Mortgage rates this week are at their highest level since the global financial crisis 15 years ago. The International Monetary Fund has warned that borrowing costs may need to go higher – and stay there – if the Bank of England is to bring inflation back on target. Pay packets are going up but prices are going up faster. People are getting poorer, not richer.
Clearly, this is a problem for a government that can only delay the next general election for at most 18 months. But it is also a cause for concern for Labour, which stands to inherit an economic mess and a ton of political problems, if it can end a run of four election defeats.
Strange things can happen. Rishi Sunak may somehow deliver an economic miracle. When it comes to it, voters may decide they don’t fancy Sir Keir Starmer as prime minister and stick with the devil they know. Currently it doesn’t look that way. The poor state of the economy helps explain why the Conservatives are more than 20 points behind in the latest opinion polls.
Unless Sunak can conjure up a feelgood factor pretty rapidly, he looks to be on course to lose by a landslide. The Tories have been presiding over a cost of living crisis and could soon be saddled with a housing crash as a result of higher mortgage rates. An economy that has been moving sideways for the past year could easily be tipped into a winter recession if the Bank of England feels the need to heed the IMF’s advice.
Logically, the worse things get for the economy over the coming months, the better things should look for Starmer. Higher interest rates are pushing up the cost of servicing the UK’s national debt, and there is little scope – if any – for the chancellor, Jeremy Hunt, to indulge in that time-honoured tradition: pre-election Tory tax cuts.
But logic doesn’t always count for much, and there is a risk that the worse things get the harder it will be for Labour to win. No question, voters think things are going badly with Sunak in charge, but they might conclude that taxes and interest rates would be even higher under Starmer. That is what happened in 1992, when the Tories mounted a highly successful Project fear campaign to deny Neil Kinnock victory.
Fear of repeating that defeat explains why Starmer and the shadow chancellor, Rachel Reeves, have been paring back Labour’s spending commitments, have said very little about tax and have generally been pursuing a safety-first strategy. They don’t trust the opinion polls predicting a Labour landslide at the next election and fully expect Sunak to run a “Labour tax bombshell” campaign. The intention is to give the Tories’ negative-campaigning machine as little to work with as possible.
Expect the ultra-cautious approach to continue, in the event that Starmer becomes the first Labour leader since Tony Blair in 2005 to win an election. To be sure, governing is not going to be easy, with money tight and heavy pressure to spend more on everything from the NHS to the arts. The unions will expect Starmer to deliver on public sector pay. Labour’s green lobby will demand faster progress on achieving net zero. Meanwhile, the City will demand to know whether the new government’s sums add up. The financial markets rarely give Labour an even break.
So what’s new? Not much. The Conservatives tend to run the economy into the ground before they leave office, with Blair the only Labour prime minister to arrive in Downing Street with a relatively benign economic inheritance. Significantly, the first big announcement of the Blair government – independence of the Bank of England – was designed to give Labour credibility with the markets. It worked, too. Judging by the polls, the public’s desire to be shot of the Tories is stronger than its appetite for the alternative. The public would harbour doubts about a Labour government even after voting for one. Starmer and his team know they would be on probation, and – hardly surprisingly – that makes them risk averse. Reeves has insisted Labour’s fiscal rules – borrowing only for investment and debt falling as a share of national output – are non-negotiable.
There are obvious downsides to this approach. Most obviously, it makes it harder for Labour to portray itself as the party of change, and feeds the perception that Starmer doesn’t really believe in anything. The upside is that Labour will be taking over the economy when the worst is over, and that gives it the chance to take things steadily in the hope of governing for at least two full terms. Inflation will be close to its 2% target, interest rates will be on the way down, living standards will be rising. The IMF is forecasting steady if unspectacular growth of 2% a year in 2025 and 2026.
If they are smart, Starmer and Reeves will take control of the economic narrative, blaming Tory mismanagement for any tough decisions that have to be made. This approach worked a treat for David Cameron and George Osborne in 2010, when they pinned the blame for the coalition government’s austerity measures on Gordon Brown’s alleged profligacy.
The deferred-gratification approach won’t be popular with those who say a Labour government needs to think bigger, but let’s be realistic. There will be no radical economic departures from a Starmer government, and if it went into the next election proposing anything that seriously challenged the orthodoxy – Bank of England independence and tight control of the public finances, for example – Labour would probably lose. Sometimes you have to win – and govern – ugly.
Larry Elliott is the Guardian’s economics editor
Guardian Newsroom: Can the UK avoid a recession?
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