This summer’s “rebuild, rebuild, rebuild” campaign by the government feels less like a policy programme than a seance. Promising renewal, Keir Starmer instead channels the ghosts of governments past. As Karl Marx put it, people make history but not in circumstances of their own choosing; they do so haunted by dead ideas, dressing the future in secondhand costume. Labour wears what was fashionable in 1997 and 2010: Gordon Brown’s technocratic reverence for central bank independence andGeorge Osborne’sdevotion to fiscal rectitude.
But we are no longer living in the world those policies were designed for.
The global order that sustained Britain’s post-1979 model is cracking. International tradepeaked in 2008. The promise of seamless globalisation – of frictionless finance and footloose production – has faded. Donald Trump’s rise marked the terminal contradiction of neoliberalism: the moment its hegemon turned against it. As the US embraces a form ofeconomic nationalism, Britain – which is dependent on capital inflows, asset bubbles and open markets – faces a historic reckoning. It needs a new economic settlement. It needs imagination. But Starmer and his chancellor Rachel Reeves remain stuck in a paradigm whose time has passed.
Take Reeves’s fiscal stance. Despite promises of transformation,departmental budgetswill grow more slowly than under the last parliament. This isn’t mere prudence; it’s the codification of a false scarcity – engineered not by inflation or investor panic, but by a Treasury framework that treats self-imposed constraints as natural laws.
The most telling example? The silent havoc wrought by quantitative tightening (QT). While other G7 central bankstread cautiously, the Bank of England has embarked on the most aggressive QT programme in the developed world. To understand what’s going on, you have to go back to the 2010s. When the economy crashed, the Bank of England created money out of thin air to buy government debt. This was called quantitative easing (QE) – and the idea was to pump money into the financial system to keep the City running. It worked but it also meant the Bank ended up owning a huge pile of government bonds.
Now, the Bank is doing the reverse: QT. That means the Bank is selling those bonds or letting them mature without replacing them. The goal is to shrink its balance sheet to “undo” QE. The problem? It’s reversing course in a more dramatic way than any other major central bank.
Why does that matter? Because when those bonds were first bought, they were expensive. Now they’re being sold for less – so the Bank is making a loss. The trouble is that the Treasury (ie the state) has promised to cover those losses. On top of that, because QE created a lot of bank reserves (money that commercial banks hold at the Bank of England), the Bank is now paying billions in interest to those same commercial banks – at today’s much higher rates.
This means QT sees the Treasury handing over public money to cover bond losses and top up the profits of commercial banks. It’s a quiet and alarming transfer of wealth to the financial sector. The cost to the Treasury? About£40bn per year– money that could have paid for social care reform or scrapping the two-child benefit cap.
These aren’t marginal technicalities. They are central political choices. And Reeves has chosen to uphold the orthodoxy – locking in monetary contraction while binding herself to fiscal rules that treat these giveaways to the financial sector as sacrosanct, but deny cash to local councils and legal aid. The result: a paradoxical state that both invests and cuts – that spends on nuclear reactors and tram lines but won’t supply the cash required to run them in the future.
This is not rebuilding. It is auto-cannibalism. Worse still, the justification isn’t even compelling. Asked by former financier and Liberal Democrat MPChris Coghlanwhy the Bank doesn’t just abandon QT, its governor, Andrew Bailey, replied that it keeps markets “efficient”. Efficient for whom? Certainly not for the disabled person reliant on benefits, the underfunded headteacher or the hospital trust closing down services. The British state is not broke; it is being deliberately starved, not by financial markets, but by its own managers.
A rerouting of QT cash would go a long way to restoring the state’s capacity to genuinely improve services, undoing some of the pandemic setbacks and austerity-era neglect. It would mark a first step toward coherent fiscal policy and honest political economics. Nigel Farage masquerades as the voters’ friend byhijacking this policy– but that shouldn’t deter Labour from doing what’s right.
Instead of intervening, Reeves prefers the script of necessary sacrifice, in which there is no money for transforming the public realm but seemingly unlimited room for interest transfers to the banking sector.
The deeper irony is that this deference to the Bank – and the belief that QT is untouchable – is a New Labour inheritance. The original sin was granting the Bank of England operational independence in 1997. Brownsacrificed policy controlover interest rates to reassure the City that New Labour’s monetary policy would be governed by unaccountable experts rather than political whims.
But before New Labour turned central bank independence into holy writ, Tory chancellorKen Clarke,hardly a socialist firebrand, regularly overruled the Bank of England on interest rates. Monetary discretion wasn’t always heresy; it was governance.
Yet this insulation was always a fiction. The Treasury still indemnifies Bank losses. The government could pause QT, rework reserve interest payments or end the indemnity altogether.Other countries do.With a commanding Commons majority, ministers can easily force such a change. The Bank of England may be operationally independent, but ministers can take control of it in“extreme economic circumstances”. If£150bn of Treasury spendingto needlessly cover central bank losses doesn’t qualify, what does?
But in Starmer’s Britain, policy remains trapped in the costume drama of the late 1990s – where credibility meant sounding like the bond market, and success meant keeping one’s hands off the steering wheel. And so we drift.Labourcannot fund the transformation it promises, because it refuses to rewrite the rules that make transformation impossible.
This is austerity by amnesia. A government elected to change Britain instead parrots the scripts of decline. It is reported that Reeves is looking totax banks. That’s not a bad idea but it avoids the far larger prize: reforming the policies that funnel billions into their coffers in the first place. And in so doing, she repeats the fatalism ofPhilip Snowden, Labour’s first chancellor, who insisted in the 1930s that there was no alternative to cuts. That path led to economic stagnation and Labour’s near-destruction. It may do so again.
Randeep Ramesh is chief leader writer for the Guardian