Insisting on neoliberal economic orthodoxy in a period of low or stagnating global growth is a recipe for economic malaise, and a disaster for a Labour government, argues Kevin Crane

The Labour government went into the Christmas holidays in big trouble; no sooner had it returned from them, things became even more severe. Chancellor Rachel Reeves’ budget had had a pretty rough reception when it came out around Halloween, but now it looks like the government won’t even be able to sustain the measures in that budget for more than a couple of months. This administration is getting hit by the perfect storm that is sometimes called ‘stagflation’, which is to say that economic growth is stagnant, but inflation is still raising costs: a very bad combination in conventional economics. The biggest pressure on the government now is that worries over the possible impact of Trump’s policies in the bond markets have driven up the cost of government borrowing in the US and elsewhere. This has made the UK government’s borrowing substantially more expensive and throws its spending plans completely out of balance.

Keir Starmer and Rachel Reeves came into office, barely half a year ago, positioning themselves as hyper-competent problem solvers, completely focused on the economy and ready to fix the mess that the Tories had created. The media was, at that time, largely supporting their claim to be uniquely talented and able to sort everything out. It is going to be very hard for them to project that image again now, even if they had media support.

But why have things gone so badly? The rising pace of the problems is not as fast as with the Tory Liz Truss’ infamous budget of 2022, but is a dangerous situation nonetheless. The answer is that, while Truss’ Tories and Starmer’s Labour have pursued different strategies at a detailed level, they are chasing the same basic goal, which cannot be achieved: they are trying to obtain economic growth out of a system which won’t deliver it.

Labour’s Sideways Budget

Labour spent the run-up to the general election moving well to the right over the question of the economy and kept moving to the right even after they had won. Under Starmer, the party has been desperate to present itself as fully committed to neoliberal orthodoxy, opposed to taxing capitalist profits and wealth and focused on keeping inflation low. When asked how these policies could help do something about rising poverty, crumbling public services and falling living standards in Britain, they responded that ordinary people would benefit because Labour’s policies were going to make the economy grow, and everyone would derive some gain from that.

The first thing to say about prioritising growth as the way to solve people’s problems is that it is, essentially, what has historically been called ‘trickle-down economics’, a term politicians don’t like using because it is so widely known not to work. The other thing to say is that it doesn’t actually differ from what Liz Truss, or really anyone else in the Tory Party, also believes. A key part of the neoliberal consensus is that politicians have to promise profitability to capitalists, who will then provide the growth.

Once in office, Labour began to implement its growth plan by instantly doubling down on the narrative that the Tories have left things in a mess. Starmer referred to the British economy as being full of ‘rubble and ruin’ and Reeves claimed that the economic situation was substantially worse than she had realised before she’d become chancellor. It cannot be stated enough that this was a lie: Reeves had privileged access to all the necessary data she would have needed. The government was saying these things to get two short-term outcomes:

1. To scare the public into accepting brutal austerity measures like retaining the two-child cap on benefits for parents and means-testing pensioners’ winter fuel allowance.
2. Making the public deeply afraid of the contents of the first budget in the autumn.

The plan with point 2 was then to release a budget that seemed much more conciliatory than most people would expect, enabling the government to get most of what it wanted while also neutralising potential resistance, particularly resistance that could have come from the trade unions but also to wrongfoot the remnants of the Labour Party’s own left.

The conciliation came in the form of increased public spending in key areas, to give this budget a very different look from the harsh cuts packages that almost all Tory budgets have been since 2010. Reeves had ruled out taxing the wealthy, landowners or monopolies to fund this, so instead she looked to raising taxes in less directly confrontational ways, particularly raising employers’ National Insurance. It was a sort of ‘sideways’ move, making a (very limited) concession to Labour’s base without challenging the big money interests to which she was desperate to appeal.

A slow-burning failure

The manoeuvring in the run-up to the budget was partially successful, at least as far as the politics goes. The trade unions have, indeed, largely given up large-scale struggle over pay and conditions, and have been trying to defend the budget, even if they can’t defend the government over murderously unpopular moves like the winter-fuel-allowance cut, or betraying the Waspi women. The Labour left, in so far as it even exists anymore, was utterly dumbstruck and failed to issue any independent criticism or comment on the budget.

One thing Labour didn’t anticipate, however, was resistance from the right, in particular the way that rich farmers were able to mobilise a much wider layer of rural support against cuts to tax loopholes that they’d been enjoying for the last couple of decades (another ‘soft’ tax rise, that Reeves wrongly thought would fly under the radar). Yet this has not been the most significant thing that the government miscalculated.

A genuine problem that both Starmer and Reeves have, as people, is that they wrongly think that they are a lot smarter than the general public. This leads them to make mistakes, such as not realising that if you’ve spent the entire summer telling the public that the economy is in deep and immediate crisis and things are completely terrible, then the public will rationally change their behaviour to cope with that situation. In particular, they will make a real effort to limit the amount of money they spend, since they may well need to save money for the near future. The immediate consequence of this is that the retail sector immediately suffers, since by definition it needs people to be making purchases, and a lack of such activity causes the economy to suffer.

Added to this has been the National Insurance rises. In effect, they are a taxation on employing staff, which has been historically rational as a way to fund public services for working-class people. It does, though, have the effect that when it goes up, businesses start finding their staff to be more expensive to keep in employment. This wouldn’t matter much if the economy was growing, but combine those expenses with retailers struggling with a very lean and disappointing pre-Christmas period, and both increased prices and job losses start to look like good options to business owners.

When served with the news that things were not going well economically just before Christmas, Keir Starmer’s response bordered on idiotic. He issued an absurd pronouncement that he was going to demand that civil servants and regulators start enabling growth, as if they’d been deliberately preventing it for some reason. Once again, one cannot help but be reminded of Liz Truss rambling on about her enemies being an ‘anti-growth coalition’. As mentioned, it has only been getting worse since then.

You’ve got a capitalism problem, not a growth problem

Liz Truss’ ‘mini-budget’ of 2022 was a failure, fundamentally, because it was premised on the idea that just cutting taxes would free businesses to become suddenly hyper-dynamic and profitable and so the problem of the government’s debts and bills would be solved by an overnight economic boom. It was the result of taking the loose rhetoric that wealthy libertarian financiers like to chat about amongst themselves in their cocktail bars and trying to implement this guff in real life.

Rachel Reeves’ budget was delivered with the absolute opposite of all that bravado. Reeves tells twee, sentimental stories like ‘My mum showed me how to balance the books at the kitchen table’, as if setting budgets for key institutions and infrastructure were in some way the same as going to the shops to fetch groceries. Despite these apparent differences, however, the crises of 2022 and 2025 are more alike than not.

Both Tory and Labour governments are trying to use the tools of the neoliberal era – as developed in the days of Margret Thatcher and Ronald Reagan – in a time when they cannot be made to work. Because capitalist politicians are often dishonest with themselves about what they are doing and how, it is very difficult for them to adapt when faced with an economic situation in which the range of policies they deem acceptable does not yield good results.

The world today has changed almost unrecognisably from four decades ago. Globalisation of trade and manufacturing has peaked, and is beginning to go into reverse. War and political instability are rising threats, not retreating ones as they were then. Most gravely, climate change is making the world into a harsher, more inhospitable and risky place. In the face of these realities, our mainstream politicians trying to pretend that this or that bit of jiggery-pokery will somehow restore the economy of the early 2000s is basically magical thinking. The people who consider themselves the ‘grown-ups in the room’ are really absolute dupes, in denial about the circumstances in which they find themselves. This is the backdrop to both the Tory and Labour Parties having lower levels of public support than they have had since universal suffrage was introduced.

At the moment, the main beneficiary of the failure of the establishment parties is poised to be the radical right wing, represented by Reform UK in this country. It needs to be said, however, that they too will not be able to simply overcome fundamental failures in the capitalist system. Part of opposing the far right has to be also presenting the actual anti-capitalist alternative.

A genuine radical left government could make real changes now, by taking measures that both the centrist establishment and the hard right reject, such as taxing the assets of the super-rich, controlling rents and energy prices, and investing in infrastructure for public good rather than private profit. It is vital that the left make these arguments, to persuade a lot of people who currently lack hope that society can, and should, do better.