Inflation is coming, but for how long it will last above the 2% Bank of England target and whether Britain will face several inflation spikes is still debatable. If Labour hopes to sell a new World War II style settlement to the electorate at the next general election then Labour had better hope that the Bank of England is correct in its assessment that a spike in inflation will prove to be temporary.
Limited increases in inflation are part of a growing economy, but a sustained spike in inflation can shred economic competence as both Labour and Conservative governments experienced in the 1970s. The ‘Winter of Discontent’ was partly caused by the Labour government’s failed attempt to control runaway inflation and contributed to the rise of Thatcherism.
Labour’s poor inflation record granted Thatcher an effective attack line against Kinnoch. Spiking inflation would hit the government’s economic record, but if Labour has a raft of WWII settlement spending commitments then the credibility of the party’s economic platform will also suffer especially if Sunak successfully reduces government expenditure.
Firstly, one does not need to look far to see the looming dangers of inflation creeping into British politics. The recent debate over whether the chancellor will maintain the triple lock on pensions in the event of a rise in inflation is an excellent example of how the pandemic’s ‘politics of plenty’ with low interest rates and low inflation rates could quickly switch to the ‘politics of scarcity’.
The Treasury is now beginning to ponder the very difficult question of how to reign in government spending and repair the budget deficit caused by the pandemic. If a sustained rise in inflation kicks in, changing the economic structural constraints, then this switch to the ‘politics of scarcity’ will only intensify.
Secondly, a rise in inflation will constrain the economic policy space of any future British government, but will particularly impact a Labour government pledging additional state spending on services. Just a cursory look at Labour’s August press releases reveals a number of spending pledges already made that would both contribute to and be impacted by inflation rates: investment in early years, funding for children’s crisis services, 100,000 apprenticeships, NHS technology and staffing funding, education recovery plan, temporary universal credit increase, faster low emission economic transformation, investment in green jobs, Turing scheme funding increase and funding for local government drug services.
Lastly, the Labour Party will be open to another electoral defeat because it will be increasingly difficult to prove to the electorate that a Labour government would have a firm hand on the nation’s wallet if its previous spending commitments are exacerbated by concerns of rising inflation and the Conservative attack lines, which will come with it.
If the wheel of fortune continues to point to low interest rates and low inflation then Labour will continue to enjoy the current political backdrop at the next election (although even this does not guarantee a Labour win). However, if the wheel of economic fortune lands on a sustained increase in inflation then the politics of today will look very different to the politics at the general election.
Labour needs to keep in mind that it is setting out its economic policy during a critical juncture in political economic history and that the economic wheel of fortune is still spinning. Labour must avoid a ‘bits-and-bobs’ economic policy with spending commitments littered over a four year parliament. The party must seriously consider the threat of inflation and how Labour will win an election if the next election is fought on a ‘politics of scarcity’.
The party’s economic narrative and strategy must be future proofed against inflation. Labour must plan for the worse and hope for the best. Only then will the party be both an effective opposition and future government regardless of any future economic shifts.
