Britain’s political journalists have already settled on a narrative for Keir Starmer and Andy Burnham. Starmer, they’ve decided, was simply not a politician. He entered politics late in life and was never comfortable with its rhythms. Burnham, conversely, is a people’s politician, a natural leader, a winner.

I don’t believe that story, no matter how often it’s repeated. Starmer pulled off a number of remarkable coups over his short political career. Between 2016 and 2019, he changed Labour’s position from reluctantly backing Brexit to supporting a second referendum. Then he ruthlessly cleared Labour of his political opponents. That helped him win a landslide victory with only 34% of the vote. There are reasons why Starmer failed — but lack of political instinct isn’t one of them.

Bond markets, too, have stories. And not all of them are true or consistent either. After all, “bond vigilantes”, as bond market speculators are sometimes called, haven’t attacked France, a country with an even bigger public debt problem than the UK. France’s annual deficit, and its total stock of debt, are higher than Britain’s too, even as successive French governments have failed to stabilize public spending. So if France is safe, might it not be reasonable to think that the UK has a bit of headroom left too?

Unfortunately not. An attack on France would carry incalculable risks for the vigilantes. France is backed by the European Central Bank: an immensely powerful institution, with the ability to bail out countries of any size. I would hope this never happens. But I can’t rule it out, and the bond vigilantes can’t either. If you bet on a rise in French bond prices, and the ECB intervenes to lower them, a speculator could potentially face massive losses.

The UK obviously doesn’t have the protections that come with membership of a large monetary union. That’s precisely why the country needs a solid fiscal framework, as well as a rules-based central bank. And, here, Rachel Reeves’ fiscal rules have proved decent enough. They are certainly conservative, but importantly distinguish between current spending and long-term investment.

If, in other words, Andy Burnham and his next chancellor were to scrap Britain’s fiscal framework, the bond market vigilantes would have every incentive to attack. Jim O’Neill, a former Goldman Sachs chief economist and now an adviser to Burnham, has reportedly come out in favor of a German-style multi-annual public investment fund.  To make his idea palatable to the bond markets, O’Neill has suggested that the UK get rid of the pensions triple lock. I don’t think this will impress the vigilantes unless and until Burnham actually started freezing pensions — and that’s before you factor in the political challenges.

Under the triple lock, pensions must increase by whichever’s highest: inflation, earnings growth, or 2.5%. This year, earnings came out top, informing the 4.8% jump in pensions. If Burnham were to cap pension increases at 2.5%, that may make an impression on the bond markets, but he’d also lose the support of many pensioners.

In other words, policy choices are difficult, and far beyond the triple lock too. Taxing property sounds fine, for instance, until you discover how many of your own voters would be paying the tax. Many Labour voters in the South of England own high-value properties. Reeves has already imposed a mansion tax on homes worth £2 million or more. If you slashed that to £1 million, you would invariably hit a lot of Labour voters in places like London, particularly when not everybody who is asset-rich is also income-rich.

To put it another way, there are no low-hanging fruits left to pick. Reeves and her Conservative predecessors have already stripped the orchard clean.

If you don’t want to cut military or welfare spending, and have no scope to raise borrowing, the only alternative left would be to raise taxes. But that doesn’t work either. A good example of how difficult it is to raise tax on high-income earners is the story of the UK’s now-abolished scheme for non-domiciled employees — the infamous “non-dom” regime. Classic non-domers used to be American investment bankers, seconded to the City of London for five or 10 years.

Successive Tory governments already scaled it down, and when Reeves came to office, she abolished the little that remained. But then she discovered that she lost out on tax revenues. Some foreign workers went home. Others went to Italy, which has successfully set up its own non-dom regime. Today, Milan is booming for that very reason.

This is what happens when your tax policies meet the complex reality of a world in which high-income earners are exceptionally mobile. Alas, Burnham and his team don’t live in this world. He may have been prepared for his power grab, but he hasn’t thought about the gritty details of economic policy.

Contrary to the stereotypes, Starmer and Reeves were prepared for power, economically speaking anyway. What they failed to do was translate a fiscal strategy into a political one. Traditionally, the Labour Party was the party of work. Rather than accepting the welfare state in its current unsustainable size, Starmer and Reeves could have framed their economic policy as a welfare-to-work program, with a strong emphasis on productive public-sector jobs. To that extent, their failure had nothing to do with day-to-day political nous — what they lacked was an overarching political agenda.

To be fair, Burnham has an agenda: just not a very inspiring one. Let’s go through some possible scenarios. He may do what I just suggested Starmer should have done: he might conclude that boosting Britain’s low productivity is key to winning the next election. Productivity is the money we earn per-hour-worked. It is a better metric than the more common statistic of gross domestic product, which conflates a lot of other stuff. GDP might go up because we work longer hours — or because of higher immigration.

But this does not make us feel better. Productivity is the better metric for politicians, too, because it explains how the median voter actually feels about the economy. The reason people are struggling to make ends meet, let alone afford to buy property, is closely related to the fall in productivity growth.

The one forecast I will make is that without a rebound in productivity growth, no prime minister can succeed. Even if he doesn’t have his own productivity agenda, Burnham may still be lucky. There are some tentative signs that productivity is rising again. For instance, payroll data shows an increase in output-per-hour to levels not seen since the financial crisis. But if that were to happen, Starmer, too, would have been lucky.

I am, however, struggling to see any scenario in which Burnham succeeds on the basis of what he is offering. Productivity doesn’t increase because railways are in public ownership, while higher taxes would actually impede productivity growth. There may be reasons to support more public-sector investment — but productivity is not one of them. If Burnham were to deliver his promises, indeed, the impact on productivity growth would be negative.

A smarter strategy would be old-school, Left-wing radicalism. I myself would hate it — but don’t let that get in the way of our discussion. A socialist with a brain might just do the following. You’d start by taking back control of the Bank of England and imposing a governor who supports your policies. The bond market vigilantes would get ready to attack immediately. But then you’d fight back, warning them you’re ready to default on all of Britain’s debt.

This is the “Kim Jong Un scenario”: a mad dictator with a few nuclear bombs is more powerful than a centrist people-pleaser with thousands. If the UK were to default on its debt, it would bring down the global financial system. The UK is not Argentina. It is too big to fail. So if you hold the nerve, and your MPs don’t panic and replace you in the meantime, you can dictate any deal you like. In practice, that might mean restructuring your debt, giving you breathing space on interest payments.

Back on Earth, though, we can all rest assured that none of this is going to happen because, as is increasingly clear from Burnham’s putative plan, the Leftists of our generation are mostly uninterested in economics, unlike their 20th-century predecessors.

In the Seventies, the Labour Party, and European social democratic parties, were focused on Keynesian economics. Gordon Brown, shortly after he became chancellor, famously talked about endogenous growth theory. Reeves and O’Neill may be trained economists, yet I’d struggle to identify any economic thinkers in the Labour Party today. Together with Germany’s SPD, and the French Socialists, the modern Left is focused primarily on income redistribution.

This leaves us with a scenario where Burnham might succeed because of luck, or where he fails. As so often in life, though, there are more ways to fail than succeed. My expectation is that in a year from now, Labour MPs will look in the mirror and ask: “what did we do?” And political journalists will have a neat narrative to explain why Burnham was always bound to fail.

---

Wolfgang Munchau is the Director of Eurointelligence and an UnHerd columnist.

EuroBriefing

Britain’s political journalists have already settled on a narrative for Keir Starmer and Andy Burnham. Starmer, they’ve decided, was simply not a politician. He entered politics late in life and was never comfortable with its rhythms. Burnham, conversely, is a people’s politician, a natural leader, a winner.

I don’t believe that story, no matter how often it’s repeated. Starmer pulled off a number of remarkable coups over his short political career. Between 2016 and 2019, he changed Labour’s position from reluctantly backing Brexit to supporting a second referendum. Then he ruthlessly cleared Labour of his political opponents. That helped him win a landslide victory with only 34% of the vote. There are reasons why Starmer failed — but lack of political instinct isn’t one of them.

Bond markets, too, have stories. And not all of them are true or consistent either. After all, “bond vigilantes”, as bond market speculators are sometimes called, haven’t attacked France, a country with an even bigger public debt problem than the UK. France’s annual deficit, and its total stock of debt, are higher than Britain’s too, even as successive French governments have failed to stabilise public spending. So if France is safe, might it not be reasonable to think that the UK has a bit of headroom left too?

Unfortunately not. An attack on France would carry incalculable risks for the vigilantes. France is backed by the European Central Bank: an immensely powerful institution, with the ability to bail out countries of any size. I would hope this never happens. But I can’t rule it out, and the bond vigilantes can’t either. If you bet on a rise in French bond prices, and the ECB intervenes to lower them, a speculator could potentially face massive losses.

The UK obviously doesn’t have the protections that come with membership of a large monetary union. That’s precisely why the country needs a solid fiscal framework, as well as a rules-based central bank. And, here, Rachel Reeves’ fiscal rules have proved decent enough. They are certainly conservative, but importantly distinguish between current spending and long-term investment.

If, in other words, Andy Burnham and his next chancellor were to scrap Britain’s fiscal framework, the bond market vigilantes would have every incentive to attack. Jim O’Neill, a former Goldman Sachs chief economist and now an adviser to Burnham, has reportedly come out in favour of a German-style multi-annual public investment fund.  To make his idea palatable to the bond markets, O’Neill has suggested that the UK get rid of the pensions triple lock. I don’t think this will impress the vigilantes unless and until Burnham actually started freezing pensions — and that’s before you factor in the political challenges.

Under the triple lock, pensions must increase by whichever’s highest: inflation, earnings growth, or 2.5%. This year, earnings came out top, informing the 4.8% jump in pensions. If Burnham were to cap pension increases at 2.5%, that may make an impression on the bond markets, but he’d also lose the support of many pensioners.

In other words, policy choices are difficult, and far beyond the triple lock too. Taxing property sounds fine, for instance, until you discover how many of your own voters would be paying the tax. Many Labour voters in the South of England own high-value properties. Reeves has already imposed a mansion tax on homes worth £2 million or more. If you slashed that to £1 million, you would invariably hit a lot of Labour voters in places like London, particularly when not everybody who is asset-rich is also income-rich.

To put it another way, there are no low-hanging fruits left to pick. Reeves and her Conservative predecessors have already stripped the orchard clean.

If you don’t want to cut military or welfare spending, and have no scope to raise borrowing, the only alternative left would be to raise taxes. But that doesn’t work either. A good example of how difficult it is to raise tax on high-income earners is the story of the UK’s now-abolished scheme for non-domiciled employees — the infamous “non-dom” regime. Classic non-domers used to be American investment bankers, seconded to the City of London for five or 10 years.

Successive Tory governments already scaled it down, and when Reeves came to office, she abolished the little that remained. But then she discovered that she lost out on tax revenues. Some foreign workers went home. Others went to Italy, which has successfully set up its own non-dom regime. Today, Milan is booming for that very reason.

This is what happens when your tax policies meet the complex reality of a world in which high-income earners are exceptionally mobile. Alas, Burnham and his team don’t live in this world. He may have been prepared for his power grab, but he hasn’t thought about the gritty details of economic policy.

Contrary to the stereotypes, Starmer and Reeves were prepared for power, economically speaking anyway. What they failed to do was translate a fiscal strategy into a political one. Traditionally, the Labour Party was the party of work. Rather than accepting the welfare state in its current unsustainable size, Starmer and Reeves could have framed their economic policy as a welfare-to-work programme, with a strong emphasis on productive public-sector jobs. To that extent, their failure had nothing to do with day-to-day political nous — what they lacked was an overarching political agenda.

To be fair, Burnham has an agenda: just not a very inspiring one. Let’s go through some possible scenarios. He may do what I just suggested Starmer should have done: he might conclude that boosting Britain’s low productivity is key to winning the next election. Productivity is the money we earn per-hour-worked. It is a better metric than the more common statistic of gross domestic product, which conflates a lot of other stuff. GDP might go up because we work longer hours — or because of higher immigration.

But this does not make us feel better. Productivity is the better metric for politicians, too, because it explains how the median voter actually feels about the economy. The reason people are struggling to make ends meet, let alone afford to buy property, is closely related to the fall in productivity growth.

The one forecast I will make is that without a rebound in productivity growth, no prime minister can succeed. Even if he doesn’t have his own productivity agenda, Burnham may still be lucky. There are some tentative signs that productivity is rising again. For instance, payroll data shows an increase in output-per-hour to levels not seen since the financial crisis. But if that were to happen, Starmer, too, would have been lucky.

I am, however, struggling to see any scenario in which Burnham succeeds on the basis of what he is offering. Productivity doesn’t increase because railways are in public ownership, while higher taxes would actually impede productivity growth. There may be reasons to support more public-sector investment — but productivity is not one of them. If Burnham were to deliver his promises, indeed, the impact on productivity growth would be negative.

A smarter strategy would be old-school, Left-wing radicalism. I myself would hate it — but don’t let that get in the way of our discussion. A socialist with a brain might just do the following. You’d start by taking back control of the Bank of England and imposing a governor who supports your policies. The bond market vigilantes would get ready to attack immediately. But then you’d fight back, warning them you’re ready to default on all of Britain’s debt.

This is the “Kim Jong Un scenario”: a mad dictator with a few nuclear bombs is more powerful than a centrist people-pleaser with thousands. If the UK were to default on its debt, it would bring down the global financial system. The UK is not Argentina. It is too big to fail. So if you hold the nerve, and your MPs don’t panic and replace you in the meantime, you can dictate any deal you like. In practice, that might mean restructuring your debt, giving you breathing space on interest payments.

Back on Earth, though, we can all rest assured that none of this is going to happen because, as is increasingly clear from Burnham’s putative plan, the Leftists of our generation are mostly uninterested in economics, unlike their 20th-century predecessors.

In the Seventies, the Labour Party, and European social democratic parties, were focused on Keynesian economics. Gordon Brown, shortly after he became chancellor, famously talked about endogenous growth theory. Reeves and O’Neill may be trained economists, yet I’d struggle to identify any economic thinkers in the Labour Party today. Together with Germany’s SPD, and the French Socialists, the modern Left is focused primarily on income redistribution.

This leaves us with a scenario where Burnham might succeed because of luck, or where he fails. As so often in life, though, there are more ways to fail than succeed. My expectation is that in a year from now, Labour MPs will look in the mirror and ask: “what did we do?” And political journalists will have a neat narrative to explain why Burnham was always bound to fail.

---

Wolfgang Munchau is the Director of Eurointelligence and an UnHerd columnist.

EuroBriefing