Truss’s go-for-broke gamble means Labour inherits economic mess if it wins election

Labour tends to come to power with the economy in poor shape. That was the case for Clement Attlee in 1945 and for Harold Wilson in both 1964 and 1974. Of the party’s postwar premiers, only Tony Blair arrived in Downing Street with the economy in decent condition.

Blair was the last Labour leader to win an election, 17 years and four defeats ago, so the talk at the party’s conference in Liverpool this week will be that nothing can be taken for granted and there is still work to be done.

Fair enough. There have been occasions in the past – 1992 most notably – when Labour snatched defeat from the jaws of victory, meaning a degree of caution is warranted. Yet despite the reluctance to count chickens, there is now a real chance of history repeating itself. The election is there to be lost but Labour will inherit an economic mess if it wins.

Things could hardly have gone better for the party since it met in Brighton last year. The post-Covid recovery in the economy fizzled out. Scandal forced Boris Johnson to resign. Over the summer inflation has risen to its highest level in 40 years. Living standards have been eroded. A second recession in less than three years is underway. Liz Truss and Kwasi Kwarteng have seen their pro-rich mini-budget shot down in flames by the financial markets.

Labour now outscores the Conservatives for economic competence, perhaps unsurprisingly given a backdrop of stagflation, rising interest rates and the weakness of the pound. Markets currently see sterling as a one-way bet, just as they did when the UK was forced to leave the European exchange rate mechanism 30 years ago, on Black Wednesday.

Friday was not quite a Black Wednesday moment for Truss, because the government is not trying to defend a fixed level for the pound in the way it was in 1992. But the higher premium demanded by investors to finance UK government borrowing shows how nervous the markets have become. Once lost, a reputation for competence is not easily recovered.

Truss’s shift back to a more traditional form of Conservatism – tax cuts, deregulation, constraints on union action, tougher welfare rules – sharpens the political divide with Labour. The abolition of the 45% rate of income tax, the scrapping of the bankers’ bonus cap and the opposition to a more stringent windfall tax on energy producers are all gifts for Sir Keir Starmer and the shadow chancellor, Rachel Reeves.

Johnson pieced together a fragile coalition at the last election made up of traditional Tories in the south of England and former Labour voters in the red wall seats in the north of England and the Midlands. The red wall half of that coalition now looks highly vulnerable. As the Resolution Foundation thinktank has pointed out Kwarteng’s tax cuts were worth three times as much to households in London and the south-east than to households in Wales, Yorkshire and the north-east. There aren’t many people earning more than £150,000 a year in Blyth.

The evidence from focus groups is that while voters may be much less keen on the Conservatives than they were in 2019, they have yet to be convinced by Labour.

To an extent, that’s understandable because all the attention for months has been on the dramas inside the Conservative party. Yet, in a quiet way, Labour has been making the political weather on the economy. It opposed the increase in national insurance contributions, which was reversed by Kwarteng. It called for a windfall tax that Rishi Sunak originally opposed but later announced, and it was quicker than the government to see the need for an energy price cap. The idea that Labour has simply been waiting for the government to implode is not correct.

Reeves will flesh out Labour’s thinking on the economy in her speech to conference on Monday. She will attack the idea that wealth trickles down from rich to poor, arguing – rightly – that growth is best achieved from the bottom up and from the middle out. She will reject the free-market notion that the economy is best served when the government gets out of the way. She will make the case for a strong institutional framework involving the Bank of England, the Treasury and the Office for Budget Responsibility. Finally, she will stress the need for strong public finances to pay for investment in skills, childcare and the greening of the economy.

All of which might seem somewhat tame, especially when set against the government’s attempt to break the economy out of its cycle of stagnation by tax cuts that are eventually supposed to pay for themselves through higher growth. There is certainly a contrast between the cautious, step-by-step approach being pursued by Reeves and Kwarteng’s go-for-broke gamble.

But that’s the route Labour is committed to and it is not going to change direction now. If Starmer still goes down to defeat at the next election there will be recriminations galore.

Increasingly, though, it looks as if the Tories are heading for defeat. Voters will see through the attempts by Truss to disclaim any responsibility for the economic failures of the past 12 years. Any boost to growth from capping energy bills and the tax cuts will be offset by higher interest from the Bank of England. There is no real prospect of the government’s supply-side reforms having an impact before the next election.

The state of the economy is still crucial in determining the result of elections so Labour’s task is to show that it can run it more responsibly than the Tories, more sustainably than the Tories and more fairly than the Tories. It really shouldn’t be that hard.