Kate Andrews Kate Andrews

Why Starmer is choosing fiscal discipline, above all else

Credit: Getty Images

It’s been more than two days since Keir Starmer told the BBC’s Laura Kuenssberg that Labour would keep the two-child benefit cap, yet the party seems no closer to finding resolution on the issue. The pushback within the party has been intense, with plenty of people (including, reportedly, members of the shadow cabinet) asking how the opposition leader can keep a benefits cap that he once railed against.

But Starmer isn’t budging. Speaking on a conference stage with former prime minister Tony Blair this evening, Starmer insisted this wasn’t an issue of changing hearts, but rather a changing set of circumstances. Speaking about spending commitments more generally, Starmer noted that:

We keep saying collectively as a party we’ve got to take tough decisions. And in the abstract everyone says, that’s right, Keir… And then we get a tough decision— we’ve been in one of those the last few days – (and) they say, ‘we don’t like that, can we not just make that one?’ … but we have to take the tough decisions.

Strip away the name, and you might think it was a quote from the Prime Minister, Rishi Sunak, who is often talking about the need for difficult choices and trade-offs. Perhaps that’s Starmer’s intent: promoting fiscal discipline and costing every policy proposal may well be an election strategy – one that makes it much more difficult for the Tory party to accuse Labour of fiscal sloppiness. 

But put that to one side. Even if Starmer wanted to throw fiscal restraint to the wind, and embrace the calls of everyone wanting him to endorse a more generous welfare strategy, would he realistically be able to do so?

Markets suggest not – or at least, not on any kind of big scale. Inflation remains stubbornly high and that means more interest rate hikes are almost certain to follow, with market expectation still for rates to peak around one percentage point higher than the current base rate (at 5 per cent). 

As rates rise, so does the cost of borrowing, with five-year and ten-year gilt yields back at 15-year highs: back to where they were the summer of the financial crash, and back on par with where Liz Truss’s mini-Budget sent them spiralling last year (albeit for very different reasons).

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