One by one, they stamp all over your dreams. In this election year, the dashed hopes will belong to Rachel Reeves. In 2010 the victim was Alistair Darling.
Reeves wants to increase spending on the UK’s crumbling infrastructure should Labour win at the polls. Her commitments have become less ambitious as pressure mounts from mainstream economists and those in high finance worried about current debt levels escalating.
The experts who feel the need to pour cold water on higher spending plans avoid direct criticism of Labour’s £28bn green investment package. Instead there is general concern about the level of government debt, supporting Jeremy Hunt’s view that debt must fall, come what may.
Such is the weight of argument against Reeves that Labour has scaled down its ambitions, and the investment plan will only reduce, rather than reverse, the dramatic fall in public investment as a proportion of national income mapped out by the current administration over the next five years.
Sir Robert Stheeman, who runs the government’s Debt Management Office (DMO), is the latest expert to portray his intervention as a display of technical profundity when in reality it is a swipe at those who want to end a century of underinvestment.
Before we hear from Stheeman, it should be remembered that, as governor of the Bank of England, Mervyn King set a precedent when he said that Darling’s budget before the 2010 election had not gone far enough to bring down Britain’s debt. It was the boost George Osborne needed to persuade many waverers that Gordon Brown’s government could not be trusted with the nation’s finances.
Many economists at the time said there was a clear case for borrowing at historically low interest rates to invest in Britain’s infrastructure and its education, health and welfare systems to raise productivity and national income.
But King was joined by the International Monetary Fund, the Organisation for Economic Cooperation and Development and the major credit ratings agencies, which arbitrate on the value of government debt, in his praise of austerity. They won the day.
Stheeman is due to retire next year from the DMO, which acts as the government’s mortgage broker, managing the thousands of bonds that amount to the government’s total borrowings.
Last week he warned Financial Times readers that ministers should be wary of provoking a backlash in financial markets by increasing borrowing too quickly. “In a world where we have debt to sell,” he said, “policymaking cannot be divorced from the reality of the market.”
Later in the interview, the DMO boss said the current level of borrowing – £2.7tn, or almost 98% of gross domestic product – was manageable, but appeared to argue that £2.8tn or £2.9tn would trigger a panic.
He can be forgiven for referring to Liz Truss’s attempt to spend tens of billions on tax cuts almost overnight, paid for with borrowing, when she and Kwasi Kwarteng took control of Downing Street in 2022. But Truss is history and Stheeman was telling us about the future. He will know that Reeves is the future, and his warning shot looks to be aimed at Labour’s spending plans.
The DMO boss went on holiday after his interview. A spokesperson said that on his return he would be in pre-budget purdah and questions from the press would have to wait until after 6 March.
As the year progresses, other prominent voices will put pressure on the government, and future governments, to reduce borrowing.
Clare Lombardelli, the former Treasury official who is now the OECD’s chief economist, said last summer that while a few countries might have exceptional circumstances, “on average, we do need to get debt levels down”.
The credit ratings agencies say borrowing levels need to fall and the IMF, amid concerns about inequality and climate resilience, will probably also warn about debt levels.
Compared with the aftermath of the 2008 crash, western economies are paying much higher interest rates, which makes investment harder to justify. Nevertheless, the French government has borrowed 112% of GDP and the Spanish 111%, much higher than the UK’s 97.5%. The US has borrowed 120% of GDP, while Italy and Japan are on 142% and 220% respectively.
It’s not the level of borrowing that matters so much as what the nation does with the money. That’s where the UK’s reputation falls down.
So Labour voters need to accept that the weight of mainstream economic opinion, and a recent history of squandering what money there is limits Reeves’s room for manoeuvre.
Do you have an opinion on the issues raised in this article? If you would like to submit a letter of up to 250 words to be considered for publication, email it to us at observer.letters@observer.co.uk
