Rachel Reeves' book launch: key takeaways

Last Wednesday’s event was not just an opportunity for our chief economist, Gemma Tetlow, to grill Reeves on the book. The person being interviewed, more than an author, is the likely next chancellor, and the topic is how she aims to meet the challenges facing the Treasury. I took away several points.

Reeves is serious in her commitment to fiscal discipline

First, speaking in front of a good chunk of her shadow cabinet colleague (representing several hundred billion pounds in prospective public spending), Reeves showed no hesitation in reiterating the tough messages on fiscal policy that have characterised her time in the role. Told that George Osborne had applauded her for mimicking the “ironclad discipline” of the coalition-era, she robustly refuted the implication that fiscal prudence is by definition a right-wing posture. “Ordinary working people” are the victims, she said, when financial discipline breaks down – it underpins all else the government may want to do, be it to restore public services or juice up growth.

Reeves is arguably the most pro-industrial strategy shadow chancellor since the 1970s

Second, Reeves is willing to go much further than her predecessors to question the nostrums of free market thinking on where economic activity takes place, making her arguably the most pro-industrial strategy shadow chancellor since the 1970s. This wasn’t a new revelation but built on positions set out in speeches she has given all year, including at Labour’s party conference. As well as the standard justification – that a skilful government can reorder production so that higher-value work takes place in the UK – Reeves constantly reiterates the theme of security: a defence angle, but also energy and job insecurity, which she argues undermines the economy.

Her approach will be based on ‘modern supply-side economics’ – and in the ‘everyday economy’

Third, we gained a little more insight into what this industrial strategy might consist of. One of her book’s subjects, US Treasury secretary Janet Yellen, is apparently an intellectual influence, sending me to the US Treasury archive of Yellen’s remarks to puzzle what this means. The answer is “modern supply-side economics” (MSSE), defined against the un-modern variant that is driven by aggressive deregulation and tax-cuts. The old approach failed to boost growth but did worsen inequality; MSSE in contrast emphasises higher labour supply, education, better infrastructure and more R&D. This is all meant to be shaped somehow in pursuit of particular goals and industries, in particular the energy transition. But unlike the 1970s approaches (to which it will doubtless be likened by its critics) Yellen calls for partnership with business rather than the government replacing it.

A Reevesian twist is the “everyday economy” – a theme from her pre-shadow chancellor days that rejects the idea of an industrial strategy solely focussed on high-tech, cutting-edge industries. Instead, she argues the need for less glamorous sectors to be working well for the whole economy to prosper. Labour’s proposals to tighten employment regulations are aimed at helping the workers in these sectors.

Together, this draws the outline of a distinctive economic approach: fiscally prudent, interventionist, a little protectionist, and sceptical towards the value of wholly flexible labour markets. Respect for institutions is a repeating theme, as is multilateralism; the UK clearly cannot have a finger in every pie, and needs trusted international partners if it wants to enhance its economic security. In many ways, with its concern with the deficit, scepticism about the value of tax cuts and pell-mell deregulation, and emphasis on public goods, it is an economic philosophy designed to be the opposite of that still preached by Liz Truss, the 49-day prime minister of late 2022. In political terms that no doubt makes sense. 

Reeves is setting out a programme towards which the Treasury is traditionally sceptical

The proof of the pudding will be in the eating. Prudence aside, Rachel Reeves is setting out a programme towards which the Treasury is traditionally sceptical (watch this space for a future Institute for Government report on Treasury ‘orthodoxy’ and its influence on policy making). The test for both Reeves and her future department will be how that orthodoxy can be evolved in a way that supports her programme without abandoning the Treasury’s core role of sceptical challenge.

One answer may lie in the use of institutions – a topic that economist Paul Mason asked her about last week – where Labour has set out plans for a National Wealth Fund and Great British Energy as vehicles for supporting the investment needed to achieve its growth and environmental goals. Properly constituted organisations with clear goals, operated at arms’ length from the political class, can be more effective than government departments – particularly if the latter keep changing leadership. But creating an institution does not on its own solve a problem, particularly if there are not plentiful funds to deploy. How exactly they will be competent to deliver value-enhancing interventions, or untangle the political knots that slow infrastructure delivery, is not clear.

The challenge will be all the greater because, whether or not the shadow cabinet applauds her stout defence of fiscal conservatism, the spending totals pencilled in for the next chancellor to divide up are probably insufficient. Public services are in a far worse state than in 2010, reflecting in part a failure to invest (as Performance Tracker 2023 lays bare). Money needs to be found, but Reeves vows to do this “without raiding the pockets of ordinary hard-working people”. Saying this sounds noble; achieving it feels nigh-on impossible.

It is unrealistic to expect too much in terms of crunchy detail at this point, certainly not from a team as cautious as Rachel Reeves and Keir Starmer. In 2009, George Osborne rather boldly decided to set out a raft of measures intended to tackle the (giant) fiscal deficit should the Conservatives come to power;  his reward was a wobble in the opinion polls and quite possibly the loss of a likely majority the following year. Few now give him credit for frankness – but his boldness helped Conservatives later to argue that the public knew what it was voting for, providing some legitimacy for the austerity that followed. The critical question for Reeves is how much more frank she needs to be in the year ahead.