Labour rebels making a catastrophic economic error sending Britain leftwards

I hope to be proven mistaken when I say that this brings us close to a crunch moment, when we will be lucky to avoid a Greek-style crisis.

Liz Kendall, Secretary of State for Work and Pensions (via House of Commons)

How are you planning to celebrate this week’s first anniversary of Sir Keir Starmer’s arrival in Downing Street? By holding a street party or marking the occasion quietly at home?

Labour MPs have been celebrating in style by blowing up Starmer’s premiership, putting a bomb under their own government’s domestic programme and threatening to flick the switch on detonation. So incensed were they by the government’s welfare reforms involving plans to save £5bn from a bill for social protection that is now over £300bn that they forced Starmer’s ministers to in effect junk the cuts. Amid chaotic scenes, Starmer had to make several humiliating concessions on the basis Labour whips had lost control. The fear was the government would lose the legislation, a development that would have imperilled the PM’s hold on office. As the ever wise Gary Gibbon of Channel 4 put it on air minutes after the vote in the Commons: the welfare reforms and the savings needed to make the government’s sums add up have now been “vaporised.”

By Wednesday, the stricken Chancellor (poor person) was in tears when sitting behind the Prime Minister at PMQs.

Now, steady on. Did I just say that Labour MPs have blown up Starmer’s premiership? Isn’t that hyperbole when he leads a government with a Commons majority of over 170 and the opposition Conservatives languish on only 121 seats? Perhaps. There are three to four more years left of this government, in theory, and Labour does not have a history of removing its leaders.

Indeed, watching some of the coverage last night, my mind went back to the feverish night of the Syria vote in 2013 when David Cameron was Prime Minister. MPs voted to block British involvement in bombing raids in Syria, when the butcher Assad had used chemical weapons and breached the so-called red line laid down by President Obama. The defeat of Cameron in that vote so spooked Obama that the US backed away from firm action, or maybe it gave him a convenient excuse. Either way, it is a sequence of events that is impossible to imagine today with a unilateralist Trump in the White House.

That night in 2013 it seemed to me Cameron’s authority was weakened, possibly fatally, because he had lost control of foreign policy. It seemed a historic moment. Commentators, me included, wrote pieces on that basis saying the PM would at best limp on. Yet the world carried on turning and Cameron won an overall majority in the 2015 general election.

Of course, history works in weird ways and the Syria vote was a historic moment, although not quite in the way it seemed at the time. The signal it sent - the West is weak and a glib and too clever by half US president can be persuaded quite easily to abandon robust action against tyrants - was picked up by the West’s opponents. While on its own the incident wasn’t decisive in persuading Putin he could take Crimea in 2014 and not face meaningful challenge from Obama and the rest, it helped illustrate how decadent and indecisive we had become, scared of our own shadow after Iraq.

On Starmer, there is certainly a scenario in which he recovers from this humiliation quite quickly, and even with Reform surging at the moment he ends up winning a second term or more likely heading a coalition with the Lib Dems if Reform and the Tories split the centre right vote at the next election. Look out in the media in the next few weeks for a lot of sanctimonious talk about how Labour is a “family” and families have rows, and once everyone had had a good cry they will get round the table and sort it out with a family meeting.

Where the real damage from this affair is about to be done is in the British economy.

Whether or not the cuts to PIP (Personal Independence Payments) selected by the Prime Minister and ministers were the correct way to do it, Britain clearly needs to get its welfare bill under control. It has spiralled since the pandemic, and the former Health Secretary Jeremy Hunt, a Tory, admits he and his colleagues a decade ago made it easier (for reasons which seemed justifiable at the time) to claim benefits if you suffered poor mental health, depression or anxiety. This was well-meaning as these are serious problems. Unfortunately, greater availability of benefits has encouraged many people, and many young people, to claim and become enmeshed in the benefit system, which long term is the opposite of what they need to prosper with confidence.

As the government put it in March:

“Since the pandemic, the number of working-age people receiving PIP has more than doubled from 15,300 to 35,100 a month. The number of young people (16-24) receiving PIP per month has also skyrocketed from 2,967 to 7,857 a month. Over the next five years, if no action is taken, the number of working age people claiming PIP is expected to increase from 2 million in 2021 to 4.3 million, costing £34.1 billion annually.”

Abandoning these reforms blows a £5bn hole in the Chancellor’s sums ahead of the autumn Budget. That is on top of the savings lost when ministers u-turned on cuts to another entitlement, the bloated winter fuel allowance.

And that’s where the economic damage comes in with the Chancellor scrambling to fill the hole. Taxes are about to go up, again, which will have a further damaging effect on growth, taking money from consumers and investment so it can be spent by the government on ever expanding entitlements, in the process knocking the confidence of anyone with any gumption or desire to get on.

There are reports ministers are considering finding money by slashing the tax free savings allowance - the ISA - from £20,000 to just £5,000. That would be a crazy move, as we need people to save. And we need them to invest.

Perhaps the best and simplest option - if we the deluded British public will not accept any cuts in entitlements - is for the Chancellor (whoever that is this autumn) to whack a couple of pennies on income tax. The big taxes paid by all of us, or only 37.4m of us out of a population of 67m in the case of income tax, are the only way to raise serious sums fast, if a potential borrowing crisis is looming.

As a pro-market person who wants taxes to be as low as feasible, this pains me. I would far rather we got the state under control, levelled with the public about the realities of our economic position, made the changes required to defend the country properly, and set about making the economy more dynamic. There seems to be very little interest in such an approach, sadly. Although the insurgent Reform, which may win power if Labour collapses, talks about eliminating waste in local and national government, this is largely performative, Elon Musk lite nonsense. Farage the former Thatcherite is a big spender who can sniff power and he is not going to cut entitlements when he needs the votes of those on welfare.

Instead of an honest reckoning, I suspect we will now get something amounting to economic class warfare as an embattled Prime Minister is forced to please the left-wing rebel MPs (AKA perhaps half the parliamentary party) who humiliated ministers this week. They are dragging him leftwards, and the demand will be to increase taxes even further on wealth and investment as an alternative to spending restraint. Dividend tax looks likely to skyrocket. Will Capital Gains Tax be raised, again? Presumably.

In this way, to hold the Labour Party together, more wealth and people will be driven abroad and more businesses will shelve expansion plans on the following basis. What’s the point of trying to grow and hire when the government takes so much?

The end result? I hope to be proven mistaken when I say that it brings us close to a crunch moment when we will be lucky to avoid a Greek-style crisis, only bigger because it is Britain, a member of the G7. And then someone serious (from one of the two main parties) will have to set about clearing up the mess. We have a debt of £2.8 trillion, or almost 100% of GDP, and a deficit this year predicted to be around £120bn.

If people don’t like the minor cuts, actually an attempted small slowing of the rate of increases, that were being proposed until the rebels blocked them, wait until we experience the epic cuts to social entitlements that follow a proper smash.

Better news, part 1

A friend with a great deal of experience in the City says the economic gloom is overdone. He pointed out in his latest private note to clients that energy costs are down. Oil fell below $70. Natural gas has come back into a range of what would have been considered normal before the full-scale invasion of Ukraine, he says. The fossil fuel market is working its magic in managing market disruption and balancing supply and demand. Even in the UK, where the maniacal efforts of the Energy Secretary Ed Miliband threaten to send us all back to the Stone Age via a too rapid dash to net zero, consumers will benefit from falling fossil fuel prices if this continues.

Better news, part 2

Love it or (more likely) loathe it, Donald Trump’s Middle East policy appears to be working. After almost two decades of Obama-ism, nuclear inspectors and teeth-sucking, the Americans hit Iran hard to land the message that a nuclear Iranian regime is not going to be accepted.

There’s a “but”, of course. And rather a big but. Did the US get what they needed when they bombed Iran? The Iranians seem to be trying to get their programme going again.

I’ll write more on this at the weekend.

Newsletter news

As I said, there will be more from me over the weekend, including on the books I’ve been reading on recent travels.

Until then, have a good week.