Rachel Reeves is the most powerful Chancellor of the Exchequer of modern times. Her nearest equivalent would be Gordon Brown in 1997: another huge Labour majority, and a position of authority which made him unsackable for the next decade before inheriting the mantle unchallenged. Perhaps Brown’s trajectory is the model for Reeves, but if so, she already has the edge on him: Tony Blair was a brilliant public communicator and disagreed with Brown on some key economic issues, whereas Keir Starmer is not a fluent speaker and claims no expertise on the economy, on which he defers to her.
So, how does she want to use that unparalleled power? Her mantra of “stability will be the crucial change” was an apt and politically astute comment on the post-Cameron years of Tory meltdown, but already the international financial landscape has transformed. Sterling’s strength reflects a new sense that in contrast to North America and continental Europe, Britain now has a centrist government that is solidly in power for the foreseeable future. We are already an oasis of stability: inertia on matters where change is urgently needed is unnecessary and, I will argue, self-defeating.
So where is change needed? Perhaps start with the most internationally damaging news since the election: riots around the poorer towns of the country. Unsurprisingly, our former public prosecutor turned PM imposed swift and severe jail sentences. But at some point, any government facing the disaffection of poor communities, and most especially a Labour one, must acknowledge the underlying problem is one of blighted economic opportunities: the riots were a rollcall of despair. The equivalent would be the Toxteth riots of 1981, which even under Thatcher at her most hard line triggered the appointment of a new cabinet position and an economic programme of renewal which improved housing and job opportunities for the black community in inner-city Liverpool. Since Starmer has ceded economic decisions and pronouncements to Reeves, such a programme for blighted towns is hers to announce.
The poor towns are in poor regions, which is the spatial level best-suited for an economic programme of renewal. Politically, the architecture is already largely in place thanks to the creation of elected mayors in charge or city-region authorities. Following the May local elections, nearly all of them are Labour. Further, Whitehall is already well prepared: thanks to the work of Andy Haldane while he was the permanent secretary for levelling up, there are many projects that are shovel-ready.
Starmer has banned the term “levelling up”, but the prolonged divergence of every English region from the abundant economic opportunities of London is not dismissible. Sustained renewal – the sort that addresses the productivity gap – depends on a combination of four place-focused public investments. They would be in regional and local transport infrastructure, in training in vocational skills, in risk capital for small and medium-sized enterprises (SME) growth and in the capacities of regional government.
Transport infrastructure for England north of Birmingham has been dominated by the fabulously costly fiasco of HS2, which should be cancelled. What should replace it? The only project that survived the Tory chaos is a much-needed and long-delayed project for an east-west connection of the northern cities, the Trans-Pennine Link. Despite being an MP for Leeds, Reeves has astonishingly called this into question, demanding £50m of cuts to each of the west-of-Leeds and east-of-Leeds legs for her Budget. This yet again delays the construction of the link and has a chilling effect on all other regional transport projects, ultimately raising costs as construction companies factor in the greater uncertainty into their bids for government contracts. The measure is almost a caricature of Treasury short-termism: kick costs down the road from the Budget, no matter how much it increases them later. The Treasury has run things one annual Budget at a time. This is now well understood, though Sam Freedman’s Failed State provides some gruesome new interview evidence on Treasury attitudes.
Turning from transport to training, the Treasury has chosen to save money by cutting investment at each end of schooling. Sure Start, the pre-school programme for remedying deficiencies in early childhood, was shredded; it was the sort of programme Whitehall and the political class think of as concerning only “other people’s children”. Post-school vocational training, such as apprenticeships, has similarly suffered. London abounds with pre-school tiger mothers, post-school job opportunities and abundant role models who have gone to university. But most provincial working-class boys of whatever ethnicity or sexual orientation want to leave school after A-levels and start work. Since the collapse of apprenticeships in the 1980s, a plethora of little schemes have complicated but not met these needs, cumulating into an acute shortage of pathways into skilled vocations. Reeves could restore these programmes in October’s Budget, or she could maintain the “stability is change” mantra – AKA inertia.
Once young people have vocational skills, they need jobs where they can use them. In a flattened region, private investment flows out rather than in. Only once enough local SMEs take off will national and foreign firms reconsider places they have written off. But for SME to take off, those with the potential need the accelerator of risk-bearing finance: venture capital. Britain has lots of it, concentrated within the magic triangle of London, Oxford and Cambridge. But two-thirds of it is invested in that triangle, so that is where future skilled jobs will go unless public policy decisively changes.
Yet less than a quarter of the population lives within that privileged triangle. So what can be done? Reeves’ inertia option would leave investment flowing to the triangle and provincial workers languishing in dead-end jobs. The palliative option would be to encourage everyone to move to the triangle, wasting public spending on subsidising housing there. The best option is to redirect investment to the provinces. European governments do this through massive public institutions such as the European Investment Bank (EIB) and Germany’s KfW. They supplement them by organising their banking systems so that regional banks loan money for investment, which Britain’s nationally organised banks won’t do.
Our public investment is lower than any other significant European economy. The Tories bequeathed a suicidal fiscal strategy of cutting it even further. Were Reeves to implement this, it would doom us to decline and divergence. But at last, we have a few public institutions like EIB: the British Business Bank (BBB), the National Infrastructure Bank (NIB), and the UK Research and Infrastructure Fund which could pour investment into the provinces. Done at sufficient scale, this could raise public investment instead of shrinking it further, doing for the nation and the regions what Mario Draghi’s new report aims to do for the EU: reset investor expectations.
Currently, these three institutions are too small, and their primary purpose is not to reduce regional divergence: for example, the NIB has been told to achieve net zero. Yet if the only investment the BBB and the NIB are permitted to support in the regions is for green energy, most of their promising SMEs will be ineligible. The divergence of provincial economies from London will continue while Treasury short-term parsimony triumphs over long-term strategy. Fortunately, Reeves has the unprecedented combination of unchallengeable legal and political authority to expand, repurpose and rescale these public institutions.
All local governments outside London are short of talented staff: they have been loaded with statutory duties, stripped of powers and shorn of budgets. Their role has been to take the blame for failures suffered by communities but made inevitable by Whitehall’s policies and dysfunction. Whitehall uses the poor quality of local government as a justification for the micro-management that defends taxpayers from misspending (overlooking its own dismal record of fiascos). But local government should be accountable to local voters, not to London-based civil servants.
Voter turnout at local elections is pitiful, but it reflects voter understanding that it has no powers. In the countries where local governments have power and money, turnout is ample. Only once local government matters will enough talented people go into it. If Whitehall wishes to accelerate the process, it can refocus its attempts to move parts of ministries to the regions, to a scheme that encourages staff to work for the city-region governments. Currently, the relocations are only exacerbating the lack of inter-ministry cooperation: the enduring culture of rival fiefdoms being reinforced by putting distance between them.
By announcing this package of policies together, Reeves could weave them into a narrative of credible hope for provincial Britain. In the process, it would begin to heal the rifts that opened up with Brexit, exploded into riots and remain a simmering invitation to charlatans like Nigel Farage. But to do so, she would need to devolve some of her vast powers and revenues to the mayors. Their potential is enormous: forming a small, networked group, once able to use powers and money to experiment with initiatives, they would learn from each other. In doing so, they would have earned the right to claim a share of the credit for renewal.
And that is why Rachel Reeves’ choice is really a test of her character. She could opt to retain all that power for herself, hoping to claim the credit for national economic renewal. The rest of us would pay the price: no renewal, since at best, our uniquely over-centralised system of government could deliver only palliatives. More likely, she would have written the gravestone of her government. Or she can begin the process of shifting power decisively from the Treasury in London to the mayors in the provinces. Superficially, she would share the political credit for an awakening provincial economy, but fundamentally, it would be hers alone.
[See also: 100 days that shook Labour]
