Rachel Reeves: Hero of the Left
7 min read
The bond markets barely blinked at a spending review that included a substantial real-term increase for the NHS. That’s something the left should celebrate, argues Tim Leunig
As a student, Rachel Reeves hung a framed picture of Gordon Brown on her wall. History does not record whether it was signed or not. Brown was, in fact, a pretty average chancellor, but he was lucky enough to be chancellor in a period of global prosperity.
Many of Reeves’ problems stem from his time in office. Despite presiding over a record 50 quarters of uninterrupted growth, UK national debt relative to GDP rose by a quarter between Labour’s 2001 re-election and Brown becoming PM in 2007. In the same period, national debt fell in Australia, Belgium, Canada, the Netherlands, Sweden and Switzerland, and rose only five to 10 per cent in France, Germany and the US. It is hard to understand why the UK allowed debt to rise in this era. These were the good times, and in the good times you put money away, rather than spend money you don’t have.
If Brown had lived within his means in the good years, and followed Canada and the Netherlands in cutting national debt by 15 per cent of GDP, our debt would be £430bn lower today. At the current 10 year gilt rate we are paying £19bn annually in extra interest for his profligacy.
There is nothing right-wing about understanding markets or tough fiscal rules, or wanting a strong role for the OBR
This understates the cost of Brown. Interest rates are not fixed – the more you borrow, the higher the rate. It is no coincidence that Switzerland, with only a trivial national debt, pays 0.3 per cent on its 10 year bonds. Germany, with a 60 per cent debt to GDP ratio, pays 2.5 per cent, and the UK, with debt roughly equal to GDP, pays 4.5 per cent. If the UK had been better run when Brown was Chancellor and PM, our government would plausibly be paying 0.75 per cent less today – another £18bn annual saving. The costs to profligacy are real.
Reeves understands this sort of maths. She understands that if a nation wants to borrow money, it needs a credible route to paying it back. That means borrowing the minimum possible, and having a half-way credible plan for growth.
Fiscal rules reassure markets that the government will borrow no more than is necessary. We can argue about whether the exact rules are perfect, but as former Treasury second permanent secretary John Kingman has remarked, when walking along a cliff edge in fog, removing the protective fence is “unlikely to be a good idea”.
Reeves gets this. Perhaps because she has thought a lot about Brown’s time as a chancellor. Perhaps because she worked in the Bank of England. Perhaps simply because she is a good economist.
That said, after Liz Truss and Kwasi Kwarteng’s infamous mini-budget, even the dimmest MP should get it. Sadly, too many have learned too little from that budget. We see politicians on the right trumpet unfunded tax cuts, and politicians on the left claiming the Chancellor is wedded to her fiscal rules for no good reason. Both are wrong.
There is nothing right-wing about understanding markets or tough fiscal rules, or wanting a strong role for the Office for Budget Responsibility. It is a fact of life that if individuals or governments want to borrow money, they need to respect those they want to borrow from.
This is particularly important in the UK, since foreigners buy more than a quarter of our national debt. They owe us nothing, and they have choices. If they don’t trust us, they can sell their bonds, and interest rates will rise. There are plenty of other countries for them to invest in.
None of this precludes the UK increasing public spending and extending or improving public services. It just means taxes have to rise to cover the new spending. We could perfectly well follow France, Germany and other European countries in having better public services, funded by raising far more revenue from income taxes.
Let’s imagine that the Chancellor did instead what many of her left-wing critics want, and materially rewrote the fiscal rules. Perhaps she would count raising teacher wages as investment – after all, a better-educated teaching profession might be more effective, and that would raise the rate of growth. Perhaps she would count more police as investment – after all, deterring crime would encourage private sector investment. Perhaps she would slow down the trajectory of getting the fiscal position back into shape. Perhaps she would start using a lot more off-balance sheet smoke and mirrors – starting with defence, say. Perhaps she could even abolish the OBR and go back to the – still relatively recent – days of when the Treasury marked its own homework, wrote its own growth forecast, and so on.
I have friends who are close to the markets. I asked around as to the effect of a meaningful loosening of the fiscal rules. No one I spoke to suggested the effect would be less than a one per cent rise in interest rates, at least for medium and longer-term debt, and several suggested it could easily be more. Gilt yields rose 1.2 per cent in a week under Truss, and we start from much higher rates now. Perhaps it is a Donald Trump effect, but global markets are certainly more nervous now, as Japan has found out recently. A one per cent rise in interest rates is a lot when the national debt is large – indeed, in the medium term it would be an extra cost of £28bn in extra interest for the existing debt, plus a few billion in interest on the new debt.
The recent comprehensive spending review announced a three per cent real-terms rise in NHS spending. This is in line with historical norms, and probably enough to stop the NHS falling over. If people can see tangible improvements, or at least accept that it is not getting worse, Labour might get re-elected, especially if the principal opposition remains hopeless.
This government can afford that three per cent real terms rise entirely because of Reeves’ stewardship of our fiscal position. Without that, the government’s interest bill would have risen more strongly, and would still be rising. For sure, it would not yet have risen by £28bn, but markets are dynamic, and they don’t like things moving in the wrong direction. As Denis Healey, Norman Lamont and Kwasi Kwarteng all learned to their costs, when the markets lose confidence in a government, things go pear-shaped very quickly. When that happens, governments have to U-turn, or go to the International Monetary Fund for a bailout.
The markets believe that Reeves will stick to her fiscal rules – they hardly moved when the details of the spending review came out. Given her record so far, she will stick to them by the narrowest of margins. I don’t think that is ideal, but over time her willingness to face down colleagues – Yvette Cooper most obviously this time – and to find taxes she is willing to raise as and when necessary, will continue to impress the markets. They will realise that she means what she says, and that she has the PM’s backing.
In that way, interest rates will be kept low. Not as low as if previous chancellors had shown more self-discipline, but as low as is realistic today. With slow domestic and global growth, that is the only way the government is going to find the money to improve public service funding as the left wants. That is why all left-wingers should stick a picture of Rachel Reeves on their walls, as their – perhaps unlikely – hero.