There’s no doubt Germany is having a bit of a moment in Westminster’s bars and tearooms, and it’s not about the Nations League.
Labour MPs, anxious about what Chancellor Rachel Reeves has in store at her Spring Statement next week, keep talking up Berlin’s changes to its borrowing rules as the way to get through the thorny thicket of increased defence spending at the cost of slashing the welfare bill and foreign aid.
Reeves is understood to have drawn attention to the comparison herself in conversations with colleagues at all levels to show how a copycat move wouldn’t work in the UK.
On Friday Germany’s upper chamber of parliament, the Bundesrat, voted in favour of a massive financial package that will pour billions of euros into defence, infrastructure and climate protection. It was confirmation of a decision by the lower house, the Bundestag, earlier this week which approved an historic amendment to its constitution to allow unprecedented levels of government expenditure. It’s a move that’s been watched with jealousy in London by Labour MPs who want Reeves to increase borrowing.
“Rachel needs to do something – anything – to get us out of this hole,” one Labour MP told The i Paper. “I think she should change the debt rules like Germany. I know she won’t though because she’s too stubborn.”
But the exasperation expressed by the Labour MP at high-ranking Government officials is mutual.
Senior members of the Government are frustrated that their Labour colleagues keep bringing up Germany’s debt rule change, when the country’s borrowing levels are so much lower than the UK’s. Instead they are urging fractious MPs to be patient and wait for growth.
The UK’s public sector net liability was 95.3 per cent of GDP, where Germany’s stands at 63 per cent. Reeves is understood to be keen not to take on new loans without a clear plan to pay for it.
French bank BNP Paribas predicted German 10-year bond yields – a proxy for government borrowing costs – could rise as high as 4 per cent in the next three years as the country issues far more bonds to fund the extra spending. The UK is already incurring debt at 4.7 per cent by the same measure.
An rise in UK borrowing costs of only 0.25 per cent would cost the Government £4bn more a year in debt interest.
“I think a really key thing is that loads of MPs bring up Germany and what they are doing. But Germany’s borrowing is 63 per cent of GDP, and even that has caused some market jitters. If anything, it proves how important what we are doing is, because let’s be clear, additional borrowing at the moment is a recipe for higher mortgage repayments.
“Turning the economy around is not an overnight fix, it takes time and discipline. We are absolutely serious about creating a more productive economy. There’s not a lot we can do about global trade tariffs, but we are going to make Britain’s economy as strong and efficient as possible,” a No 10 source told The i Paper.
Germany’s decision to borrow billions more has revived a debate in the Labour Party which some of its most senior members hoped had all-but vanished.
The fictional magic money tree – so beloved of former Labour leader Jeremy Corbyn’s brand of opposition politics – has, spring like, burst into bud again. Also dangling from its branches is the nebulous blossom of wealth taxes. It’s a suggestion that comes up with wearying regularity by the socialist wing of the Labour Party as if the 2019 general election defeat never happened.
This wishful thinking also partly explains why the most left-wing members of the Cabinet – like Ed Miliband – are also having a moment. He came top in a Cabinet popularity poll of Labour’s grass roots this week. Reeves was at the bottom of the rankings with an approval rating of minus 11 per cent.
Reeves won’t raise taxes in next Wednesday’s Spring Statement, even as the Conservatives try to claim she is preparing an “emergency Budget”. Instead, public spending reductions through a combination of welfare cuts and savings to the planned budgets of Whitehall departments will be used to rebuild adequate headroom against her fiscal rules.
In opposition the phrase “sticking to the fiscal rules” was a handy fig leaf that kept the troops in order long enough to win the election. It’s much harder in government when the choices must be owned. Yes, yes, yes to spending on defence, health and the infected blood scandal. No, no, no to compensating Waspi women, keeping benefits for Gen Z or maintaining foreign aid spending.
Labour MPs and activists need to find someone to blame, and Reeves is the grown-up in the room.
Some of their number suggest rules are made to be broken. They point to former Tory chancellor George Osborne who was guilty of breaking his own golden rules within two years of coming to office.
square KITTY DONALDSON
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Read MoreEven former Labour prime minister and chancellor Gordon Brown, the self-proclaimed architect of fiscal prudence, was forced to break his own rules during the financial crisis of 2008. During the Covid-19 pandemic then chancellor Rishi Sunak suspended the fiscal rules and nobody argued at the time it was the wrong decision.
But while the term “fiscal rules” enjoys a relative consensus in British politics to constrain politically motivated deficits, the definition of what counts as an emergency differs.
If in doubt about the strength of your case to break the glass and abandon the fiscal rules, how about invoking the ad Nazium argument and comparing your present situation to the 1930s?
This week’s guilty party is Lord Hain, a usually sensible Labour Party grandee, who argued Reeves should bend her fiscal rules, given the “exceptional, and exceptionally dangerous, times” now faced by the UK. Hain said borrowing had been used by Britain to re-arm in the run up to the Second World War, and without it “Hitler would have won”.
But Reeves already changed the fiscal rules at October’s Budget to borrow an additional £140bn over five years to invest in infrastructure and public services.
Another Labour MP suggested Reeves is right to stick to her current rules, even if her predecessors as chancellor didn’t.
“The thing about the fiscal rules is that their half-life is shrinking. They last less time every time they’re invoked by a new chancellor. Gordon was the first to break his own rules and then they’ve lasted less long for every chancellor since. But the idea that she’s going to change them in the first year is nuts. You could argue the fiscal rules were a bit tight in first place, and we left ourselves in a tight spot which is suddenly a conversation going around the tearoom. But once she’s got to this point, you know, that’s a valid position whether you agree with her or not,” the MP told The i Paper.
While some Labour MPs don’t seem to mind that the size of state is highest since the 1980s – outside of the pandemic and financial crisis – this statistic alarms those in charge of reining in spending.
There’s also the character of Reeves herself to consider.
“When Rachel makes a promise, she doesn’t back down,” an admiring Labour MP told The i Paper. “Keir will reverse sometimes but she doesn’t.”
Labour MPs will have to stick to taking lessons from Germany’s football players, not its politicians.
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