For a while it looked as if Keir Starmer and Rachel Reeves were going to be lucky: they had walked into an economic recovery. The anaemic growth and market turmoil of the past few years – which Labour liked to blame entirely on ‘Tory chaos’ and absolutely nothing to do with the pandemic or energy crisis which followed the invasion of Ukraine – were going to be replaced by a period of stability and prosperity. Some governments are fortunate in their timing: Tony Blair walked into a decade of non-inflationary growth thanks to globalisation and the emergence of China as a major economy.
But Starmer, it now looks, will not be so lucky. The stock market slide which began on Friday has intensified this morning and is now beginning to look like a global correction, as traders fret that growth may not be as perky as previously hoped. Meanwhile, in the US, interest rate cuts have so far failed to materialise. But it is in Japan where the slide began. The Nikkei index is down 12 per cent this morning, which puts it in the territory of Black Monday 1987. That, perhaps, is an optimistic way of putting it, given that the 1987 crash did not presage a recession and markets recovered quickly. In Britain, the FTSE was actually up slightly over the course of the year, thanks to the boom which preceded the crash. Japan has seen a similar boom this year.
You would have to be a little unfair to blame the FTSE’s much more modest fall on Starmer and Reeves. Nevertheless, it does leave them with a political problem. In 12 weeks’ time Reeves is going to deliver a Budget based on the premise that the wealthy are doing well and can afford to be tapped for higher taxes. Moreover, she is inviting us to think it is fair to raise taxes to pay for higher wages for public sector workers – on the pretext that private sector workers have been doing well over the past couple of years. In particular, Reeves appears to be plotting to raid pension tax relief. But you can’t have a rout in global equities without people with private pensions feeling a lot worse off. It won’t bother the public sector workers whom Reeves wants us to think are underpaid because most are on pensions which are guaranteed, salary-linked, inflation-proofed and underwritten by the taxpayer. It is a very different story if you are relying on stock market performance for your pension.
The risk for Reeves is that she rapidly risks offending those workers in the latter group. She has promised not to raise taxes for working people, and has vowed to make us all better off through economic growth. But we have yet to see policies that will boost growth, and have seen several that will damage it, such as repealing Conservative laws ensuring minimum service levels in the public services on strike days. A stock market slide is only going to contribute to a sense of malaise, and further damage the idea that a new government will lead to economic turnaround.
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