Labour must manage the balancing act of convincing voters it can deliver greater social justice, climate justice and national security without risking the economy.

Mike Buckley is the director of the Independent Commission on UK-EU Relations and a former Labour Party adviser 

Keir Starmer was midway through his education speech last week when two student members of campaign group Green New Deal Rising unfurled a banner which read: “No more U-turns – Green New Deal!”

The students were expressing frustration at Labour’s announcement that its planned £28bn annual investment in renewable energy, household insulation and other green measures would be achieved over the course of the parliament, not from day one as had been trailed.

Their call for no more U-turns had further resonance because along with the deferral of green spending Labour has recently ditched or qualified commitments on university tuition fees, free preschool childcare and school meals, the restoration of 0.7% GDP aid spending and an independent Department for International Development.

Labour’s response to those who have criticised its changed policy pledges is simple: after a further year of economic turmoil caused, exacerbated or simply unfixed by the Conservatives, the public finances Labour is likely to inherit will be substantially worse than expected, inhibiting what would be possible in the first years of a Labour Government.

Shadow Chancellor Rachel Reeves told the BBC that interest rates had gone up 12 times because “the Tories have crashed our economy. I did not foresee what the Tories would do to the economy, maybe that was foolish of me.”

Reeves argues that Labour’s pledges have always been contingent on borrowing complying with the party’s fiscal rule that debt must be falling as a share of national income after five years.

Yet she remains committed to the green investment programme: “We’re committed to it but it’s subject to our fiscal rules. All our plans will be built on a rock of economic and fiscal responsibility. Labour will not play fast and loose with the public finances.”

Labour knows it cannot win an election without a clear lead on economic competence. That measure, plus the popularity of the main party leaders, is in most circumstances a better indicator of voting intention than headline polls.

Labour is in a robust position, having built a ten point lead over the Conservatives on economic competence. Nonetheless about a third of voters still trust neither party with the nation’s finances — a group Labour knows will be critical to deciding who wins next year’s election.

Labour may be mindful that a commitment to high levels of borrowing would open them up to the kind of attacks it experienced in previous elections. Labour will also be concerned not to spook the markets, mindful that gilt yields spiked last autumn when Liz Truss and Kwasi Kwarteng announced huge unfunded tax cuts. 

Mike Riddell, global bond fund manager at Allianz Global, says an increase in issuance of green gilts could push up yields: “Additional unexpected borrowing risks another gilt meltdown.” Labour’s plans have not been fully “priced in” by investors and could make investors “jittery” as they become headline news, he argued.

As if to underline the point, the current Government has just paid the highest borrowing cost on two-year debt this century at an auction of £4bn of gilts, as the recent surge in bond yields feeds through to the Government’s finances.

If this trend continues the Government will be spending increasingly huge sums to service its debt, restricting its ability to make new spending commitments or fill now gaping holes in health, education and other public services.

But economic credibility, while essential, is not sufficient for Labour to win. Just as voters know public finances are in a mess they know too that public services – including most clearly the NHS – are no longer fit for purpose.

The catch all summary of ‘nothing works anymore’ is resonant because it’s so often true. The ill effects of austerity, an inadequate Brexit deal that divorced British business and industry from their key market and decades old Tory mistakes like the failed water privatisation are coming home to roost.

At the same time, generational challenges including the need to build hundreds of thousands of houses, insulate many more, the clean energy transition and the wider response to the climate crisis, war in Europe and an unpredictable China await an incoming Labour Government.

To be credible Labour needs a policy programme commensurate to the magnitude of the challenge at hand, and to manage the balancing act of convincing voters it can deliver greater social justice, climate justice and national security without risking the economy.

The danger, argue political scientists Paul Webb and Tim Bale, is that Labour “should not allow a reassuring emphasis on greater managerial credibility to crowd out a more inspiring narrative about fairness.”

In truth, even with recent changes, Labour’s policy programme remains ambitious. “It’s much more radical than people give [Starmer] credit for,” argues Gary Smith, general secretary of the GMB union.

The FT concluded in June that Labour “are piecing together a manifesto which, despite the soothing, pro-business rhetoric, would still represent a striking shift in the way the economy is run.”

Yet the message is not cutting through: 50% of adults say they don’t know what Sir Keir stands for, up six points since January. When asked to name people in the shadow Cabinet only Angela Rayner got into double figures in public recognition.

Labour knows it needs to face this challenge. Says one Starmer aide: “We want to be offering people hope, and sunny uplands, but we are constantly coming up against fiscal rules . . . we know what we are going to inherit.”

The Conservatives are as unpopular now as they were in the dying days of the Major administration almost 30 years ago. But Labour as a party, and Starmer as leader, are not as popular as they were under Blair. The unfinished business of offering that “inspiring narrative about fairness” may be part of the reason why.

The prevailing view is that Labour will be limited by the parlous state of the economy. Projections show continuing stagnation in coming years. Interest rates will remain high, limiting the party’s ability to borrow. Taxes are at a 70 year high; beyond relatively minor changes like the removal of charitable status from private schools, Labour may be reluctant to raise taxes further, even on the wealthy.

But to win Labour needs to offer an answer to people’s hopes and fears. The country votes Labour when the Conservatives have failed; implicit in that vote is a belief that Labour can fix the mess and create a fairer and more stable future. To prove the value of Labour in power, Starmer and Reeves need to set out how they will do so, grounded in economic credibility but with enough ambition and clarity to inspire hope in a country long starved of it.

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