How Labour can avoid defeat in 2029

Attlee and Wilson were punished for delaying the inevitable. Starmer can avoid their fate – if he acts fast

Labour lost the 1970 election four years earlier, on July 20, 1966. Future historians may conclude that that Labour lost the 2029 election on March 26, 2025 – this Wednesday – and for much the same reason.

Labour’s best chance of avoiding that fate is for Keir Starmer and Rachel Reeves to learn the lessons from what Harold Wilson and James Callaghan did, or more accurately did not do, six decades ago – and Clement Attlee two decades before that.

After 13 years of Conservative rule, Labour returned to office on Friday October 16, 1964. Within hours, the Treasury warned Wilson and Callaghan that the Tories had lumbered them with a bleak financial inheritance. They resisted the most dramatic option: devaluation. Attlee’s government had devalued the pound in 1949. The new Prime Minister feared that Labour would be saddled with the label of “devaluation party” rather than be credited as the party of economic competence. His motives were honourable, but his decision mistaken.

Instead, Callaghan announced other measures that he hoped would avert a crisis. Ten days after becoming Chancellor, he imposed a 15 per cent import surcharge. That did not satisfy the financial markets. Three weeks later he introduced an emergency budget, with increases in income tax, national insurance, company taxes and petrol duty. Still the markets were unhappy. It took a billion-pound loan from foreign central banks (worth £17 billion at today’s prices) to calm the markets down.

This bought the government time but did not solve the underlying problem, that the pound was overvalued. This was disguised long enough for Labour to call a fresh election in March 1966, when it increased its majority from a precarious four to a comfortable 98. But soon afterwards, on July 20, Wilson faced a run on the pound. Once again he ruled out devaluation. Instead he imposed big cuts to public spending, a six-month wage freeze and higher taxes on alcohol, petrol and service-sector jobs.

The following year, his defences crumbled. The pound was devalued by 14 per cent. What could have been defended after the 1966 election as the action of a government with a fresh mandate to grow Britain’s economy, was now seen as an admission of abject failure. Wilson was voted out office in 1970. The definitive study of the 1970 election judged that “had he agreed to devaluation in July 1966, he would in all likelihood have won the 1970 election and become the first Prime Minister since Lord Liverpool in the 1820s to win three elections in a row”[i].

Today, in an era of floating exchange rates, our core problem is not an overvalued pound but the impact of Brexit. But the consequences are essentially the same: low growth and weak public finances. Brexit is not our only problem but, after defence, the biggest. Once again, Labour’s economic credibility is at stake – and once again, the danger is that the wrong lesson is being learned.

What, then, is the right lesson? It is to recognise that credibility is earned not by ducking the big decisions but by taking them earlier. The problem with Attlee’s devaluation in 1949 was not (as Wilson judged) that it happened, but that it should have happened earlier. Britain had emerged from the Second World War in debt to the United States. In 1946 the US extended its loan on condition that Britain accepted the convertibility of sterling – that is, allowed the pound to be traded against the dollar and other currencies in the foreign exchange markets.

The agreement came into effect in July 1947. The pound came under great pressure. To avoid devaluation, Attlee intensified Britain’s post-war austerity. Inflation jumped from 3 to 7 per cent. Imports were controlled more tightly. Bread was rationed – something that had never happened during the war. The petrol ration was reduced by one-third. Attlee hoped that devaluation could be avoided, but two years later he accepted the inevitable. The value of the pound was cut by 30 per cent, from four US dollars to 2.8.

Had Attlee devalued in 1947 and Wilson in 1964, both would have been seen to react swifty to circumstances not of their making and improved their prospects for remaining in office longer. Starmer’s challenge is to avoid becoming the third Labour Prime Minister to delay the inevitable and be punished for his failure.

A few weeks ago, a good case could be made for saying he and Reeves had already missed the bus. Their election plans – to hold down personal taxes and stick to the fundamentals of the Brexit deal they inherited – were doomed to fail. Their motives were honourable but their decisions mistaken.

Then came Donald Trump. In just nine weeks he has abandoned America’s traditional commitments to Europe’s defence and to global free trade. By doing so, he has confronted Starmer with new challenges – but also given him a second chance to change course. In 1966, Wilson blew his second chance. Starmer need not blow his. If he acts quickly, here is the case he could make:

“We have entered an era of massive change. 2025 is year zero of a new world order. Today’s conditions are no longer those that faced us in last year’s election. To stick rigidly to the commitments we made then would be to condemn Britain to a bleak future. We shall change course – not by stealth, but openly, honestly and boldly.

“First and most obviously, we shall spend more, much more, on defence: increasing it to 3 per cent of GDP by the end of this parliament and four per cent by the end of the next one. But our plans are about more than numbers. We must wind down our reliance on America for our hardware and software, especially our nuclear arsenal.

“This means working more closely with our European allies. We need a fully integrated Europe-wide programme for research, development and procurement. This includes working with the European Defence Fund. It was set up by European Union; but Norway, a non-EU member, has a co-operation agreement with the EDF. So should we.

“That should be the start of a much more ambitious deal with the EU. We must shed the illusion that we can prosper apart. At the UK-EU summit in May I shall stress that the UK’s destiny is with Europe.

“This means rethinking Brexit from first principles. The evidence is clear. We are poorer than we should be. Just now, urging the economy to grow faster is like urging Lewis Hamilton to race with a roof rack. We need urgently to restore frictionless trade, so goods can once again flow freely across the Channel. This should be possible. Norway and Switzerland have Single Market deals with the EU. Turkey has been in a Customs Union with the EU for almost thirty years. I am determined to achieve the advantages of both the Single Market and the Customs Union as part of a grand bargain with our European neighbours.

“Finally, we must be frank about immigration. We need more workers to come to Britain, at least for now. At the same time, we must deter those who come here hoping to live comfortably in the cash economy. We shall make possession of an identity card – whether physical or in a digital app – compulsory. Alongside this we shall pursue any employer or property-owner who hires, pays or shelters anyone without the right to be in the UK. Our immigration policy will rest on two planks: welcoming with open arms and a warm heart the people we need, and taking effective action to keep out those we don’t want.”

Here's my prediction. None of these things will be done. Reeves and Starmer will miss their second big chance to put things right. Their supply-side reforms will help but won’t be enough. A pity: reforms plus frictionless trade – then we’d be motoring. Instead, we shall continue to be buffeted by economic headwinds, and Reeves will have to impose a relentless diet of tough budgets. Hence the fear that the strategy unveiled in Wednesday’s Spring Statement could condemn Labour to losing its majority at the next election

I hope I am wrong. But the clock is ticking. Like Wilson and Attlee, Reeves and Starmer may still end up forced to change course. However, the longer they wait, the more their U-turn will look like failure rather than courage. As lawyers say, time is of the essence.

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[i] The British General election of 1970, by David Butler and Michael Piinto-Duschinsky, Macmillan, page 6