Truss’ go-for-broke gamble means Labor inherits economic chaos if election wins | Larry Eliot

Labour tends to take over when the economy is in bad shape. That was the case with Clement Attlee in 1945 and with Harold Wilson in both 1964 and 1974. Of the post-war party leaders, only Tony Blair arrived at Downing Street with a decent economy.

Blair was the last Labor leader to win an election 17 years and four defeats ago, so this week’s party conference in Liverpool will be the talk of nothing being taken for granted and much work still to be done.

Fair enough. There have been occasions in the past – most notably in 1992 – when Labor have snatched defeat from the jaws of victory, which means a degree of caution is warranted. But despite the reluctance to count chickens, there is now a real chance that history will repeat itself. The election is meant to be lost, but Labor will inherit economic chaos if it wins.

Things could hardly have gone better for the party since they met in Brighton last year. The post-Covid economic recovery fizzled out. Scandal forced Boris Johnson to resign. Over the summer, inflation has risen to its highest level in 40 years. The standard of living has been eroded. A second recession in less than three years is underway. Liz Truss and Kwasi Kwarteng have seen their mini-budget for the rich erupt in the financial markets.

Labor is now outperforming the Conservatives on economic savvy, perhaps unsurprising given stagflation, rising interest rates and sterling weakness. Markets are currently viewing sterling as a one-way bet, just as they did when Britain was forced to leave the European Exchange Rate Mechanism on Black Wednesday 30 years ago.

Friday was not exactly a black Wednesday for Truss as the government made no attempt to defend a firm level for the pound as 1992 has become. A reputation for competence, once lost, is not easily regained.

Truss’s return to a more traditional form of conservatism – tax cuts, deregulation, restrictions on union action, tougher welfare regulations – is widening the political divide with Labour. Abolishing the 45% income tax rate, removing the bankers’ bonus cap and opposing a tougher windfall tax on energy producers are all gifts to Sir Keir Starmer and Shadow Chancellor Rachel Reeves.

Johnson put together a fragile coalition of traditional Tories in the south of England and former Labor voters in the Red Wall seats in the north of England and the Midlands at the last election. The red wall half of this coalition now looks very vulnerable. As the think tank Resolution Foundation pointed out, Kwarteng’s tax cuts were worth three times as much for households in London and the South East as for households in Wales, Yorkshire and the North East. There aren’t many people in Blyth making more than £150,000 a year.

The focus groups show that while voters are much less interested in the Conservatives than they were in 2019, Labor has yet to win them over.

To a certain extent, that’s understandable, given that drama within the Conservative Party has been the focus of attention for months. Yet Labor has quietly set the political weather in the economy. She opposed the increase in social security contributions, which was reversed by Kwarteng. It called for a windfall tax, which Rishi Sunak originally opposed but later announced, and it was quicker than the government to recognize the need for an energy price cap. The notion that Labor simply waited for the government to implode is incorrect.

Reeves will flesh out Labour’s thoughts on the economy in her speech at Monday’s conference. She will attack the idea that wealth trickles down from rich to poor, arguing – rightly so – that growth is best achieved from the bottom up and the middle out. It will reject the free market notion that the economy is best served when government gets out of the way. She will advocate for a strong institutional framework involving the Bank of England, the Treasury and the Office for Fiscal Responsibility. Finally, she will stress the need for strong public finances to fund investment in skills, childcare and the greening of the economy.

All of this may seem a bit tame, especially when contrasted with the government’s attempt to pull the economy out of its stagnation cycle through tax cuts that should eventually be paid off in higher growth. There’s certainly a contrast between Reeves’ cautious, step-by-step approach and Kwarteng’s go-for-broke gamble.

But that is the path Labor is committed to and will not change direction now. If Starmer still suffers defeat in the next election, there will be plenty of recriminations.

Increasingly, however, it looks like the Tories are headed for defeat. Voters will see through Truss’ attempts to deny any responsibility for the economic failures of the past 12 years. Any growth spurt from energy bill caps and tax cuts will be offset by higher Bank of England interest rates. There is no real prospect of the government’s supply-side reforms having an impact before the next elections.

The state of the economy remains crucial to the outcome of elections, so Labor’s job is to show that it can do business more responsibly than the Tories, more sustainably than the Tories and fairer than the Tories. It really shouldn’t be that hard.