By Peter Main
Under Keir Starmer, Labour’s economic strategy has been guided by his determination to prove that a Labour government would not be a threat to big business interests.
That was why Rachel Reeves, his Chancellor of the Exchequer, guaranteed not to raise taxes and to stick to existing, Tory formulated spending limits.
Once in government, Reeves withdrew the Winter Fuel Tax Allowance from the great majority of pensioners, just to prove to the City that she could be relied on to cut government spending, no matter who it hurt.
Labour’s fear of a market attack like the one which brought down Liz Truss is well founded. Because of its origins in the working class movement and its reliance on trade union support, the wealthy expect Labour to come under pressure to raise spending on public services. What they want instead is privatisation of those services so that profits can be made from them.
The first full week of trading after the New Year provided an opportunity to test Labour’s resolve. The Tory owned media shrieked about a panic on the gilts market. Kemi Badenoch, still trying to prove she’s up to the job of Leader of the Opposition, insisted Reeves should resign because she had flown to Beijing when the ‘markets are in turmoil’. One week later, the panic was, apparently, all over and nothing much had changed. So, what was all that about?
Despite the press hysteria, this was not a solely British affair; interest rates on government bonds were rising in other countries, too. Many factors contributed to the uncertainties that drove up those rates; political instability in Germany and France, fears for the future of Ukraine and the ongoing war in Palestine, for example, but the principal factor was the impending inauguration of Donald Trump.
It is widely believed that his policies, high tariffs and forced expulsion of ‘illegal’ immigrants, will stoke inflation in the USA. That would mean interest rates staying high after markets had expected as many as four rate cuts this year. High rates in the US will attract capital from elsewhere, forcing governments to raise their own interest rates to try to hold on to their domestic capital which, of course, is not at all patriotic.
In Britain, the interest rate on 10 year government bonds (gilts) was 3.75% in September, and rose to 4.93% at the height of the January panic—a 16 year high. That points to increased costs for the government across the board, thereby threatening its economic policy.
This is what prompted Reeves to insist that she would stick to her ‘fiscal rules’. Those rules require that current expenditure, including debt repayments, must only come from current revenue, that is, taxation. As a consequence, if those repayments go up, spending on everything else, for example, health, education and social care, will have to go down. That is the kind of promise that ‘the markets’ want to hear from Labour.
To listen to the media, you would think these markets are uncontrollable forces, a bit like the Santa Ana winds that fanned the flames in Los Angeles at about the same time. In reality, of course, they are just very rich people and corporations whose only aim is to maximise their profits and grow their capital.
Hargreaves Lansdown, a broker dealing in gilts, reported 6,100 transactions in the first two weeks of January, amounting to £225 million in total. On average, then, each transaction was worth some £36,885. So, ‘the market’ in this case was people who could fork out £36,885 as a bet on an investment—no doubt just one of many—and as a result destabilise the entire national economy.
Where were the headlines about greedy financiers holding the country to ransom? Nowhere to be seen—after all, these are ‘the markets’ which governments must obey! In fact, worse than that, when interest rates return to more normal levels, as they are already doing, the price of the bonds will go up. When the buyers sell them at this higher price, they will not be taxed, because such profits are not subject to capital gains tax. In other words, the government’s own financial rules encourage this irresponsible behaviour.
The uncertainties in the global situation, which are the background to the sudden increase in bond yields, are real enough, especially with regard to the likely effects of a Trump presidency. In the UK, however, the supposed ‘market panic’ was quite consciously exaggerated. A mere 0.1% drop in inflation was enough to turn the tide.
The press barons who whipped up this hysteria are instinctively hostile to any Labour government. They realise that it will come under pressure from its voters and the unions to make the rich pay for essential expenditure on public services. For them, the episode was a warning to Starmer and Reeves to keep their promises to the City of London, not those made to its members and supporters.
That Starmer and Reeves were so vehement in their insistence on sticking to their fiscal rules should be a warning to workers and their unions that more than argument and protest will be needed to force this government to put the interests of the working class before those of capital. Only by organising to take militant mass action, including strikes, can we begin to tip the scales in our favour.
