Necessity trumps ‘fiscal rules.’ Labour should look to it’s own history in Government


“If the approach of Reeves and Starmer had been applied in 1945, we would not have built the NHS nor 1 million council homes.”

By Martin Wicks

The message from Rachel Reeves is that because of the economic situation bequeathed to an incoming Labour government, they will not be able to do all they want to do as quickly as they would like.

Even before they face the pressures of government she has rowed back on the commitment of £28 billion a year for ten years for the ‘Green Prosperity Plan’. The message has been reinforced by various shadow cabinet members. “There is no more money,” said Wes Streeting. Meg Hillier told Radio 4, “We face an impossible economic situation”. “Labour will rebuild Britain with big reforms, not big spending,” said Keir Starmer.

Certainly the economic situation has deteriorated as a result of Brexit, the pandemic and the crazy experiment of the short-lived Truss government. Yet Labour’s own history shows that it is possible to do much that might be deemed to be ‘unaffordable’. The current economic situation bears no comparison with the dire circumstances faced by the Attlee government in 1945.

In 1944 Churchill told an American politician that the day the war ended, “the country would be bankrupt and the returning soldiers would have little to come back to.” Wartime indebtedness to allies was £3.35 billion. The great ‘ally’, the USA, abruptly ended Lend-Lease arrangements without discussion.

Hugh Dalton, the Chancellor, wrote: “This very heavy blow was struck at us without warning and without discussion. We had at least expected some tapering off over the first few years of peace. But now we faced, not war any more, only total economic ruin.

”Keynes warned of “a financial Dunkirk.”

When we hear today of the difficulties that an incoming Labour government will face, with a debt to GDP ratio of 100%, contrast it to the 270% that the Attlee government faced. Yet they managed to launch the NHS and fund the building of a million council homes. Obviously budgets were set but it was inevitable that the NHS would be faced with a population seeking remedy for the unaddressed health issues for those who could not afford to pay a GP under the private system.

When the NHS was launched, planning predicted an annual cost of £170 million. Yet in the first year the cost was over £305 million. £1 million was budgeted for opticians but within a year 5.25 million spectacle prescriptions had been issued, costing £32 million. Prescriptions rose from 7 million per month in 1947 to 19 million in 1951. All this reflected historical unmet need of people who could not afford to buy healthcare as a commodity.

Bevan triples the grant

When it came to building council housing, Bevan tripled the grant for local authorities. A Housing (Financial and Miscellaneous Provisions Bill) was presented for 2nd reading on March 6th 1946. Bevan, supposedly the great egotist, invited his under-secretary Charles Key, a local government expert in his own right, to make the opening speech. He said:

“There is no greater social problem facing the people of this country today than housing, and at no time before have there been placed before the house financial proposals for tackling that problem more generous in amount, more consistent in principle or more complete in character than those embodied in this Bill.”

Local authorities, he said, would welcome the proposals as being “in excess not only of their wildest expectations but even of their highest hopes.” Existing subsidy on a three-bed house on a 40 year basis was £5.10s from the national exchequer and £2.15s from the rates. The new Bill lengthened the period from 40 to 60 years, raised the subsidy from the exchequer to £16 10s and £5.10s from the local rates (£22 per year for 60 years: £1,320). Michael Foot explained:

“Compared with pre-war, this marked a revolutionary change. Previously house building had been left in the main to the operation of the free market, to speculative builders building for profit; now, even when a small proportion of houses was to be built for sale (one in five was the suggestion at the outset) permits had to be secured from the local authority.”

In a 1942 broadcast on the BBC John Maynard Keynes, speaking of the post-war world said, “anything we can actually do we can afford”. Necessity is the mother of invention, as they say.

Cutting the debt and trimming the programme

If the approach of Reeves and Starmer had been applied in 1945, we would not have built the NHS nor 1 million council homes. Reeves recently announced that a Labour government would not be able to carry out its commitment to spend £28 billion a year on its ‘Green Prosperity Programme’ until the second half of the next Parliament. Even the liberal Guardian described this as pusillanimous.

If the justification of this retreat is the cost of borrowing then you have to ask the question why hasn’t Labour demanded that the Bank of England cut interest rates instead of increasing them? They know that the increases are driving up mortgage interest payments for those who have to renew them. According to finance site Moneyfacts, the average interest rate on a two-year residential fixed product has hit 6.78 per cent. A year ago, rates on two-year fixed mortgages were averaging 3.25 per cent.

But the situation of renters is worse, because they pay so much more of their income on rent. Interest rate increases also impact on tenants in the private rented sector since Buy to Let Landlords are raising rents to cover the increase in their interest rate costs at a time when private rents are at historic highs.

Increases also impact on councils borrowing money from the Public Works Loans Board, and has a negative impact on council house building. A 30 year ‘maturity loan’ (the loan is repaid at the end of the loan period) is 5.5% as compared to 1.93% 18 months ago.

Labour hasn’t challenged the Bank because of its ideological commitment to Bank of England ‘independence’. The idea that interest rate decisions can be rendered ‘non-political’ by handing them over to the Bank is a nonsense. In effect Labour is accepting measures which are designed to take money out of the pockets of millions of people (who they want to vote for them) and to drive down economic activity.

A self-made straitjacket for a Labour government

Rachel Reeves is placing her own future government in a self-made straitjacket. They say that they can’t increase taxes because they are at “the highest level for 70 years”. But this is not true for everybody, is it? They won’t even do what many are suggesting is necessary: raise capital gains tax to the same level as general taxation. They propose to leave in place the current regressive tax system which favours the rich and the big corporations.

The overall message is that we can only do what we can ‘afford’. Historically that’s a nonsense. Would any wartime Chancellor have opposed building Spitfire and Hurricane war planes because the programme wasn’t costed? Is the climate crisis any less of an emergency than a world war? I think not. Some unnamed adviser to Keir Starmer has said that if the Green Prosperity Plan comes into conflict with the fiscal rules then the latter will trump the former. We are also told that the fiscal rules are ‘non-negotiable’. This is the position of an ideologue. A policy which is not subject to the test of real life experience is pure dogma.

The reality of the crisis that we face is such that we cannot afford not to do what is necessary. The idea that we can only deal with the climate emergency ‘if we can afford to’ is arrant stupidity. Aditya Chakrabortty summed it up well: “In a choice between planetary life and some bullshit notion of fiscal credibility, we will always choose the latter.” 

Necessity trumps ‘fiscal rules’. Failure to take emergency action means that the cost of it later will increase. Faced with an existential crisis, the status quo is not an option except for those who wish to maintain their wealth and power at the expense of the majority of the population and place their profits above preventing global warming from rising out of control.

Featured image: Shadow Chancellor Rachel Reeves speaking at the World Economic Forum 2023 on January 19th, 2023. Photo credit: World Economic Forum under the Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

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