The IMF on the UK’s fiscal rules

 

Press coverage of the IMF’s annual report on the UK economy in both the FT and Guardian chose to headline their comments about ‘refining’ fiscal rules. Those headlines might have been interpreted as saying the IMF thought Reeves could raise spending without raising taxes. If you thought that then you would have been disappointed. Nothing the Fund said does that. The Fund effectively endorsed the current fiscal rules, which for reasons I will discuss below is a little disappointing coming from one of the few institutions that has expertise on these matters. But for those wanting higher public spending (which is most voters), their message is one I would agree with: its tax, not the fiscal rules, that has to change.

What they do comment on is how what happened in March might be avoided in the future. Reeves has sensibly committed to just having a tax changing budget in the Autumn, but the OBR is legally obliged to do two forecasts a year. Unfortunately, Reeves and the Treasury believe that each forecast has to show the government meeting its fiscal rules. After the Autumn budget those rules were only just met, so that meant that the OBR’s March forecast had a good chance of showing the government breaking its rules. Reeves decided, wrongly in my view, to make disability payments the residual item of spending that would adjust to make sure the rules held.

Singling out any one item of public spending to be the residual to be adjusted to ensure your rules hold in the OBR’s March forecast is a daft way to make fiscal decisions. Furthermore, adjusting spending or tax on a six monthly basis to get a fiscal forecast to hit a target is unnecessary. I noted at the time Charlie Bean (ex BoE, MPC and OBR) saying that a grown up approach would just promise to adjust policy in the Autumn budget to meet the fiscal rules, but following the Truss debacle politicians and civil servants were so scared of the bond market this didn’t happen.

The IMF mentions some ways of avoiding what happened in March happening again. I can interpret them as involving three possibilities. The first is to formalise this grown up policy. The OBR could still produce two forecasts each year, but in March they would omit their final chapter on assessing whether the fiscal rules were met. Instead the Chancellor would simply commit to making the necessary policy adjustments in the Autumn. The second option is to get the OBR to forecast just once a year, to coincide with the Autumn budget. A third possibility mentioned by the IMF involves “de-emphasizing point estimates of headroom in OBR assessments of rule compliance”.

The second option, the OBR producing just one forecast a year, is the one favoured by The Institute for Government (see Gemma Tetlow here). I have no problem with this, because issues involving fiscal sustainability are about the long term, not short term. I find the media’s discussion of monthly deficit numbers alternatively funny and exasperating. However the Treasury might want a six month OBR forecast to at least frame the pre-budget discussions. While plenty of other macro forecasts exist, the OBR’s detailed analysis of the public finance data is unique. It would be politically impossible for the OBR to do a forecast for the Treasury in secret.

I’m also not sure how de-emphasizing point estimates would work, because they could always be derived even if the OBR hid them. As Gemma Tetlow points out, the Bank has done this for some time and everyone still focuses on the point forecast. Saying that the fiscal rules would be formally met if there was a 40%, rather than 50%, chance of hitting the targets would rightly be seen as a major change in the ruIes.

I still think a viable option is to formalise the grown-up policy, because at some stage politicians and the Treasury need to start treating the bond market as grown-up too. (The media, I fear, never will.) By March next year Reeves should feel she has established enough credibility to be able to say that she would make the adjustments needed to meet the fiscal rules in the Autumn, without fear of spooking the bond market. To be honest I don’t think the bond market would have been spooked even if she had done this last March.

The two issues that I was disappointed the IMF didn’t comment on are the supplementary fiscal rules, and the change to a three year horizon.

The main fiscal rule, and the one driving policy at the moment, is the ‘golden rule’, which says current spending must be matched by taxes at some date in the future. The IMF rightly says that this rule “helps preserve space for investment”, which is one reason why it is a good fiscal rule. But there are two supplementary rules: a rule for welfare spending and a rule saying the debt to GDP ratio must be falling at some date in the future. In my view both are a waste of time.

Yet the IMF says that the falling debt to GDP rule “safeguards fiscal sustainability”, implying that the golden rule alone fails to do that. By fiscal sustainability they mean that debt to GDP remains stable or falling in the longer term. This is just incorrect, as the IMF must know. Getting debt to GDP to be falling in a few years time does not ensure sustainability. It is quite possible for the rule to be continuously met and yet for debt to GDP to rise steadily, because current increases more than offset any expected future falls.

As I have argued consistently (and to my knowledge no one has established otherwise) the golden rule is the best we can do to ensure sustainability, as long as taxes matching spending is defined sufficiently to allow space for an average level of investment spending. Periods of unusually high public investment never threaten fiscal sustainability. The falling debt to GDP rule therefore adds nothing useful. Yet what it does do, if it happens to bind when the golden rule doesn’t, is encourage governments to cut back on useful investment. It therefore partially negates a key advantage of the golden rule.

Putting the same point another way, any rule that looks at government debt is just looking at one side of the balance sheet by ignoring government assets. It is like saying that when you take out a mortgage on a house your financial position has reached crisis point because your debt level has exploded. If instead you required the GDP share of public sector net wealth to fall over time, you can formally show that this is simply double counting the golden rule. Again, you don’t need a supplementary rule.

The IMF does note that the fiscal rules are changing from looking five years ahead to instead look just three years ahead. All the IMF say about this is that this change is “expected to make the rules more credible, while allowing time to adjust gradually to shocks.” I agree that the Treasury expects this three year horizon to be more credible, but the IMF ignores the basic problem in moving from five to three years ahead, and that is the business cycle.

The current deficit target in the golden rule is not cyclically adjusted. This is potentially a problem because in economic downturns the deficit rises and vice versa. However as long as the fiscal rules looked five years ahead, this cyclicality was never going to be a problem, because the OBR would always be forecasting a return to trend output after five years. But that is no longer true if the target is just three years ahead.

You don’t need a full blown recession for this to become a problem. For example, at the moment the OBR is forecasting steady growth from 2026 onwards. But supposing Trump’s tariffs or other factors depress the global economy in 2026, and this is expected to continue into 2027. This impacts the UK, such that the OBR forecasts made in the Autumn of 2026 show the UK economy still 1% below trend in 2029. In 2026 the fiscal rules will apply three years ahead, which is 2029.

That may well mean that the current balance will not be expected to be at target in 2029, but will be by 2031. To cut spending or raise taxes in those circumstances, just before an election, would be crazy from both an economic and political point of view.

Did the Treasury not think about this possibility? If they did, why did Reeves still take this risk? One of the features of fiscal rules under the Conservatives was endless tinkering for short term political gain at the expense of economic logic, and unfortunately the change from a 5 year to a 3 year horizon is I believe another example. To be quite frank, I just wished they had asked me about this change before they did it. [1]

The scenario above might not happen of course, or it may happen at some other time in the future. But that it might well happen means this rule change is another example of Reeves erecting hurdles that she might fall over in the future. Labour’s tax pledges are the biggest of course, but at least there was a political justification for those. Changing the target horizon from five to three years has no such excuse. The bond markets were never going to be spooked by her October budget with its small adjustment to the falling debt to GDP rule, so she didn’t need to throw them a bone, particularly one they have no interest in. [2]

[1] If that sounds pompous, I am one of the very few in the UK who has written an academic paper about both the theory and practical issues behind fiscal rules.The paper recommends using the golden rule, with a target five years ahead. I advised the previous Labour Chancellor but one to adopt this rule, advice he accepted. Even if the current Chancellor was determined to make this change to ‘enhance credibility’, I would have pointed out that it should have involved moving to a cyclically adjusted target for the current deficit.

[2] Bond markets don’t really care about the details of fiscal rules anyway. Just look at the number of times the last government changed those rules, none of which produced any reaction from the markets. As I set out here, markets are mainly interested in where the central bank will set interest rates in the future, and how uncertain those expectations are.

Is the centre right doomed?

 

This post is not about whether the UK Conservative party will be replaced by Farage’s Reform as the main opposition to Labour. As long as the Conservative party sees its future in emulating Farage’s politics, then the Conservative party is no longer centre right, but a right wing populist party. Which of these two right wing populist parties will win out mainly depends on how good a politician and leader Farage turns out to be. If he plays his hand well, then it is quite possible that after the next election Reform will be Labour’s main opposition, but I have no idea if he will play it well. [1] Alternatively a merger is possible, because as Tim Bale, the UK’s leading academic expert on the Conservative party, has shown the membership of the two parties is pretty similar.

Instead I want to discuss why so many parties of the centre right across the West seem either to have been squeezed out by populist right wing parties (as in France for example), or have transformed into populist right wing parties (as the Republicans have in the US), or have done both (as in the UK). This is the topic addressed in this article by (in my view) one of the best political and policy analysts in the UK right now, Sam Freedman. It is also something I have written about myself, sometimes under the label of neoliberal overreach or plutocracy, most recently here.

At first sight the story Freedman tells is rather different to mine. He first talks about a middle class, then managerial class and finally (following Badenoch) bureaucratic class, that includes “civil servants, psychiatrists, compliance officers and risk managers, most lawyers, and everyone working in HR”. Once, alongside the capitalist class, this group was the bedrock of Conservative support, while the centre/left represented the working class. The political affiliation of this class became more contested as the centre left looked beyond the working class for support (e.g. under Blair in the UK), but initially the centre right still competed for their votes.

However, Freedman argues, a strand of thinking that saw this class as the enemy began to emerge on the right. The capitalist class saw the bureaucratic class as frustrating enterprise and profit, while older socially conservative voters became resentful of the social liberal ideas prominent within the middle/managerial/bureaucratic class. This coalition is exactly what you see behind Trump’s presidency today. (These two paragraphs cannot do justice to Freedman’s account, and I strongly recommend reading the article, particularly if you are interested in some of the thinkers behind this movement.)

My own account lays much more stress on the role of neoliberalism, and its capture of the centre right in the 1970s/80s. After an initial honeymoon period under Thatcher and Reagan, neoliberalism became much more problematic for voters. While politicians on the right wanted to go further in reducing the role of the state, voters clearly didn’t. Rather than compromise their neoliberal beliefs, right wing politicians and the media that supported them turned to culture wars (particularly immigration outside the US), as a vote winning tool.

This shift to social conservatism was largely instrumental: it was a means of keeping or obtaining power rather than a matter of principle or conviction. In areas like immigration and trade when it came to a conflict between neoliberalism and social conservatism, centre right governments when in power chose the former. That in turn led to a revolt by social conservatives (financed by particular members of the capitalist class), leading to either a take over of the centre right party (the US) or the emergence of a competitor party (the UK). Once competition or division emerged on the right, plutocratic elements (including media owners) could gain power and influence by playing one side against the other, and a neoliberal ideology could be subverted (but not completely overturned) with the help of particular monied interests (think Dyson over Brexit, who clearly didn’t speak for business as a whole.)

Although these two accounts sound different, I think there is a lot of common ground. Both involve the radicalisation of social conservatives. The centre right has always been a coalition between social conservatives and a more socially liberal but economically right wing middle class. But Tory MPs were typically much more socially liberal than the party’s members, and partly for that reason in the UK and elsewhere social liberalism has made great advances. Although there may also be specific national reasons, this is one common factor behind the radicalisation of social conservatives in many countries. However I would argue this radicalisation also reflects campaigning choices by neoliberal politicians on the centre right. (In the UK, contrast Edward Heath’s sacking of Enoch Powell with the Conservative party and its press after 1997.) But as my recent piece admits (see ‘critique’) it remains unclear to me how important these campaigning choices were, and whether the advance of social liberalism alone was sufficient to create social conservative radicalisation.

Indeed it could be argued that the transformation of centre left parties from being made up largely of working class voters to containing more middle class, typically university educated voters (what Piketty calls the Brahmin Left) is part of the same dynamic as growing social liberalism. While until recently centre right parties didn’t try to reverse this trend because their leaders were relatively socially liberal compared to their voters, it is still clear to social liberals that the party of the centre left is the one implementing socially liberal reforms, so it will attract their votes. The advance of social liberalism causes increasing middle class support for the centre left, which in turn facilitates further social liberalism.

In addition, the members of the capitalist class wanting a smaller state emphasised by Freedman (eg Musk) and the politicians pushing for a smaller state that I sometimes focus on (eg Osborne) have similar effects. As I argue, the move of the centre right to become more populist follows naturally from the emphasis on social conservative (sometimes called authoritarian) ideas.

We also agree that, to use Freedman’s words, their current strategy is

“hopeless for the Conservatives, many of whom were either in or adjacent to this bureaucratic class before becoming MPs themselves. For those who wish to rebel against the establishment, Reform is a much more attractive choice. Meanwhile the Tories are gifting professional graduate voters to parties of the left and centre, as demonstrated by the ongoing destruction of the Tory party by the Liberal Democrats in long-held heartlands like Oxfordshire and Hertfordshire.”

In my view they would be much better advised to fight on this second flank where they have more chance of winning, but whether their membership and their press will allow them to do this is doubtful. I also agree with Robert Saunders who in 2019 argued that Brexit had helped rot the party’s strategic mind. He shows that before 1997 the party was always receptive to new ideas and thinking and this helped it become such a dominant force, but it no longer has that ability unless those ideas come from Nigel Farage. To quote:

“As John Stuart Mill well knew, the Conservative Party was never truly “the stupid party”. Yet what was once an insult has become an aspiration. It may yet prove the party’s epitaph.”

The parties of the centre right that survive best may be those that don't put all their focus into trying to copy populist right wing politics, and instead fight these populists head on. 

[1] That does not necessarily mean the death of the Conservative party, particularly if Reform does so well that it forms the next government and that proves to be predictably bad for the UK economy.

Reeves is not following in Osborne’s footsteps

 

I often see the claim that Reeves is just doing a version of George Osborne’s austerity, or that Reeves is following Osborne in being obsessed with fiscal rules. As Osborne’s period as Chancellor is increasingly seen as a disaster for the UK (as a few of us shouted at the time, but were ignored by a media that thought austerity was common sense), such comparisons serve a political purpose, but they are very misleading. The big mistake Reeves is making has little to do with Osborne and rather more to do with the folklore that emerged from Labour’s eighteen years in opposition between 1979 and 1997.

If anyone was following in Osborne’s footsteps it was Jeremy Hunt, who promised if a Conservative government was re-elected an additional period of significant spending cuts. In reality, as Will Dunn reminds us, he was repeating the trick played by Osborne before the 2015 election: set impossibly tough targets for spending after the election to limit what Labour could promise. Osborne was re-elected, and promptly moderated the decline in spending (as a percent of GDP). Hunt wasn’t re-elected, but Reeves raised government spending to be roughly flat (as a percent of GDP). From 2010 Osborne cut public investment (as a share of GDP) substantially, while Reeves raised Hunt’s plans to keep public investment roughly flat (as a share of GDP). As regular readers will know, Reeves has done much less than I would have liked, but it is not because she is following in Osborne’s footsteps.

Reeves appears obsessed by her fiscal rules, but in this she is following Gordon Brown rather than George Osborne. It was Gorden Brown that first created the ‘golden rule’, that current public spending should be matched by taxes. (It’s form was different because Brown’s rules looked backwards over a complete economic cycle, while today’s rule looks forward a number of years, but that is a detail compared to the rule’s basic principle.) The context in which Reeves is operating is also more similar to Brown’s than Osborne’s. Osborne’s principle macroeconomic error was to cut spending hard at the bottom of the deepest recession the UK had experienced since WWII, when interest rates were at their floor, going against standard macroeconomic theory and evidence. Reeves inherited a far weaker economy than Brown, but its weakness represents supply side stagnation rather than deficient demand. Overall, if Reeves is following anyone it is Labour’s most accomplished Chancellor, while any obsession about following rules on her part can unfortunately be laid at the door of Liz Truss.

As I have argued many times (most recently here) Reeves’s main error has been a failure to raise tax sufficiently. This is partly the result of commitments that Labour made before the 2024 general election. But Brown and Blair also committed not to raise the standard and higher rates of income tax before the 1997 election, as well as pledging to exempt some items from VAT. That the 2024 commitments covered more areas on tax than in 1997 may just reflect that the Conservative government had changed these additional taxes. Gordon Brown did eventually raise personal national insurance contributions (NIC) to partially fund higher health spending, but only after winning a second term of office. Even in this case I remember him telling me that they were really worried about the media and public reaction to this tax increase, and spent months carefully preparing the ground for that announcement. (Preparations that were, apparently, blown out of the water by Tony Blair in a media interview.)

Labour’s fear of tax increases is therefore longstanding, and owes a great deal to a belief that the public's distaste for tax increases was key in keeping Labour in opposition for eighteen years before 1997. In particular, their defeat in 1992 is often put down to a shadow budget which involved increasing taxes on high earners, which John Major described as Labour’s ‘tax bombshell’. 1992 was an election Labour thought they were going to win, but where they were soundly defeated yet again.

Are Labour’s fears about the electoral impact of tax rises justified? I’m not really qualified to answer (and I’m not sure anyone really knows), but some things are clear. First, many more voters favour higher taxes and spending compared to lower taxes and spending, although in recent years that large gap has been closing. However, the link between the two in many voter’s minds may not be clear: voters know that they pay taxes, but may be unsure that additional tax revenue will go to the kind of government spending they favour. In addition, those with high incomes and wealth tend to have an outsize influence in the media.

What does seem clear is that Brown’s concern about the reaction to his NIC increase to fund additional health spending proved unwarranted. Even a majority of Conservative voters supported it at the time. One difference between then and now, of course, is that back then real incomes were growing, whereas today they are not, such that those on low or modest incomes are already stretched. However, even if that concern is valid, the case for not increasing the top rates of income tax today looks rather thin.

Starmer’s Disgraceful and Damaging Remarks

 

I’m on holiday, and wasn’t going to write a blog post this week. But after a splendid day out on the Northumbrian coast I made the mistake of reading Starmer’s remarks on Labour’s immigration white paper. I have in the past gone through speeches by Cameron or Osborne to point out the lies and deceptions they contained, because most of the media and generally the opposition would not do this job. Unfortunately much the same is now true for what Labour says about immigration. Going through the speech:

1. In the first para: “This strategy will finally take back control of our borders and close the book on a squalid chapter for our politics, our economy, and our country.” Elsewhere he said that high immigration had done ‘incalculable damage’.
   
   You may not have liked the immigration policy of the previous government, but calling a system that prioritised skilled over unskilled immigration or allowed migrants to take jobs in areas where shortages were causing real harm (social care) is hardly ‘squalid for our economy or country’ and it certainly did not cause incalculable damage. This is nonsense language worthy of a Trump style populist.

2. Apparently the previous government’s immigration policy was “A one-nation experiment in open borders conducted on a country that voted for control.” That is a simple lie. A visa system that excludes most low skilled migrants is not an open borders policy. Yet apparently it risked the UK “becoming an island of strangers, not a nation that walks forward together.” Starmer has no evidence to support this, so it’s just a simple appeal to xenophobia, with a long tradition (e.g.)
   
   

3. “Migration is part of Britain’s national story…..But when people come to our country, they should also commit to integration, to learning our language, and our system should actively distinguish between those that do and those that don’t.” Integration is of course important, but implying that this is all down to migrants and nothing to do with the government is false, and voters understand that. So why not say this? Perhaps because the white paper proposes doubling the time before migrants can apply for citizenship, which hardly encourages integration.
   
   

4. The previous immigration system meant “Fewer people who make a strong economic contribution, more who work in parts of our economy that put downward pressure on wages.” There is no good evidence for this, and plenty that shows it is false. If Starmer is talking about social care, then what would he have done when acute shortages emerged and the previous government allowed substantial immigration for social care jobs? Nothing, allowing job shortages to persist with all the suffering that would bring? Or would he have raised taxes or cut government spending to make room for higher wages to attract more to take up social care jobs? By pretending this dilemma doesn’t exist he is being deceitful.
   
   

5. “But at the same time, we do have to ask why parts of our economy seem almost addicted to importing cheap labour rather than investing in the skills of people who are here and want a good job in their community.” As the above shows, ‘parts of the economy’ here includes this government.
   
   

6. “If we do need to take further steps, if we do need to do more to release pressure on housing and our public services, then mark my words – we will.” The old lie, repeated at every opportunity by Reform and many Tory politicians, that immigration puts pressure on public services. The evidence suggests the opposite is true, as the OBR have noted. What the OBR thinks matters a lot, because if immigration is less than they expect that will mean their projections for the public finances will get worse, not better, and the Chancellor will respond with higher taxes or more spending cuts. As for housing, there is this.
   
   

7. “So perhaps the biggest shift in this White Paper is that we will finally honour what “take back control” meant and begin to choose who comes here so that migration works for our national interest.” This statement suggests a fundamental change in our immigration system, whereas in reality the white paper essentially keeps the same skilled based visa system and just changes its parameters.
   
   

Taken as a whole, what I find distasteful about these remarks is not their political viewpoint but instead their simple dishonesty. They suggest, just as right wing populists do, that reducing immigration involves no costs, and in particular it’s unequivocally good for the economy. From these remarks you would be forgiven in thinking that there are no trade-offs at all. You might also wonder why, if that is the case, previous governments have found it so hard to control.

If a government told you that you could have lower taxes and higher public spending without additional borrowing you would be a fool to believe it, but politicians continue to treat voters as fools when it comes to immigration. It is as if politicians believe that being honest will be seen as a weakness of resolve, whereas in reality the opposite is true.

That is why these remarks are disgraceful. They are damaging in part because they validate the rhetoric and dishonesty of both Reform and the Conservatives. But, incredibly, they are also seriously damaging for the Labour government itself, for reasons I spelt out here and here. By seeming to validate almost everything right wing populists say it only makes them more attractive to voters, while remarks like this are almost designed to make social liberals and anyone with a bit of knowledge of the issue disinclined to vote Labour again.

This government had a golden opportunity, with immigration numbers falling, to try and make the UK's debate about immigration more honest. It has done the opposite, and the chance is unlikely to come again. As a result, the UK's squalid and damaging discourse on immigration will continue. 

’

The mistakes that have led the Conservatives towards annihilation, and Labour copying them

 

Despite what you read, we have been here before. In the 2019 European Election, Farage and his Brexit party won over 30% of votes, with Labour on 14% and the Conservatives 9%. That directly led to the Conservatives adopting populism by electing Johnson as its leader. The Conservatives under Johnson ticked most of the boxes that define right wing populism: an all powerful leader, endemic lying, attacks on our pluralist democracy (e.g. suspending parliament), sidelining expertise (the second and third Covid waves), culture wars, corruption and so on. The one box he didn’t tick was reducing immigration, which is one reason the Conservatives lost big in 2024 and why Reform has now taken their place. [1]

To some extent the elections last week told us what we already knew, which is that both the two main traditional parties are very unpopular. It emphasised this unpopularity, however, because both Labour and Conservatives underperformed their current national polling as many of their voters didn’t bother to turn up. As the Liberal Democrats and the Greens also did very well, last week was about Labour and Conservative unpopularity more than the popularity of Reform.

If last week’s vote shares were repeated in a general election Ben Ansell calculates that Reform might win an outright majority, but with a bit of tactical voting a Labour/LibDem coalition is more likely. But neither result is that surprising when you see that the same calculations give the Conservatives just 10-20 seats. The Conservatives are in annihilation territory, with Reform taking their place.

Reform gets most of its voters from the Conservatives, and Farage sees the future of Reform as replacing them, so it is instructive to see why the Conservatives have so far utterly failed to stem the Reform tide. Under Sunak and Badenoch their line seems to have been: we agree with Farage on the key socially conservative issues and their importance, which is why you shouldn’t vote for him. It was Farage who first popularised the issue of what he termed an ‘invasion’ of small boats, and the Conservatives who invented a crackpot scheme to deal with them.

By adopting largely the same rhetoric of Farage on asylum and immigration, but failing to change things, the Conservative government set themselves up to lose large numbers of votes to Reform. Worse still, by adopting the language of Farage they alienated those Conservative voters who were economically right wing but socially liberal, and so in the General Election they lost a large number of seats to the Liberal Democrats.

There seems little chance that Badenoch will change this failed strategy, but equally there seems little chance that the strategy will suddenly come good. Put simply, their record on both immigration and asylum will over the next few years weigh more heavily with voters than their Farage-like rhetoric. So why would a voter who really cared about these issues vote for the Conservatives rather than Reform?

On the other hand, the success of the Liberal Democrats has a less secure foundation. If the Conservative party moved away from trying to beat Farage on socially conservative rhetoric and policies, and instead started to sound a little more liberal and less populist, then there is the potential to squeeze the LibDem vote in a general election. The Conservatives' not unreasonable argument would be that voting LibDem would keep Labour in power, because the Liberal Democrats are clearly not against cooperating with a minority Labour government while Reform could not.

To make that transformation the Conservatives would need a new leader, and here they have a problem. James Cleverly is the obvious alternative leader to achieve such a switch, but while a ballot of MPs might put him first, his main rival Robert Jenrick is far more popular with Tory members. These members, who are largely sympathetic to Farage and his agenda, have the final say in choosing a leader and will not want to choose someone who sounds more liberal.

The Conservatives seem to be hoping that over the next few years Farage and Reform lose some of their current appeal. That could occur if Reform makes a mess of running some councils and that gets media coverage, but would that coverage ever be extensive enough to influence predominantly low information Reform voters? Is there any other reason why the media might start subjecting Farage and Reform to proper scrutiny, when they have largely avoided doing so until now. The right wing press is increasingly acting as the media arm of Reform rather than the Conservative party.

Equally it is quite possible that, with more Reform politicians at the local level, we will see more internal dissent within the party. But that has happened already, and it doesn’t seem to have done Reform any harm at all. This is partly about media coverage, but it is also about the nature of a populist party where the leader is king, and unlike the Conservatives there is no means for the king to be deposed.

It is therefore not obvious why what happened to the Conservatives last week will not continue to happen over the next few years, and they will be facing wipe-out at the next general election. For this reason they will be desperate to do some kind of deal with Reform, but equally there is no obvious reason why Farage should cooperate. The final card Conservative MPs have is to offer Farage a merger that included his leadership of their party, which takes us back to those 2019 European election results. Conservative MPs dealt with that existential crisis by giving the leadership to their own right wing populist, when most MPs knew full well that he would be a terrible Prime Minister.

The possible death of the Conservative party is such a momentous milestone in UK politics that you would think the other main traditional UK party, Labour, would be doing everything they could not to make the same mistakes. Yet incredibly Labour seem to have decided to follow much the same strategy that failed the Conservative government so badly. They too are employing rhetoric and making policy that says Farage is right about small boats and immigration. This is alienating parts of their core vote just as the Conservatives alienated its southern heartlands.

The only way a Labour government can avoid a similar fate to the previous Conservative government is by having a really good (in the eyes of social conservatives) record on immigration and asylum. A record that was Farage proof. To see why that is very unlikely to happen, they just need to remember Cameron’s immigration targets.

What Labour, the Conservatives and Reform will not admit is that measures to directly reduce immigration have clear economic costs. If you stop granting visas during a period, like now, of low unemployment you create labour shortages that will reduce output in the short term, and may move jobs, output and therefore income overseas in the longer term. If you stop overseas students going to UK universities you will bankrupt some (with big losses to the local economy) and require government money to help others out. That is on top of the fact that cutting immigration makes the public finances worse. [2]

There was a reason why Cameron didn’t try to hit his targets for immigration. But the fact that he had targets which he missed played into Farage’s hands, who blamed free movement under the EU. Is Labour really prepared to reduce real incomes and growth to hit low levels of immigration? Even if they did, small boat numbers are largely governed by events overseas over which the UK government has almost no control. By mimicking Farage on these issues they are laying the ground for their failure in the eyes of voters.

Will Labour see sense on this? The FT’s George Parker writes: “Morgan McSweeney, Starmer’s chief of staff, will pore over the results on Friday and is likely to conclude that he is right to pursue a “Blue Labour” strategy to address the populist threat — a policy which is already starting to be deployed.” Parker is probably right, unfortunately, but hasn’t this strategy already been deployed since Labour were elected, and for some time before that as well? Are last week’s results more a comment on the failure of that policy?

Or George Eaton in the New Statesman: “expect an increasing number of MPs to demand a “reset” – greater action to reduce immigration (one of the defining issues in Runcorn) and an avoidance of further austerity measures.” Except as any Labour MP should know reducing immigration will increase the need for austerity measures given Labour's fiscal rules, or do these MPs believe the Reform party politicians who falsely say the opposite?

And this, suggesting Labour’s unpopularity is all the fault of Ed Miliband and trying to save the planet! And this. Many Labour ministers, MPs and advisors seemed to have learnt nothing from the demise of the Conservative party.

As I have argued before, it would be far better if Labour started developing a more distinctive line on immigration issues, which didn’t just parrot Farage. Crucially they need to start relating immigration to the jobs immigrants do, and start talking about the causes of high UK immigration at the same time as showing why crude targets are either pointless or damaging. On asylum they need to talk about international fairness and establish safe routes. As yet there is no sign of any of those things happening. [3]

[1] Even earlier, right wing populism achieved its first majority win in the UK with the Brexit referendum.

[2] Migrants tend to be young, so pay taxes but put below average demand on public services. In the short term it is what the OBR does that matters, and here is their analysis.

[3] Unfortunately the Labour government is not just copying Conservative strategy on immigration and Reform, it is in danger of effectively doing so on growth and public services too. In the General Election the Conservatives lost so badly not just (or even mainly) because of immigration but because living standards were stagnant and public services had been run into the ground. There is some evidence that, in terms of losing voters to Reform in Runcorn at least, these issues mattered more than immigration.

On growth and public services Labour wants to do much better than the Conservatives, but they have not as yet put the resources in place to do so. Joining the EU’s customs union and harmonisation of standards would lead to significantly higher growth quite quickly, but Labour are moving much more slowly because they don’t want to upset social conservatives. By pretending they can make Brexit work they are not using one of their strongest weapons against the man who championed it during the referendum.

On public services Labour have stopped the ridiculous additional cuts the Conservative government had pencilled in, but they haven’t raised taxes enough to significantly improve service provision compared to levels they inherited. Hence their very unpopular decisions to end the winter fuel allowance and cut disability benefits. As I note here, planned total current public spending in four years time is slightly below the level it was at the end of the previous Conservative government.

Labour say that they have taken unpopular decisions to enable improvements that will come good over the next few years. If they believe that then they are in serious danger of deluding themselves. The reality is that they have taken unpopular decisions for very little money, so the big danger is that voters will not see future benefits and will decide that a Labour government is little better than a Conservative one, and vote for something different.

What Labour is getting wrong in fighting right wing populism

 

We can guess that, however well the Liberal Democrats or Greens do in this week’s council elections, the main headlines will be about the success of Farage and his Reform party. David Jeffrey, in discussing how to fight right wing populism here, has a clear message for Labour. “For social democratic centre-left parties, academic research is clear: do not move towards the populist radical right on policy.” Yet that is what Labour did last year, with such apparent success, and what it is continuing to do. Is this because our FPTP voting system means that lessons from Europe do not apply to the UK?

There is a simple trade-off. By adopting a more socially conservative position Labour may attract voters who would otherwise vote for one of our two right wing populist parties, but they may lose socially liberal voters who might normally vote Labour. What do current polls tell us about this trade-off? We know that the big changes since last year’s general election are a big increase in the Reform vote and a big fall in Labour’s vote. But that isn’t because lots of Labour voters are switching to Reform.

Take for example this YouGov poll from mid-April. Most ‘new’ Reform voters come from the Conservatives, not Labour. Labour have lost twice as many voters to the Liberal Democrats than Reform. If you equate right wing populism in the UK with Farage and Reform, then what the Conservatives do to combat Reform matters much more than anything Labour does, and Labour are currently losing three times more voters to the LibDems plus Greens than Reform.

However it is incorrect to follow the media in believing that right wing populism is confined to Reform. There was little difference in the last election between Reform and the Conservatives on policy, and the latter hasn’t exactly become more socially liberal since then! In addition, Labour should plan on the basis that there will be a Tory/Reform pact at the next election. Yet even taking this point on board, currently Labour are still losing twice as many voters to socially liberal parties than socially conservative parties.

There is an obvious problem with this calculation. It might tell us something about the number of voters Labour could win back by changing their socially conservative stance, but it doesn’t tell us how many more voters Labour might lose to the Tories or Reform if they did so. To put it another way, Labour have since the general election lost a substantial number of voters to right wing populism despite maintaining a socially conservative stance.

There are two good reasons why this numerical exercise overestimates the potential cost of defections by socially liberal or left wing voters. The first is that this is an opinion poll, not a general election. Labour clearly thinks [1] that, come a general election, many of these voters will return to Labour to avoid a right wing populist party winning. I discussed here some reasons why many might not, but some certainly will. However even if this ‘they will come back’ argument is correct, it ignores the political costs of Labour being seen as a very unpopular government between now and the next election. The second is that many of the Labour voters being lost to more socially liberal parties will be in city seats that are safe for Labour. As Brexit showed, FPTP is biased towards social conservatism.

However there are also strong arguments that triangulating towards socially conservative policies will not stop many Labour voters defecting to Reform or the Conservatives. The first is that triangulation makes much more sense for an opposition than a government.

When a government is unpopular, it makes sense for the main opposition to diminish the differences between itself and the government, because by doing so it can attract voters who might be sympathetic to the government’s goals but disappointed in its record. If the opposition instead promised radically different policies, that might sound dangerous to these voters. Those who want large changes will vote for the opposition in a general election anyway (probably but not necessarily hoping for greater change). Triangulation by the opposition makes sense, because it reduces fear of change.

In contrast, it makes much less sense for an unpopular government to try and diminish the differences between itself and the opposition, because voters will base their decisions on the government’s record rather than its rhetoric.

Take immigration as an example. The last government said it was tough on immigration, but their record said otherwise. As a result many of those who wanted lower immigration were unhappy with the Tory government and voted to defeat it. As the Labour opposition said they like low immigration too, these voters feel safer in voting the government out.

Now think about a Labour government in 2028/9. Immigration, although lower than 2024, is still likely to be higher than socially conservative voters want. The Conservatives and Reform will be fighting Labour on this issue, so socially conservative voters will turn to these two parties. It doesn’t matter if the Labour government says they want lower immigration, because their record counts for much more in voters’ minds than what they say.

To put the same point another way, other things being equal, if you are a social conservative you will vote for a party that is most convincingly socially conservative. As David Jeffrey notes, “when parties adopt populist radical right positions, voters are more likely to defect to the radical right instead.” That didn’t work for the last government because of their record. The only way a Labour government could get voters whose primary concern was immigration to vote for them was if their record on immigration was just what socially conservative voters wanted, but that is very unlikely to happen.

The best way for a Labour government to win over socially conservative voters is on its economic record, and to contrast this with the economic record of right wing populists. This is because Labour voters who are ‘Reform curious’ are socially conservative but left leaning on economics. Although Labour understands this, I have argued repeatedly that it is failing to do what is necessary to achieve its economic ambitions. Even some in Blue Labour seem to agree. On public services, Labour has failed to raise tax by enough. It could do more to tax wealth, but if this is not enough it needs to raise taxes on income. As Labour keep saying, the world has changed, so they cannot cling to pre-election promises. [2]

Which brings us to another strong argument against Labour’s turn to social conservatism. Social conservative policies tend to lead to economic harm. If Labour adopts socially conservative policies and rhetoric, it at best undercuts what it can say on public services and growth, and at worst it undermines their attempts to improve public services and growth. It can also hinder their case against right wing populism.

Brexit is a clear example. To appease socially conservative voters Labour are approaching realignment with the EU at a snail’s pace, when doing more would have an appreciable impact on economic growth before the next election. Immigration is another example. Despite all the research showing otherwise, too many voters believe that cutting immigration will improve their access to public services. Yet instead of the government counteracting the right wing media’s propaganda on this, it seems instead to prefer not to believe the evidence! Equally universities have been a UK economic success story, but they are currently struggling in part because they are hit by Home Office concerns over immigration numbers.

At present, Labour are creating for themselves the worst possible background to the next election. By triangulating too far towards right wing populists, they are limiting what they can do to improve personal income growth and public services. By talking about immigration in the same way as the Conservatives and Reform, they are laying themselves open to a general election where the right wing press sets an agenda that has been validated by this government’s rhetoric.

This is not an argument for Labour to switch to social liberalism on issues like immigration, even though this would be closer to my own policy preference. Instead it is an argument for creating a more distinctive approach, which recognises the concerns of social conservatives but which is more honest, and as a result does not compromise living standards or public services. The Social Democrats in Denmark have shown how this can be done successfully. If you like, Labour can be tough on the causes of high immigration rather than employing empty or damaging rhetoric about being tough on immigration.

On economic issues it needs to do far more than just attack particular Reform policies. These will have a limited purchase on low information voters (who instead see stuff like this) and there is always the danger that Farage will co-opt left wing policies as he has before. He can do that because, like other right wing populists, he is quite happy to lie.

Which brings me to the two most effective weapons Labour currently have to fight Reform and Farage. The first is Brexit. Most voters, including a majority of Leave voters, recognise that Brexit has not been a success. Farage along with Johnson were the two major figures who championed leaving the EU. Farage pretends that this failure is somehow due to how Johnson enacted Brexit, whereas in reality they are inherent in Brexit itself. To an outsider it must seem incredulous that someone who can be so wrong about such a major issue, and who has made voters poorer as a result, is currently so popular. The reason is in large part because the Labour government refuses to be honest about the costs of Brexit.

The second potent weapon against Reform is Donald Trump. The simple way of getting across the message that Farage’s policies will have severe economic costs and that his claims otherwise are just lies is to equate Farage to Trump. Trump’s tariffs are hitting the US economy and causing chaos, just as Farage’s championing of Brexit has hit the UK economy. Trump promised lower prices but his policies are increasing them, and equally Reform’s promises on the economy are worthless and their policies will reduce living standards. The simple message that Labour should be repeating at every opportunity is that if voters want to know what a country led by Farage would look like, they just need to see what is happening to the nation led by his friend Donald Trump.

[1] The child benefit cap is more of a social than economic issue for some voters, because it is seen by many social conservatives as a benefit going to the undeserving poor.

[2] Labour claims that tax is a cost of living issue, but as the US election showed, what many voters blame the government for on the cost of living is higher prices, not lower real earnings. Furthermore, tax increases now will be forgotten or forgiven if it enables better public services by the time of the next election.

Is two-party politics really dead in the UK?

 

Rob Ford, previewing the upcoming election on 1st May in the Guardian, emphasises how the Liberal Democrats, Greens and Reform are likely to make big gains. Going further, in a recent article in Prospect, Peter Kellner suggests the domination of Labour and Conservatives, even in general elections where the First Past The Post (FPTP) voting system gives them a huge advantage, is over for good. I started out being more sceptical, but as I’m an amateur on these matters, I thought it was worth discussing in more depth.

The key evidence in favour of the view that multiparty politics in the UK [1] is here to stay is the trend in vote shares since shortly after WWII. Here is a more complete version of the numbers that Kellner gives in his article.

Since 1951, the UK vote share of Labour and the Conservatives combined has fallen from nearly 90% to below 60% in 2024. However the last observation is important. Kellner argues, convincingly in my view, that 2017 and 2019 are outliers because Brexit polarised politics, and so 2024 represents a return to a falling trend for the two main party’s vote share. But is this really a trend or a series of step changes due to clearly defined political developments?

Until 2010, the fall in the Lab+Con share was largely about a rising share for the Liberals/SDP-Liberal Alliance/Liberal Democrats, and here there is a clear step change around the 1970s. From 1945 to 1970 the Liberal vote share oscillated just below 10%, but from 1974 to 2010 it averaged around 20%. The rise in nationalist parties in Scotland and Wales plus the rise in UKIP in the 2000s (to achieve a 3% vote share in 2010) has a more modest influence over this period. In 2015 the LibDem vote collapsed, but the UKIP vote, and to a lesser extent the Green party vote, rose to almost compensate. Even if we discount 2017 and 2019 as Kellner suggests, 2024 looks like another step change, with the combined vote share of Reform, LibDems and the Greens being 33%.

The argument I want to present is that these two step changes occurred when the two major parties moved away from being close to where the average voter is. To understand more recent movements, we need to look at policy space in two rather than one dimension.

In the diagram above, the centre is where the average voter is, which may change over time as voter opinion changes. From 1945 to 1970, both parties were close to the centre of electoral opinion, with Labour being a little more left wing and socially liberal, the Conservatives more right wing and socially conservative. [2] Most of the political action was about economics, and voting was largely class based. FPTP ensured that there was little scope for other parties to gain a substantial vote share.

The 1970s brought inflation and industrial unrest, and I would suggest as a result public opinion moved away from both the union movement and a Labour party using incomes policies to reduce inflation. In terms of the diagram above, Labour shifted left because its policies didn’t shift with public opinion. This produced a step increase in the Liberal vote in 1974. The Conservatives in the 1970s (particularly after Thatcher became leader) moved right in economic terms, a move that in 1979 went well beyond public opinion and so they moved to the right in the diagram above. The gap between Labour and the Tories in economic terms was greatest in 1983, when the Labour vote share collapsed and the SDP-Liberal Alliance won almost as big a vote share as Labour. After 1983 Labour gradually moved back towards the economic centre ground, and won power again in 1997.

At this point the Conservatives were now much further away from the centre ground than Labour on economic issues, and as a result they began to campaign much more on social issues, and immigration in particular. Voting became less class based, and more age based (because older voters tend to be more socially conservative). This may have allowed the Conservatives to make inroads into traditionally Labour working class areas, but initially at least economic interests meant that their socially conservative rhetoric was not matched by actions. This led to the emergence of a populist right wing party, UKIP, that started to gain a significant vote share.

Skip to 2024, and Labour moved to adopt some moderately socially conservative policy positions, and also implicitly a more right wing policy in terms of public service provision. The Conservatives, in an attempt to counter the threat from Farage, adopted even tougher socially conservative policies (principally Brexit) and became increasingly populist in nature. This had two effects. The first, relatively minor, was to give the Green party its highest national vote share at 6.4%. The second, and perhaps more important, was to give the socially liberal LibDems their highest seat total since WWII.

For power, under FPTP, seats count for everything and vote share nothing. If the Conservatives stay as they are, which is a populist party advocating pretty extreme socially conservative views from a populist perspective, this leaves socially liberal but economically right wing voters very reluctant to vote for them. The Liberal Democrats in 2024 succeeded in capturing many of these votes, and as a result they obtained their highest seat total since WWII with a much lower vote share than most of the 1974-2010 period.

Seen in this way, the 2024 General Election was not the latest point on some inevitable trend to multi-party politics, but the result of shifts in the policy stance of the two main parties. Essentially the Conservatives first moved to neoliberalism, and then to right wing populism, and now Labour has moved in that direction leaving a large part of policy space empty for other parties to fill. As a consequence, whether this situation persists or becomes more marked will depend on whether the two main parties stay where they currently are, or whether they move back to where they once were.

If the Conservatives continue to focus on competing with Farage, then the LibDems have a good chance of keeping their high seat total, but their scope for further growth is modest as they were last year second in only 27 seats. [4] Otherwise the main beneficiary of this Reform/Tory battle is Labour. If Labour stay where they currently are, the Green party is second to Labour in 39 seats and therefore has scope to increase both its vote and seat total. [3] If Farage can be persuaded into an electoral pact or (less likely) the Conservatives collapse, we could get the neat result that the UK becomes a four party system, with each party representing one of the quadrants in the diagram above.

However it is equally possible that 2024 represents a low point for the two main parties. Labour could, if only for purely electoral reasons, shift back towards a moderately socially liberal position while at the same time increasing taxes further to fund better public services, as they did in the early 2000s. The Conservatives, under a new leader, could focus more on winning back the Liberal Democrat rather than Reform vote. In those circumstances Labour could use the prospect of a return of a Tory government to squeeze the Green vote, with the Conservatives using the same tactics to squeeze both the LibDems and Reform.

Both scenarios are possible. In particular, with less tactical voting in Council elections and more protest voting, the pressure on the two main political parties to change their policy positions and tactics before the next General Election will be intense. What is clear, if this analysis is right, is that any continuing decline or resurgence in the fortunes of the two main parties lies largely in their own hands.

[1] Multi-party politics has of course been with us for some time in Scotland, Wales and Northern Ireland, so this is really a question about England.

[2] In this diagram the centre is the average of voter opinion, which in terms of policy positions may shift over time. For example, since WWII voters have been becoming much more socially liberal. Undoubtedly opinion did shift left in 1945, which was why Labour’s radical policy agenda was able to win that election, and Conservative policy did then shift left to reflect that.

[3] Competition from existing or new left wing parties would of course hinder this.

[4] The main danger for the LibDems is if Labour become very unpopular among economically right wing voters, and the Conservatives successfully argue that the LibDems would support a minority Labour government.