The nation waits for the people of Makerfield to decide whether Keir Starmer will face a challenge from his most plausible and electable Labour critic. Were Andy Burnham to emerge victorious and to challenge for the party leadership, this would signal a shift to what is being called the ‘soft left’.
One of the most deeply held convictions of those in this political space is that the government is being held back from more ‘progressive’ policies by unduly restrictive fiscal rules which exist to reassure ‘the bond markets’ that the UK is a trustworthy, reliable borrower.
Andy Burnham’s position on the subject of fiscal rules and bond markets has not always been crystal clear though he has most recently signalled support for the Chancellor’s approach. If so, there will be trouble ahead with many of his supporters. I met some of them at a recent Compass gathering in London. The conference brought together those of us from different parties who have a common understanding of the need to work together to defeat Reform and to reform the voting system to reflect the fragmented nature of British politics. But it also gave vent to strong views on the kind of economic agenda Andy Burnham’s supporters will want to see.
Gordon Brown introduced formal fiscal rules in 1997 alongside the operational independence of the Bank of England: essentially, a commitment to balance current spending with government revenue – the “golden rule’ – and a commitment to borrow only to invest. Despite arguments about detailed definition- as over the period over which the ‘golden rule’ was to be applied – and some criticism of ‘the government marking its own homework’, the rules were applied effectively over the next decade and contributed greatly to the government’s reputation for economic competence: ‘prudence with a purpose’. The restriction on public investment were sufficiently severe that private finance was sought for many public sector projects – the Private Finance Initiative which proved wasteful and costly in many instances. Ominously, there are rumours that the Treasury may bring it back.
The fiscal rules were temporarily and rightly suspended as a result of the 2008 Financial Crisis which required heavy government borrowing to rescue the banking system, to negate a catastrophic collapse in demand and to offset a sharp fall in revenue from the financial sector. The Crisis created a ‘structural deficit’ which had to be reduced over time alongside day-to-day fiscal managment.
That task fell to the Coalition which reinstated the fiscal rules with an independent Office of Budget Responsibility to monitor compliance and also built in a ‘debt rule’ to require a fall in the debt to GDP ratio over time. The Coalition period was labelled ‘Austerity’ by its Labour critics but this criticism covered a range of different points: alleged exaggeration of the risk (in the bond markets) attached to postponing fiscal correction; the speed and phasing of the attempt to reduce the ‘structural deficit’; the emphasis on cutting spending rather than raising tax and the implementation of the spending cuts; the cuts to public investment as well as current spending. Those are now arguments for economic historians. But they left behind a Labour aversion to continued ‘austerity’: curbs on government spending.
The Covid pandemic led to a further suspension of the rules and a big increase of government debt. Then the Liz Truss episode, in essence, demonstrated that any government which clearly disregards the rules – in this case by making tax cuts alongside increasing government spending on reliefs for higher energy costs – risks losing the confidence of investors in the bond market. The incoming government made clear a commitment not to repeat the mistake and Rachel Reeves has been firmly committed to the fiscal rules albeit with a (welcome) redefinition of net borrowing to invest in projects netted of against the asset value created (which in principle makes it easier to borrow to build public sector housing which generates rental income).
At the same time Labour has felt it politically necessary to avoid increasing tax rates on taxes affecting ‘working people’: VAT, income tax and employee NIC rates. Andy Burnham has repeated that commitment. Slow growth of the economy, and tax revenues in particular, has led to increased taxation outside those ‘red lines’ such as freezing tax thresholds and, crucially the increase in employers’ NICs which is widely seen as depressing business confidence and growing unemployment amongst young people.
The freedom of manoeuvre facing Andy Burnham or any new Prime Minister is therefore severe. A brave social democratic government would say. ‘if we want Scandinavian public services and welfare, we have to pay for them with Scandinavian taxation which, by the way, includes VAT at 25%.’But he has firmly ruled that out. An even braver leader would say we have to ‘embrace austerity’ with radical public sector reform (and to create more space for defence spending); but that is off the agenda too. The mood I picked up amongst Labour activists was that we have to revisit the fiscal rules: ‘why can’t social care and NHS spending be treated as ‘investment’’. Of course, that wont wash. So what is left for Andy Burnham and the ‘soft left’ to do? Undoubtedly there is room for ‘progressive’ tax reform such as making council tax proportional to property value; but that doesn’t, of itself, bring in more revenue. A ‘wealth tax’ may be symbolically important but, as much of Western Europe has discovered, it wouldn’t bring in much money, if any.
Unless Andy Burnham wants to venture into Liz Truss territory – I doubt it- all those people agitating for an alternative to Starmer-Reeves who
can deliver more public spending and avoid brutally difficult choices are likely to be very disappointed.
* Sir Vince Cable is the former MP for Twickenham and was leader of the Liberal Democrats from 2017 until 2019. He also served in the Cabinet as Secretary of State for Business, Innovation and Skills from 2010 to 2015.
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27 Comments
Thank you Sir Vince for a useful survey of the history of “austerity” and the political difficulty of implementing the simple solution to our present social and political difficulties: raise taxes. Somebody has to tell the truth: that we are not over-taxed, and that Inteligently directed taxation will not impede growth. Though I wonder why we think we can only finance improvements from growth? Most of us could live very comfortably even if the government did take, say another 5%-10% of our incomes to repair the public realm. And we’d probably all be a lot happier in a more equitable society. How many more “Spirit Levels”, “Enough is Enoughs” and Piketty reports etc. do we need?
Forget about Reform they will crash and burn of their own volition.
We must strike at the Greens, not allowing them to crash and burn ourselves.
@ Peter Wrigley
“Somebody has to tell the truth: that we are not over-taxed, and that Inteligently directed taxation will not impede growth.”
That is not “the truth” – it is opinion.
What is not debatable is that much of the electorate thinks they themselves are over-taxed and also thinks that government does not spend money wisely. More details here: https://www.economist.com/finance-and-economics/2026/06/04/gen-z-socialism-from-zohran-to-zack-and-beyond
The article is also worth a read as an informed attack on what passes for economic policy in the Green Party – and by extension Andy Burnham’s supporters referenced by Vince Cable.
@ Peter Wrigley
“Most of us could live very comfortably even if the government did take, say another 5%-10% of our incomes to repair the public realm”
I put “average wage UK after tax” into Google and got this AI assisted answer:
The median full-time gross salary in the UK is about £39,039. After income tax, National Insurance, and a 5% workplace pension contribution, the average take-home pay is approximately £29,000 per year, or around £2,400 per month.(*)
I doubt most people on that wage would welcome £200 a month disappearing from their pay packet even if they can “live very comfortably” on it.
(*) https://www.google.com/search?q=average+wage+UK+after+tax&sca_esv=54f2dfe3db26537b&rlz=1C1GCPS_enGB1215GB1215&ei=klgpatjYHdbRhbIPt-7fkQ4&biw=1920&bih=911&ved=0ahUKEwjY6YSe1vyUAxXWaEEAHTf3N-IQ4dUDCBA&uact=5&oq=average+wage+UK+after+tax&gs_lp=Egxnd3Mtd2l6LXNlcnAiGWF2ZXJhZ2Ugd2FnZSBVSyBhZnRlciB0YXgyChAAGEcY1gQYsAMyChAAGEcY1gQYsAMyChAAGEcY1gQYsAMyChAAGEcY1gQYsAMyChAAGEcY1gQYsAMyChAAGEcY1gQYsAMyChAAGEcY1gQYsAMyChAAGEcY1gQYsAMyDhAAGOQCGNYEGLAD2AEBMg4QABjkAhjWBBiwA9gBATIOEAAY5AIY1gQYsAPYAQEyFxAuGNwGGLgGGNoGGNgCGMgDGLAD2AEBMhcQLhjcBhi4BhjaBhjYAhjIAxiwA9gBAUicP1AAWIU2cAB4AZABAJgBb6ABtQqqAQQyNC4xuAEDyAEA-AEBmAIZoAL_CsICChAAGIAEGIoFGEPCAhAQABiABBiKBRhDGLEDGIMBwgIWEC4YgAQYigUYQxixAxiDARjHARjRA8ICDRAAGIAEGIoFGEMYsQPCAg4QLhiABBixAxjHARjRA8ICCBAAGIAEGLEDwgIIEC4YgAQYsQPCAg4QLhivARjHARixAxiABMICBRAAGIAEwgILEAAYgAQYigUYkgPCAg0QABiABBiKBRhDGMkDwgIIEAAYgAQYyQPCAgYQABgWGB6YAwDiAwUSATEgQIgGAZAGDboGBggBEAEYCZIHBDI0LjGgB-eoAbIHBDI0LjG4B_8KwgcGMC4yMy4yyAcygAgB&sclient=gws-wiz-serp
“‘why can’t social care and NHS spending be treated as ‘investment’’. Of course, that wont wash”.
It might wash if such spending can wash its face. For example spending on care might (I don’t say would) free up carers to find paid employment so that the increased tax revenue pays for state spending on care. NHS spending on preventative health care should reduce future health problems and therefore future healthcare cost, and thus reduce the necessary health spending on those problems – or – again – enable people to work for longer/take less time of work.
Such spending could legitimately be called investment. Whether it would be prudent investment – given the long term and possibly uncertain nature of the return – is another question.
@Tristan Ward
Instead of posting such a long link may I recommend the use of https://tinyurl.com/ ?
Which reduced your huge link to https://tinyurl.com/eejsbha9
Vince Cable….Gordon Brown introduced formal fiscal rules in 1997 alongside the operational independence of the Bank of England: essentially, a commitment to balance current spending with government revenue –………………The restriction on public investment were sufficiently severe that private finance was sought for many public sector projects – the Private Finance Initiative which proved wasteful and costly in many instances.
Vince, The ‘Private Finance Initiative’ (PFI) was launched in 1992 by the Conservative government by Norman Lamont and championed by Prime Minister John Major…
It was already well established long before Gordon Brown..
According to this well-argued article (by Lib Dem councillor Mark Ellis), a simple wealth tax wouldn’t work, but tax on TRANSFER of wealth could, if current tax law was changed. At present, UK tax law allowed billionaires to live tax free for years, then pass on their wealth with no capital gains tax.
https://markellis786819.substack.com/p/how-the-very-rich-wrote-themselves
There’s really only two fiscal rules that make any sense:
1) If inflation caused by an overheating economy is the main issue, then governments should tax more and spend less.
2) If high unemployment and a sluggish economy are the main issues, then governments should tax less and spend more.
Note that this doesn’t mean that inflation caused by a reduction supply issue, such as we are facing now with energy supplies, should be treated as an overheating economy.
There is some legitimate concern with bond markets. They do have the power to force down the value of the currency. But we shouldn’t assume this is a bad thing in itself.
There’s also a lot of nonsense talked about our so-called credit rating. AA+/- or whatever. What does this mean? There’s no danger that the UK will ever involuntary default on its debts. There is a danger of inflation though. So shouldn’t the credit rating agencies be renamed the inflation rating agencies.
“‘why can’t social care and NHS spending be treated as ‘investment’’. Of course, that wont wash”.
I’d agree if were talking about retirees.
But, say we had a young person who had just started a promising career, who had the misfortune to suffer appendicitis. A potentially fatal condition. Surely the cost of the surgical operation would be far less than their potential contribution to the economy in their lifetime. It has to be a very good investment.
So if we are counting beans at least some of them could be put into the jar marked “investment”.
People who come up with these kinds of remarks often school their own children privately. They think, probably correctly, it’s a good investment. So why do they take a different view when it is everyone else’s children in the state funded system?
@ Tristan Ward. Given your views on carers, I would strongly advise you to remain healthy and not to grow old.
Might we have a definition of government debt?
Might we have a definition of democracy?
@ David Raw
“I would strongly advise you to remain healthy and not to grow old.”
Not for the first time you have misunderstood. I am trying to make the argument – contrary to what Vince Cable suggests, that care might in fact be considered as “investment”. it is the same argument as made by Peter Martin in the post above yours.
Care might also be considered investment if it relieves the financial burden on the NHS by an equal or greater amount than the amount spent on care. I believe this is how the Party justifies the spending required to implement its policy on increasing care, and I support the policy on this basis.
That said, and given today’s resignation, I suspect defence is a more urgent priority. I am glad Ed Davey has been talking about it for months. Our position is far stronger than any other party, and we should take advantage of that as much as we can to differentiate ourselves.
“why can’t social care and NHS spending be treated as ‘investment’’. Of course, that won’t wash”.
Vince is technically right. Of course, there is a small “investment element” in just about everything Government spends money on. A better NHS, and better schools, do increase human capacity to grow GDP – To a certain extent. But come on, what the bond markets want to see is that the country isn’t over-borrowing and thereby living above its means. If we pumped loads of money into schools and hospitals, and insisted on getting all the money by borrowing rather than taxing, the bond markets would rightly smell a rat, and refuse to lend at reasonable interest rates.
If we want to convince the bond markets we are not trying to live on tick, we need watertight arguments. Not over-stretched claims to be investing.
Where Vince goes wrong, in my view, is the next step. If we can’t buck the bond markets, then we have a simple choice. Raise taxes, or accept that we “can’t afford” to stop the planet burning, to cut NHS waiting lists, to raise defence spending, to stop bankrupting our local councils. Vince says we just have to accept the decline and degradation of the UK that has happened over the last 20 years, because getting taxes out of our wealthy oppressors is just too hard. That’s not a policy worth voting for.
@ David Allen
“getting taxes out of our wealthy oppressors is just too hard”.
More importantly (possibly) is that it simply would not raise enough money to do what needs to be done. On the other hand – if you can persuade private money to provide the funding on the basis that it can make a profit a lot more becomes possible.
Can I recommend this (*) from Dan Neidle (+) Perhaps the most important line is:
“the taxes people want to raise would yield – at their highly optimistic best – around £40bn. The taxes people don’t want to raise currently yield £600bn”
(*) https://taxpolicy.org.uk/2026/06/05/taxing-other-people-uk/
(+) https://en.wikipedia.org/wiki/Dan_Neidle
“If we pumped loads of money into schools and hospitals, and insisted on getting all the money by borrowing rather than taxing, the bond markets would rightly smell a rat, and refuse to lend at reasonable interest rates.”
I don’t know about anyone else, but I’ve never had a request from the government to borrow any money. I have chosen to lend them some, from time to time, by purchasing bonds either directly by purchasing premium bonds and national savings certificates or indirectly by depositing money in a bank or a pension scheme.
The higher the interest rate the more likely I, or anyone else, is to lend them money. So, if the Govt wants to borrow more, and raise their debt levels, it follows that they should raise interest rates. This is also likely to attract more overseas money into the UK which will push up the exchange rate.
Conversely they should lower interest rates if they want to borrow less and reduce their debt.
However, do government and BoE spokespersons explain themselves correctly on this matter? I don’t think so.
Peter,
In the 2025-2026 financial year, the UK government is expected to spend approximately £111.2 billion on central government debt interest. This represents about 8.3% of total public spending.
Most of that borrowing must come from big funders, not from your Premium Bonds. And it’s huge.
If we let interest rates rise, because we tried to borrow more than the bond markets thought was prudent, we might well end up spending all our new borrowings on debt interest payments. So we wouldn’t have more money to spend on public services.
Tristan,
Thanks for the link, which is interesting. Neidle’s “taxes people want to raise” are ideas like wealth tax, which Neidle thinks wouldn’t work well. His ” taxes people don’t want to raise”, which “currently yield £600bn”, are the bogstandard conventional taxes like income tax and VAT.
It’s a persuasive argument. One implication is that if we want to rich to pay a fairer share, we need to think about things like raising the income tax higher rates, rather than going for more grandiose and impracticable ideas such as wealth tax. Another implication is that we also need to persuade middle-income people to pay more tax, if they agree that getting potholes fixed and enough doctors employed takes precedence over that holiday in the Maldives.
However, I don’t see Neidle mentioning the point you made that: “if you can persuade private money to provide the funding on the basis that it can make a profit a lot more becomes possible.” I don’t think, by and large, that that’s a good solution. It’s PFI. Private money will always like to help a government live now, pay back in spades later. Governments should resist that temptation!
@David Allen
“Thanks for the link”. No trouble! Neidle is worth following.
“we also need to persuade middle-income people to pay more tax”
Thus clobbering many of those who vote for us. You don’t have to be in favour of squeezing the middle classes until the pips squeak to be a liberal.
“I don’t think, by and large, that [use of private money at a profit] is a good solution”
If the alternative is failing to stop the planet burning, failing to house people and failing to provide adequate defence for fear of someone making a profit I choose private money rather than ideological purity thanks.
Very clever Tristan, to pick up my rhetoric about “the planet burning” and turn it back against me. Unfortunately you’ve also missed my point. PFI wasted government money in the long run, because the private funders were people who could see an opportunity to screw the government.
Any person or organisation which is desperate to borrow on special terms is at risk of falling for very bad terms. Whereas you and I wouldn’t agree to a loan if it involved huge long-term liabilities, the people who run governments can and do make the cynical calculation that by the time the payback is demanded, somebody else will be governing the country and having to make the payback.
PFI won’t help stop the planet burning, it will help continue the planet burning.
@ David Allen
“PFI won’t help stop the planet burning”
Who said anything about PFI – I didn’t.
The private money that is building (not enough) houses and the private money that is funding all those solar farms and wind turbine now being built has nothing to do with PFI and government is not paying anyone a penny towards it so far as I know.
In any event, given the electorate seems highly unlikely to agree to pay the tax that would be necessary to fund the huge amount of spending necessary to get us where we need to be, let alone defence, education and all the rest, the options on offer look like private money and profit or not enough.
Socialist and quasi-socialist tax and spend is over.
Tristan,
You’re right in the sense that you didn’t specifically call for PFI. But you did say “if you can persuade private money to provide the funding on the basis that it can make a profit a lot more becomes possible”, and you implied that this would be something to pursue as an alternative to raising taxes.
Well, when private companies voluntarily do useful things like building houses or wind turbines to sell on the market and make a profit, that’s broadly a good thing. But if private companies need to be “persuaded” to build things by being given special Government funding, and special Government incentives, that’s far less good. That’s PFI, or something like it.
It’s not the free market economy. It’s a bad “live now pay later” deal by government. It works badly. It hurts the nation far more than tax rises would do.
@David Allen – Absolutely. If the best the Lib Dems have to offer is “competently managed decline” because anything else would be fiscally irresponsible, or upset too many important people, then all this talk of competing with the Greens or Reform for the “we’d like things to be different” vote needs to be put in the bin where it belongs.
Finding an authentically Liberal way out of that trap is another matter, of course.
@ David Allen, @ Tristan.
“That’s PFI, or something like it.”
Absolutely. Except I’d drop the “something like it”. It is PFI.
PFI is essentially a way of hiding public debt. It involves letting private capital pay for a a public asset and then the government renting it back with lots of hidden clauses in the rental agreement about who should pay for repairs etc. It’s far more expensive than raising the money by bond sales in the conventional way. It’s rather like renting a house on a long term basis rather than paying for it on a mortgage.
It might mean that we don’t owe money to the bank but it’s not a good deal in the long run. We still have a hidden debt to be repaid and we don’t get anything at the end of it.
@ David Allen,
“Most of that borrowing must come from big funders, not from your Premium Bonds. And it’s huge.”
Yes, of course, but the principle is the same. The big players still choose to lend rather than the Govt chooses to borrow.
“Huge” ? Well yes in terms of absolute numbers but the public debt is about 100% of GDP. There are assets on the balance sheet too which are difficult to quantify. It’s rather like someone with an annual income, after tax, of £60k owing about the same on a house worth ten times that.
Public debt in Japan is about 250% of GDP.
What strikes me about this discussion is what is absent from it. We are debating how to fund services to the last decimal place, and nobody mentions that the wealth of the richest 200 families has grown from £42 billion to £711 billion since 1989, that the very wealthiest can pay a smaller share than the people who clean their homes, or that austerity fell hardest on those least able to bear it.
On the substance, the line that a wealth tax “wouldn’t bring in much money, if any” is not supported. On the most serious UK modelling, by Arun Advani and colleagues, a 1% charge on wealth above £10 million raises in the region of £10 billion a year. That is real money.
I would also turn the Dan Neidle analysis cited above on its head. Its central finding is that frozen thresholds will drag one in three full-time workers into the higher rate by 2029. The people actually being squeezed are ordinary earners, not decamillionaires. A tax that begins at £10 million does not touch them. Taxing standing wealth is the alternative to squeezing the middle still further.
No, a wealth tax would not fund the whole state, and nobody serious says it would. But that was never the case for it. The case is that a liberal party, of all parties, should not be relaxed about wealth piling up in fewer and fewer hands while ordinary people carry the cost of everything else.
@ Tom,
Your figure of the richest 200 families being worth £711 bn suggests that a 1% wealth tax should bring in £7bn on them alone.
I’d start with these, make sure they pay, and work downwards.
I’d be surprised if there was only an extra £3bn to be gained if the threshold was reduced to £10 million.