Unlike 1997, Labour has failed to finish off the Tories

Although Sir Keir Starmer’s Labour government has been in office less than a month, similarities between this year’s election and Tony Blair’s 1997 victory end with the size of Starmer’s House of Commons majority – just 13 seats shy of Blair’s in 1997. Just four days into Blair’s government, Gordon Brown stunned the country with his announcement that he was going to make the Bank of England independent. Two of Brown’s four Conservative predecessors as Chancellor, Nigel Lawson and Norman Lamont, had used their resignation speeches to advocate Bank independence. The other two, John Major and Kenneth Clarke, had been strongly opposed. Brown came into the Treasury with a fully worked out plan for Bank independence.

Not only had Labour won a huge election victory, not only was it all about ‘Cool Britannia’: Labour stormed the commanding heights of economic policy. They were the economic modernisers now. It made the defeated Tories look not merely irrelevant but like out-of-date fossils from a bygone age.

The shock of the Blair revolution was more than presentational

The contrast with the current Chancellor could hardly be greater. Rachel Reeves introduced herself to the country by picking a fight with her predecessor and branding him a ‘liar’. Her motive is transparent and her manner disingenuous. She will have an uphill struggle persuading voters that she didn’t come into office with a bunch of tax rises in her handbag and Jeremy Hunt lined up as the fall guy. It’s a way to burn through political capital, but not a particularly productive one.

Heavily trailed among those non-pre-planned tax rises is speculation Reeves will seek to equalise the rates of capital gains tax (CGT) and income tax. Doubtless, the Chancellor will remind us on 30th October that equalising CGT and income tax had first been undertaken by none other than Nigel Lawson in his penultimate budget of 1988. This saw the top rate of income tax cut from 60 per cent to 40 per cent, and capital gains for the top rate taxpayer increased from 30 per cent to 40 per cent.

Lawson softened the blow by indexing gains against inflation, so that people wouldn’t pay tax on inflationary gains. In the three years to June of this year, inflation measured by the Consumer Prices Index, rose by 18.7 per cent. Should Reeves decide not to restore inflation indexation, it would mean that a top rate taxpayer would pay CGT of 8.4 per cent merely for the privilege of maintaining the real value of their investments.

Reeves is less likely to say that it had been Gordon Brown in his first budget who introduced taper relief on CGT, so that the longer an asset was held, the lower the rate. As with Bank independence, New Labour’s reform of CGT demonstrated its progressive economic credentials. (Brown’s abolition of advanced corporation tax relief was the first and most damaging of his stealth tax raids, this one on pension funds. Being stealthy, its damage was less widely appreciated at the time.) Subsequent Labour budgets saw the taper become more generous until the 2007 budget, when Alastair Darling scrapped the taper altogether and reintroduced a flat rate, this time at 18 per cent, compared with the 30 per cent rate before Lawson’s budget.

As Nobel laureate Robert Lucas argued, if you tax capital heavily, you end up with less capital. During this summer’s election, Starmer promised: ‘Wealth creation is our number one priority.’ But since then, there has hardly been a whisper from the new Prime Minister about wealth creation. Budget day will likely reveal that this number one priority has ended up in the same place as Labour’s dumped pledge to cut energy bills by £300.

The Chancellor’s decision to cancel badly needed road schemes provides further evidence that, unlike Gordon Brown, Reeves came into government bereft of any fresh ideas on how to improve economic performance. These schemes are crying out for private financing remunerated by road tolls, as in the case of the Silvertown tunnel Transport for London is developing in east London, which will charge drivers to pass through it. A radical Chancellor would have seized the opportunity to find ways to finance and develop public infrastructure privately. 

A forward-looking Chancellor would also know that net zero opens up a genuine, rather than contrived, hole in the public finances. In its July 2021 fiscal risks report, the Office for Budget Responsibility estimated that net zero will lead to a reduction in tax revenues equivalent to 1.1 per cent of GDP by 2050-51. To avoid rises in non-road user taxation, fuel duties will need to be supplemented and eventually replaced by per mile road charging. Tolling to finance new and improved roads would demonstrate the benefits of this approach and avoid public sector infrastructure fiascos such as HS2.

The shock of the Blair revolution was more than presentational. Blair and Brown came into office armed with the policy work they’d undertaken in opposition. On the central issue of the economy, the defeated Tories were left with nowhere to go. It precipitated the party’s collective nervous breakdown and the Conservatives entered a prolonged period of self-administered modernisation therapy. 

By contrast, Rachel Reeves’s ploy of blaming her predecessor for the allegedly undisclosed state of the public finances has acted like electro-convulsive therapy for today’s Tories. They proceeded to do what they weren’t meant to. They picked themselves up from the floor and started to fight back. The extent to which they persuade voters of their case is secondary to the fact that they are acting like a serious opposition, moreover one that, on this issue, leaves Nigel Farage and his Reform MPs mute and sidelined. 

Tony Blair’s greatest political accomplishment was to persuade Conservative politicians that they had to jettison conservatism if they wanted to win an election. It saw David Cameron promote himself as the heir to Blair. It is impossible to conceive any future Conservative leader describing themselves as the heir to Sir Keir.

Having spent most of his time as Labour leader purging his party of Corbynism, Sir Keir brings no new solutions to the serious economic problems facing the country. As a lawyer, he should know that his government’s economic priorities have been pre-empted by the Climate Change Act which requires his government to enact policies to eliminate greenhouse gas emissions by 2050.

Starmer’s effect on the Conservative party is the opposite to Blair’s. His government provides a daily reminder why they became Conservatives in the first place. That is quite an accomplishment in less than four weeks.