The Economic Competence of the Labour Party in Historical Perspective

The Labour Party’s decision in February 2024 to drop its commitment to an additional £28 billion in annual capital investment in Britain's green transition has—once again—revived the debate about Labour and economic competence, a debate which has intensified in the first months of the newly elected Labour government’s life. What are the historical roots of the relationship between the Labour Party and economic competence? Who defines economic competence and how this definition has changed in the last fifty years?

Political scientists distinguish between a generalised competence, the degree to which parties are trusted across the policy agenda, and a competence for specific issues. It is commonly believed that political parties tend to develop a good reputation in certain areas. Parties can—to some extent—shape their reputation on a single issue. Issue ownership appears to be less stable than usually assumed.

At the origin of the economic incompetence myth

Reflecting on economic competence in British politics, Antony King—a professor of government and doyen psephologist—wrote in 1998:

“The Conservative party has had a reputation for solid competence….Labour in power was liable to screw up … The history of Britain's financial crises in the twentieth century fed the Tories’ reputation (for economic competence). Between 1900 and 1992 there were four full-blown financial crises involving the British government, and Labour administrations were implicated in all of them”.

King was referring to the fact that Labour governments were obliged to deal with—and often collapsed owing to—financial disturbances: the abandonment of the gold standard in 1931, the sterling devaluations of 1949 and 1967, the International Monetary Fund loan of 1976 and the global financial crisis. These crises were the consequence of exogenous factors or rooted in policies pursued by previous Conservative administrations. Yet, what remained impressed in the collective memory was the belief that Labour could stand for popular ideas, but represented an economic risk.

The image of Labour incompetence was compounded by deeply ingrained prejudices against the working class in Britain. Other structural factors contributed. One of these was the built-in tension between the party's original role as a tool of the trade unions and its ambition to represent a wider section of British society, emerging especially during winter 1978–9. Labour was also considered inherently prone to spend more because of its goal to create a more equal society.

The Conservatives narrowly lost the 1974 elections twice on the grounds that only Labour was considered capable of cooperating with the unions and stopping inflation that was spiralling out of control. From 1974 to 1979, Labour pursued a policy of inflation containment through different means and obtained encouraging results. The winter of discontent shed a negative light on Labour's economic competence, also because of an aggressive right-wing press and Labour's failure to defend the achievements of its governments.

Margaret Thatcher's monetarist experiment of the early 1980s is emblematic of the risk of narrowly defining economic competence, in this case in terms of price stability. It is true that the policies adopted by the first Thatcher government brought inflation—peaking at 18 per cent in 1980—under control. Yet, these very policies—combined with the exploitation of North Sea oil and the second oil crisis that drove the exchange rate up dramatically—had the effect of rendering Britain's industrial sector less competitive with stark consequences on the level of employment.

Yet, making the ‘politics of inflation’ nearly coincide with the definition of economic competence permitted the New Right to blame the unions for unemployment and for the much-debated British decline more generally. The New Right downgraded expectations about the government's capacity to engineer economic transformation.

Black Wednesday and the reversal of Labour's incompetence myth

Economic competence took centre stage in Labour's fractious internal debate of the 1980s, while the Tories seemed better equipped to interpret the 1980s zeitgeist, despite an economic record that was far from immaculate. From the 1990s the downgrade of manufacturing made the British economy (and the Labour Party) more reliant on a thriving financial sector, whose success became crucial to secure conspicuous tax revenues and to balance Britain's current account deficit. Labour's attitude towards the ERM can be better understood against this backdrop.

On 16 September 1992—Black Wednesday—the Conservative government abandoned the ERM. The ERM was a system whereby each country pledged to maintain its exchange rates within a target bandwidth around a centrally defined parity. The British government had joined the ERM in 1990 while the country was facing the worst recession since the 1930s. On Black Wednesday, sterling crashed out of it, a humiliating outcome. Labour supported British membership of the ERM to signal the party's commitment to monetary stability. The ERM crisis was seen by public opinion as an exclusively Tory affair. From 1992 onwards, Labour acquired an advantage in the polls that grew into the landslide victory of 1997.

This collapse in the polls was not reflected in an equally sudden loss of reputation for economic competence. According to British Election Panel Studies’ data, the Conservatives led Labour on the economy on the eve of the 1997 election. The ownership of economic competence was about to change, but the realignment needed time. This process matured eventually on the eve of the 2001 election when 46.1 per cent of those interviewed were more optimistic about the British economy under a Labour government and only 22.7 per cent trusted the Conservatives.

Conclusion

During the 1990s, New Labour conquered the economic competence issue. It is contentious, however, whether it managed to define it differently or—instead—deserted this battle and conceded ground to the Tories on direct taxation, trade union law and financial regulation. There are good reasons to argue that the Conservatives’ definition of economic competence was challenged by New Labour. New Labour managed to increase levels of expenditure without spooking the financial markets, in what has been called ‘credible Keynesianism’. At the same time, it emphasised fiscal rectitude through ‘constrained discretion’.

After the 2007–8 global financial crisis, the Tories regained their reputation for economic competence by arguing that the crisis had been the consequence of excessive public spending by Labour and implemented policies of ‘expansionary fiscal consolidation’ under the coalition government.

The dismal economic performance of the Conservatives in power between 2010 and 2024 has offered Labour the opportunity to portray itself again as the party of economic competence. But how will it be possible for the newly elected Labour government to reconcile its stance on fiscal rectitude with the high levels of debt, taxation and public spending that would be needed to realise its ambitions and revitalise the British economy? The Autumn Budget provides a first response to this question. More generally, the difficult balancing act between restoring public finance and investing in growth will be a crucial test for Labour.