Labour promised the impossible – and it’s all fallen apart

As ye sow, so shall ye reap. One reasonably reliable rule of economics is that markets will eventually always find you out. It’s taken just six short months for this to happen to Labour, with its fairytale promise to end austerity in public services without having to raise taxes on working people.

As many of us said at the time, it always was a false prospectus – some might call it an outright lie – but it was left to stand. And its consequences are now coming home to roost in some of the highest rates of interest on long-term money in more than a quarter of a century.

Oh what a tangled web we weave when first we practice to deceive.

Growing loss of international confidence in the pound doubles down on the sense of things running out of control, and is worryingly reminiscent of previous sterling crises.

To be fair on Rachel Reeves, she is hardly the first to have engaged in such a pretence.

It’s been the stuff of British politics for decades – the conceit that somehow or other we can have European-style welfare and public services but without having to pay for them.

Under current plans, Britain is heading for the highest tax burden since the Second World War, but at 38pc of GDP it would still be exceptionally low by European standards – incredibly so, given Labour’s plans for public spending.

In Germany, the tax burden is 46.2pc, according to International Monetary Fund data; in Italy it is 46.6pc; and in France it is 51.3pc. Across the eurozone as a whole, the tax burden is nearly 47pc.

Do we want to be more like Europe in the amount we tax and spend, or more like the US, where the tax burden is less than 30pc? That question again went unresolved by last summer’s general election, where thanks to the idiosyncrasies of Britain’s first-past-the-post electoral system, Labour ended up with two thirds of the seats on one third of the votes. This was never a mandate for anything.

The confusion in purpose also remained unresolved by Reeves’s first Budget, which ended up as just another exercise in magical thinking.

But it wasn’t just the ordinary voter who was conned. The Chancellor promised the most pro-business Treasury ever. In a so-called smoked-salmon offensive, business leaders were lulled into believing that there was a reformed Labour Party they could do business with.

It seemed to come out of a clear blue sky when Reeves, denied by her own election promises any increase in the main rates of taxation, reverted to form and clobbered them instead. The sense of betrayal and consequent reining in of job creation and investment plans is palpable.

At the risk of receiving a notice of action from Liz Truss’s lawyers, I’m not going to say that Reeves is facing her own particular Truss moment – or at least, not yet.

The alarm was so great after the announcement of Truss’s £45bn of unfunded tax cuts that UK gilt yields completely decoupled from the rest of the world, forcing the government into a humiliating climb-down.

If this was not “crashing the economy”, I don’t know what is. It certainly “crashed” the Tory party, whose poll rating has yet to recover from the blow to economic credibility.

With Reeves, the damage has been on a longer fuse, and it’s been against a backdrop of steadily rising interest rate expectations globally.

All the same, she’s perilously close to the edge, and she’s only herself to blame for being there.

Think about it – as a big international investor in government bond markets, you will sit up and take notice when the Chancellor starts talking about “black holes” in the public finances, and the worst economic inheritance since the Second World War.

Both contentions were mainly untrue, but were meant for domestic consumption, or as a way of blaming the Tories for any disappointments in policy.

Reeves appears not to have given any thought to the “don’t invest here” message it might send to international capital. She took investors for granted, and oddly seems to have been surprised when they took her literally.

Nor should she be surprised at the fright investors have taken at her commitment not to raise taxes any further.

“I’m not coming back with more borrowing or more taxes,” she told business leaders at the CBI annual conference in November.

This has left her a hostage to fortune, which perhaps predictably has not gone her way.

Rising interest rates have substantially increased the Government’s borrowing costs, entirely erasing the already wafer thin headroom the Chancellor had left herself in October’s Budget to meet her own fiscal rules.

Stuff happens. The Chancellor has made her position much worse, as well as demonstrating her own lack of experience, by ruling out one of the few levers she’s got left to pull for keeping the markets sweet.

Nobody believes that a newly elected Labour Government is capable of making the deep cuts in government spending that might otherwise offset today’s rise in debt interest costs.

As it is, the assumption of a cash freeze in defence and home office spending next financial year – which is what the Government has got pencilled in to help stay within the Chancellor’s fiscal rules – looks wholly unrealistic.

What chance of containing military spending against a backdrop of rising geopolitical tensions and Donald Trump’s insistence that Nato members spend more on their own defence?

Or indeed of limiting Home Office spending when small boat crossings and the consequent costs of supporting asylum seekers continue to rise?

Seen from abroad, it all looks increasingly unstable. Far from “fixing the foundations”, which was the Chancellor’s promise, Labour has only further undermined them.

She’s also promised to have only one fiscal event a year, raising the possibility of muddling through until the autumn with no one any the wiser as to how she plans to address the growing shortfall in the public finances. It’s just one blunder after another.

Since I cannot put it any better myself, I’ll let Ben Zaranko, from the Institute for Fiscal Studies, do the talking instead. The Chancellor’s predicament, he says, “reflects a series of mutually incompatible promises – to stick to a hard, numerical fiscal rule while leaving only the finest of margins against it; to prioritise public services and avoid imposing another round of austerity; not to raise taxes on working people, and not to raise the tax burden again after the autumn Budget; and to hold only one fiscal event per year”.

I’d add only that Reeves designed her policies for a world that no longer exists – one of low inflation and zero interest rates when governments could borrow all they wanted at virtually no cost. That world has gone, and it’s proving a rude awakening.