little venture capital, and far too much money sinking, toxically and unproductively, into land and housing. Structural changes to how both state and private investment work could unlock the money Labour needs, but the political establishment is too timid and unimaginative to even dare to try. But this timidity, as we have already seen, is not being rewarded, and there are no gold stars for well-behaved head girls who follow the fiscal rules. 

What does work? Liz Truss is often imagined to have failed by ignoring the OBR, when her real errors were political. Strong leaders who secure public trust, and have a firm control of the machine of government are that much more likely to win the trust of the markets too. Moreover, a Labour government should be far from complacent about the idea of markets, civil servants, or central bankers setting the rules for democratically elected politicians, rather than vice versa. In going into the election on a platform of fiscal restraint, Labour has wasted an opportunity to win a democratic and political mandate for growth, reform and investment. 

Whether markets are to be challenged or mollified, or some combination of both, what is needed from both Number 10 and 11 is leadership and flexibility, not arbitrary proceduralism. The British establishment are just about the only group of people in the world who still believe that the world is governed by rules, and would be just fine if we were all “nice chaps” and stuck to them. The real “rules” — the realpolitik of conflict interests, alliances and the interplay of forces — are persistently flouted in the name of those dreamed up in Whitehall. 

Labour’s fiscal idiocy is compounded by domestic political errors that signal insecurity to markets, and strategic errors that alienate key allies abroad. One factor driving up the cost of borrowing is the possibility of US protectionism and tariffs under Donald Trump. If there’s one easy, obvious move for the UK right now, it is securing our relationship with America and flattering the new President. Trump is an Anglophile, and one easily swayed by nice words and a willingness to make bilateral deals. If Britain can secure carve-outs for its own products, Trump’s tariffs could even benefit British exporters.

But instead of acting to mitigate the risk of a Trump presidency, Starmer and his government have done everything possible to alienate the new administration. The decision to hand over the Chagos Islands, and the strategically vital Indian Ocean military base of Diego Garcia with them, is seen as a direct threat to national security by the US foreign policy establishment. Alongside that fatal miscalculation, Starmer has allowed himself to be provoked by Trump ally Elon Musk, with his policies on the Southport riots and the grooming gangs creating considerable animus against him on the American Right, and harming our international reputation. Whether or not Musk is personally credible or honest, or his attacks fair, Starmer has done nothing to deflect or appease the right domestically or internationally, despite the growing power of populism across the West. 

All of this has created a perfect storm, in which Britain is becoming diplomatically isolated, economically stagnant, and socially divided. At the heart of the storm, Labour don’t look embattled — they look defeated. The year has only just begun, but Starmer’s chance to turn the country around is already over. It’s already looking like Labour’s annus horribilis, is becoming Labour’s finis.