The Permacrisis

The struggles of Rachel Reeves as chancellor have become a parable for this Labour government. Sir Keir Starmer came to power promising stability and renewal, yet Labour MPs are being privately warned to “prepare for the worst” ahead of the 26 November budget. That warning can mean only one thing: the government will break its totemic general election manifesto pledge not to raise income tax, VAT, or employees’ National Insurance as it seeks to eliminate the estimated £30 billion shortfall in public finances.The narrative for Labour’s second budget, as it was for its first, is one of gloom.

In a speech delivered on Tuesday morning in Downing Street, before the markets opened, Reeves embraced realism. Repeating a variation of her new favourite refrain, she said she was adapting to the world as it is, not as she might wish it to be. The remark inadvertently echoed the opening line of VS Naipaul’s A Bend in the River – his great novel set in a collapsing, unnamed post-colonial African state that so fascinated Barack Obama. Obama once described his own worldview as one of “tragic realism”. Reeves’s, by contrast, might be called “desperate realism”.

Her tone was sombre as she blamed the Conservatives, Brexit, the threat of tariffs, a productivity downgrade, but not the government’s failure to restrain public spending or cut the runaway welfare budget (spending on health and disability benefits is predicted to hit £100 billion by the end of the parliament).

The expected 2p increase in the base rate of income tax (which will raise £18 billion), balanced by a likely cut in national insurance, is a proposal long favoured by Thorsten Bell, formerly chief executive of the Resolution Foundation, and now part of Reeves’s Treasury team. This would mark the first rise in the base rate of income tax since 1976, the year James Callaghan’s Labour government sought an emergency loan from the International Monetary Fund.

Callaghan had previously served as chancellor in 1967 but resigned when Harold Wilson devalued the pound by 14 per cent after repeatedly promising he would not. It had been fixed at $2.80 to the pound since the 1949 devaluation. Callaghan then became home secretary and was replaced by Roy Jenkins. In a televised address, Wilson assured the public: “It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.” Voters didn’t believe him. Labour lost the 1970 election - a warning from history of what happens when pledges are broken and trust collapses.  

These are different times and Reeves will not resign for breaking a manifesto pledge, and yet there was nothing but doubt in her expressions of confidence on Tuesday. She seems trapped between the bond market and the demands of her own MPs. “She has no choice but to do the right thing,” one senior Labour politician, a Reeves supporter, said. “She needs to do it in fair way by addressing intergenerational economic inequality. The trouble is we have a lot of innumerate MPs with limited life experience who do not understand what they want to do is not affordable.”  

Ever since she unilaterally cut the winter fuel allowance for most pensioners during the government’s first 100 days (since reversed) the chancellor’s colleagues have complained about her lack of judgement. Lucy Powell, the new elected deputy leader, who was sacked from the cabinet, responded to Reeves’s speech by saying that Labour must stand by its promise not to raise income tax: “If we’re to take the country with us then they’ve got to trust us.”

For now, Reeves has the confidence of the prime minister, who was absent this week at the COP summit in Brazil having originally being advised not to attend by his chief of staff. “If the markets react badly to the budget, it will not be politically recoverable for Rachel,” one influential MP said. For a Labour chancellor to owe her position to the favour of the bond market is, in the view of the soft left, unsustainable. Reeves understands the vulnerability of her position but will not compromise on her fiscal rules.   

Another difficult week for Labour was made worse by a farcical performance at prime minister’s questions by David Lammy, the justice secretary who was deputising for Starmer. He responded to questions about the mistaken release of a foreign sex offender from prison with performative outrage.

Nor was Lammy wearing a poppy in the days before Remembrance Sunday. A small detail, perhaps, but revealing: the oversight seemed careless and reinforced the view on the Labour benches that this government is inept at politics.

Like Reeves, Lammy retains Starmer’s support. Both are north London lawyers who bonded over football, although they are on different sides of the Arsenal-Spurs divide. On the night of the 2019 election, as Jeremy Corbyn led Labour to its worst defeat since 1935, Starmer and Lammy watched the results come in and discussed which one of them should run for the leadership. “I told Keir that he would have my full support,” Lammy said; he went on to co-chair Starmer’s successful campaign. He is now part of the inner cabinet - the so-called Quint, alongside Starmer, Reeves, Darren Jones, and Pat McFadden - which meets weekly. 

Once a Blairite moderniser, Lammy has been adept over the years at building alliances across the party. In spring last year, I was in Washington with him – he had no entourage and travelled to meetings by Uber – and the purpose of the trip was to network with senior Republicans, including JD Vance. Lammy relished being foreign secretary but following the reshuffle he is now London-based, desk-bound, and confronting the deepening crisis in the criminal justice system. It has been a chastening week for him.

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More broadly, MPs I’ve spoken to in recent days say their colleagues are “raging” over Starmer’s directionless leadership. The prevailing mood is one of “lost hope and flatness”: many of them are already resigned to serving only one-term. That sense of resignation leads to fatalism and rebellion.

At the same time, Zohran Mamdani, the newly elected mayor of New York City, has excited many in Labour. An unabashed ultra-progressive, Mamdani is a fluent and charismatic speaker, but this is not America, and his victory is largely irrelevant to the challenges confronting the government. Wes Streeting, the health secretary, thought otherwise, saying Labour can learn from the success of Mamdani. He praised the new mayor’s “inspirational campaign”, which offered “lessons for progressives the world over”. “Wes might as well declare now,” one minister said to me.

Streeting is assiduously courting the soft left and engaging in classic triangulation. He may yet seek an alliance with Angela Rayner, who still has a strong powerbase in the party, and with Shabana Mahmood, the home secretary, who is aligned with the Blue Labour faction and has her own leadership ambitions.

On Monday evening Starmer answered 24 questions at a meeting of the parliamentary Labour party but only became truly animated when he mounted a defence of the European Convention on Human Rights, from which both the Conservatives and Reform UK want to withdraw.

Believe it or not there are still self-described Starmer loyalists, such as the former leader Neil Kinnock – who nevertheless emphasises the distinction between loyalty and deference – but even he believes Starmer and Reeves must offer far more. “I am certain they know they need to manifest a clear sense of direction and purpose, and rapidly,” Kinnock told me.  

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Shortly after James Purnell resigned from Gordon Brown’s government in 2009, I met him for a coffee. Purnell had been considered a future Labour leader, but he would soon quit Westminster completely disillusioned. “The way we do politics in this country is infantile,” he said that morning.

I thought of Purnell’s remark as I watched Reeves’ Downing Street speech and Lammy’s hapless theatrics at PMQs. The government is preparing to break a manifesto pledge that should never have been made because in opposition the leadership was not serious or honest enough about what was required. They entered office without a theory of government, and their lack of preparation was ruthlessly exposed. Now, destabilised by internal unrest and a breakdown in collective responsibility (note Lucy Powell’s intervention on tax cuts and the briefings against Lammy), they are operating in a world where politics moves at extreme speed. In the age of vibes-based populism the old rules no longer apply.

The budget will define this government and if the response to it signals a renewed sense of purpose and direction, so much the better.

Whatever Nigel Farage might wish for, Labour’s 161-seat majority ensures it will remain in power until 2029. “We are the most stable government in Europe,” one senior No 10 aide said.

But the reality is that Starmer has been put on notice by his own MPs and leaders who make totemic pledges and then break them are seldom forgiven.  

Why do so many people think the system is rigged against them? What explains the mood of mass disaffection in the country? Why is Reform so far ahead in the polls? Voters turned to Labour last year not out of enthusiasm, but exhaustion – weary of Tory misrule and infighting. Starmer promised competence, “to tread more lightly” on people’s lives, and a government of service that would “unite the country”. “There’s a new mood of hopefulness,” he said to me a few weeks after his victory. If it ever existed, it didn’t last. Since the so-called botched reset in early September, Starmer has been presiding over a state of perma-crisis, debilitating for the government and for the country. The only real winner is Nigel Farage.