Labour’s new Shadow Chancellor suffered some unfair criticism at the end of last year, following polling that showed her predecessor was more well-known than her. However, as the person who was responsible for her predecessor’s media coverage at his peak, I think it’s unfair to judge her so early on and especially during a pandemic by this measure.
Dodds will be like all Shadow Chancellors in pursuing ‘economic credibility’ as her main objective. This is quite a nebulous objective to many, as ‘credibility’ can be subjective and hard to define. Polling offers one way of measuring it, and most polls have given the Tories a significant lead on the question of which party would best ‘manage the economy’. Whether pursuing this metric or not is helpful is debatable given that even polls ahead of the 1997 election gave the Tories a lead on the economy over Labour.
‘Economic credibility’ can also be measured in terms of support from opinion formers in the academic and media worlds. This is a very broad measure. John McDonnell, for example, was never short of economists prepared to sign letters endorsing our economic policies, which also polled strongly on their own with the public. Equally, the “tea offensive” that I set up to win over business leaders always ended with them leaving impressed by the Shadow Chancellor’s ability and acumen.
But it is with this audience that Anneliese Dodds has sought, and at first signs appears to have succeeded, to be seen as ‘credible’. This can be seen in her choice of a fiscal framework, laid out in her recent Mais lecture, that is debatably looser than that of her predecessors, and yet was well received, with a glowing write up from the FT’s Economics Editor, Chris Giles. He, like other journalists, have interpreted the speech as a breach from ‘Corbynomics’.
But while Dodds’ Mais lecture marks a move away from the Corbynomics of 2019, it also signals a move towards the earlier 2017 form, which was based around the first version of Labour’s Fiscal Credibility Rule (a cheesy name I regret coming up with).
Labour’s original Fiscal Credibility Rule was based on a 2014 paper by Jonathan Portes and Simon Wren-Lewis, submitted in 2015 to our Economic Advisory Council. It recommended firstly that Labour adopt a five-year rolling target for the deficit on day-to-day spending. George Osborne had this original fiscal rule too in 2010, but he refused to take advantage of the fiscal room for additional capital spending it gave. Secondly, the paper proposed a “knock out” rule for when monetary policy had reached its limits with rates at the zero-lower bound, signalling that at this point fiscal policy should kick in.
I further added a tweak with a debt rule, against some internal protest, based on consultation with Joseph Stiglitz. My fear was that we couldn’t avoid questions over the national debt, which left an easy line of attack for the Tories to scare our target voters. The debt rule stated that debt would fall as a share of trend GDP. It was later modified to just simply fall as a share of GDP by the end of the parliament. But the Stiglitz innovation of ‘trend GDP’ was to make it not much of a constraint as it would be backward looking. This denominator was rather nebulous to many people—including our spokespeople—and was brutally exposed in a media interview during the 2017 election campaign with one of our frontbenchers.
Anneliese Dodds has not explicitly gone for this option. Instead, she has arguably gone for a much looser position on the national debt than McDonnell. She has instead floated that an approach of long-dated gilts and a refocusing on public sector debt from one-off events like pandemics should be targeted over a longer time horizon, citing the fact that Second World War debt was only paid off in 2006.
She also seems to be sticking to the suggestion last summer by the now head of the OBR, Richard Hughes, to target overall public sector net worth. This is a small positive as the obvious thing missing from economic policy under the new leadership has been a strong commitment to the common ownership of rail, mail, water and utilities as promised during the leadership campaign. This tweak suggests that the door is still open on this front.
I suspect before the next election greater definition will be added here, and especially around her ‘fiscal anchor’, that will set a limit on public spending in a crisis. Notably, Justin Trudeau’s government in Canada have refused to update their fiscal anchors due to the current crisis. As Labour sadly learnt in 2019, it’s one thing to set out new fiscal rules, it’s another to convince people you will stick to them.
In addition, Dodds has added a similar tweak of having the National Audit Office (NAO) report to parliament each year on government spending. I also added an extra constraint similar to this to the FCR: reforming the Office of Budget Responsibility (OBR) to ensure it was a fiscal council similar to the US Congressional Budget Office. The logic for this constraint was an attempt to prevent our rule being misrepresented as an excuse for poor spending decisions, and so when Labour politicians had to talk about it in the media we could point to legitimate constraints.
The Fiscal Credibility Rule was immediately attacked by some on the left who mistakenly thought it was a mandate for, rather than against, austerity. In fact, our FCR made George Osborne style austerity, of hitting the economy by reducing public spending and sapping demand, almost impossible. Austerity was always a political choice not an economic necessity, and Dodds, by adopting a framework similar (if not even looser) to ours in 2017, has opened up room for the party to maintain its anti-austerity stance.
In her lecture, Dodds has returned to a separate policy suggestion that would fit in fine under McDonnell. This is to return to formal equality impact assessments and to assess all budget lines against our net zero ambitions. This approach is similar to that of New Zealand’s current Labour government.
Our policy to reform the OBR to model the impact of climate change at fiscal events of government policies would sit well with what Dodds espouses. My thinking in this regard was that we needed to shift fiscal policy-making into the long term to justify the large scale infrastructure spending plans that we had, and to embed serious policies on climate change into our overall approach.
For example, fiscal events look forward only a few years, and without formal equality impact assessments, and like with major infrastructure projects such as HS2, climate impact stretches over decades. The impact of climate change doesn’t obey the five-year term of any government. We are today living with the climate consequences of the governments of the past. But the more we do today, the better chance we give ourselves in reaching future net-zero targets. It seems Dodds is continuing this long-term approach.
The real differences with Dodds and the previous regime I was part of is more in tone than substance. Take for example her main capital expenditure pledge of an additional £30 billion over the next eighteen months. If we had won the 2017 election, Chancellor John McDonnell would have been planning on average £25 billion in additional capital spending next year.
The real break is from the 2019 economic approach, and the folly of announcing a new set of rules weeks out from polling day based on a paper published months earlier. Dodds has realised that she will need a long run up to the next election to sell Labour’s economic framework. In 2016, my logic was to not repeat the mistake I believed Ed Balls made in 2015 when he announced his fiscal rules just months out from the election and he got skewered on them by the SNP and the Tories.
It was a huge risk at the time and many colleagues were worried. Our plan was to show ourselves to be credible, with a set of rules that worked when the then Chancellor was about to break his own. We risked leaks from MPs and party staff ahead of our speech announcing it, and there was a fear that it could upend the leadership. But it worked, exposing George Osborne as he broke his fiscal rules while winning over critics internally and externally.
In 2019, Labour had a list of spending commitments and they wanted a rule to justify, rather than structure and prioritise, them. Dodds seems to break with this approach in wanting a framework that policies will adhere to. This is a basic principle you must follow if you choose to have fiscal rules.
Furthermore, using policy to create dividing lines can also be strategically helpful in achieving ‘economic credibility’. This was best shown by us announcing the FCR ahead of our second fiscal event, Budget 2016. And it was probably the most credible we looked on the economy until our tax guarantee announcement in 2017 alongside our costed manifesto. The latter was an approach I had introduced at our very first fiscal event to demonstrate that our new leadership were going to be braver in showing clear, costed policy alternatives – unlike our predecessors.
Alternatively, the worst was in autumn 2018 when, against my advice, we decided to abandon this approach and set out an uncosted £100bn number for reversing austerity, which was then hard to explain in interviews. Sadly, we largely repeated this failed approach in the 2019 election campaign.
Labour faces new challenges. By 2024, the Tories will have borrowed in nominal terms since they were elected in 2010 not only more than any Labour government in history, but any UK government.
The consensus has moved away from austerity and central banks are propping up capitalism and pushing wealth to the asset-owning classes. In the UK, Quantitative Easing has helped exacerbate a two-tier economy since 2008.
The battle lines of the next election will partly be over who has disproportionately further benefited from this latest round. The question is now whether Labour will be bold enough to set out a radical offer that can build a successful electoral coalition.
In her lecture Dodds has pitched greater investment around making the state more resilient, citing the response to the pandemic as a case in point. But as polls show, despite one of the highest death rates and deepest recessions in Europe, voters still blame the public over the government for the poor handling of the pandemic. It looks like it will be an uphill task, but a vital one to secure a Labour government.
Ultimately, Dodds’ lecture is a small vindication for those members who voted for Starmer on the basis that he would be the respectable face of radical policy. They have announced a looser fiscal framework yet got plaudits from the same media outlets that derided the previous regime’s policies as too radical. It’s where they go from here that will define whether those members were truly right.
James Mills is a former strategic advisor to Jeremy Corbyn, and a former director of communications for John McDonnell and the Shadow Treasury team.