Labour's self-defeating economic plans are doomed to fail. Here's why

THE greater the challenge, the bigger the response should be. That is the rule of thumb when it comes to developing progressive and effective policies. Yet recent announcements from Labour send a very different message.

Over the last year, Keir Starmer’s party have already found themselves facing a wave of criticism from leading economic experts and welfare groups after a long list of policy U-turns, notably proposals to keep the two-child benefit cap, minimal tax changes, and subsidising energy companies who are recording breaking profits. Their recent conference cemented this.

Shadow chancellor Rachel Reeves (below) made clear that the next Labour government would balance all government spending (including interest payments on debt) with all returns in tax. In other words, the next Labour government will directly balance the budget, which history shows has brought more instability than not.

Whilst Labour would reduce the debt-to-GDP ratio over five years, Reeves claimed that this would not result in austerity as extra spending would come directly from growth. This growth would support Labour's £28 billion green investment plan, one which they had previously dropped.

Following Reeves’s speech, many were left with questions. First, it would later be revealed that Labour had not in fact returned to their original £28bn green investment plan, but rather cut it back by £8bn a year.

The £20bn figure also relies on the UK economy growing, despite Labour's strict fiscal rules.

Economist Professor Bill Mitchell estimates that, since the late 1990s, the UK's average growth has sat around 1.7% (excluding the pandemic). Mitchell argues that for Labour's growth plan to work, that figure would need to immediately jump to 2.5% within a year, and continue to do so over a five-year timetable.

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With current UK growth sitting at around 0.4%, such an increase is almost impossible – at least without Labour U-turning on their own fiscal rules and drastically increasing government spending, which they have said is non-negotiable.

Even if Labour were able to increase growth by 1% within a year, this would only see a tax return of £12.5 billion.

This shows how Labour's own fiscal rules are completely self-defeating. Labour say they need growth to spend, but that growth won’t happen unless they spend.

Tackling both climate change and the cost-of-living crisis will require high public investment. But Labour's own fiscal rules have ruled out progressive spending. It is a policy loop doomed to fail.

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One way in which Labour could reduce costs for households is to nationalise the energy sector – allowing increased consumption to be used on goods and services in the private sector to increase growth. Despite Labour members and trade unions democratically passing a motion to do just that, the party leadership dismissed it.

Another way to encourage growth would be to reduce interest rates. On Thursday, the Bank of England kept rates at 5.25%, which is pressuring households to seek out private liquidity and increase their debts. The increasing interest payments on households has left lower-income households less capacity to consume on goods and services.

Whilst a Labour government could instruct the Bank of England (below) to reduce rates – since the UK's central bank is not actually independent from government – Reeves made it abundantly clear that Labour would "protect the independence of the Bank”.

The International Monetary Fund forecast that interest rates would remain between 5-6% until at least 2028. That is a full term of a Labour government that would strangle its own growth targets by refusing to lower rates. This is again entirely doomed to fail unless further U-turns are made.

Can Labour's tax proposals make up for the lack of growth? Unfortunately, no.

Their most recent plans would only return approximately £5bn a year for the entirety of the UK. In contrast, the Scottish Trade Union Congress' proposal for a wealth tax would raise an annual £1.3bn in the short-term and £3.3bn in the long-term in Scotland alone.

A one-off UK wealth tax also has the potential to return £260bn or £10bn as an annual payment. A wealth tax would open up fiscal space in the economy to invest in resources, reduce abusive price increases from large businesses, and build towards a Green New Deal. But Labour has ruled out further tax proposals until the General Election next year – and firmly ruled out a wealth tax.

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It is clear Labour's economic plan is one inspired by caution, akin to that of Conservative government of the early 2010s. This is no secret – shadow ministers have spoken openly about it.

The institutions that are in need of desperate reforms are now the ones in which Labour are eager to defend. The former leaders of these institutions, ex-chancellor of the exchequer George Osborne and ex-governor of the Bank of England Mark Carney, have publicly backed Labour's economic plan. Receiving the backing of the leading masterminds of UK austerity, a project that was responsible for 300,000 excess deaths and crumbling public services, does not send a message of economic stability.

With continued austerity on the horizon with no new economic powers, people in Scotland find themselves trapped. The powers of a normal independent state would give Scotland the ability to take a different path. It's time for an honest public debate on the scale of the current challenges of the status quo and lay out the policy steps to building an equal, stable and ecologically secure future.