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.