Badenomics begins?

Good afternoon from New Economy Brief. 

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Kemi Badenoch was elected as the Conservatives’ new leader on Saturday, securing 56.5% of party members’ votes to Robert Jenrick’s 43.5%. 

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Her victory comes hot on the heels of the new Labour government’s first Budget last week, in which Chancellor Rachel Reeves set out a very different economic philosophy to that of her Conservative predecessor, Jeremy Hunt. 

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So today we’re exploring what we know about Badenoch’s economics, what her approach to economic policy as Leader of the Opposition might be, and how this compares to the last Conservative government’s approach. We’ll also look at the potential key economic dividing lines between the government and Badenoch’s Conservative party.

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The context

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In the last round of the leadership election, where party members chose between the two remaining candidates, Badenoch won by a healthy margin. But in the first round of voting – among Conservative MPs – she received only 18.6% of the vote. In the fourth and final MP ballot she received 34.7%, with rivals Jenrick and James Cleverly close behind on 33.9% and 30.6% respectively. This means that Badenoch now leads a parliamentary party where only a third of her MPs voted for her. This is a challenging inheritance for any leader, and one made even tougher by the scale of the Conservatives’ defeat at the general election in July, which left the party with only 121 MPs. 

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Badenoch’s immediate response to the Budget

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The timing of the Conservative leadership election meant that the new leader wasn’t chosen in time to respond to the Budget in Parliament on the day – leaving Rishi Sunak to lead the official opposition response. He focused on Labour’s fiscal rule changes, the increases to both borrowing and taxes, and the harm he claimed the Budget would do to economic growth. 

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In her own media response on Wednesday (and before her victory on Saturday) Badenoch made similar criticisms, summarising the Budget as “higher taxes, more borrowing and lower growth”. She said she would use her time as leader of the opposition to build “a plan that will rewire the state, bring down taxes and reward the risk-takers and the entrepreneurs who create jobs and fuel economic growth”.

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Badenoch’s economic philosophy – Conservative continuity or radical change?

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In some ways Badenoch’s response was a continuation of the Conservatives' 2024 manifesto, which promised to cut taxes and support entrepreneurship. Then-Prime Minister Rishi Sunak was particularly keen to make tax cuts a sharp dividing line with Labour, despite widespread scepticism about how they would be paid for. Badenoch has also appointed Sunak loyalist, former Work and Pensions Secretary and fifth-placed leadership candidate Mel Stride as her Shadow Chancellor. Picking Stride, seen as belonging to the One Nation wing, looks like an attempt to shore up support from the left of the parliamentary party.

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But while the Conservative manifesto focused on ‘cutting government bureaucracy’, Badenoch’s desire to ‘rewire the state’ could go further. In a leadership campaign video from August she warned of ‘a state that is too big, too bureaucratic, and toppling over’, and  while launching her campaign back in early September she argued that ‘government should do fewer things but better.’ When asked ‘what specific areas should government not be doing’, Badenoch gave the example of the bill to phase out smoking that her own government tabled in March 2024 (although this wouldn’t involve any lower spending). Her comments on the level of statutory maternity pay in the context of a wider conversation about regulation and tax also caused controversy. 

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Badenoch’s victory speech on Saturday did not mention the economy directly, focusing instead on the broad themes of change and renewal. But a mention of ‘a clear plan to change this country by changing the way that government works’ hinted once again at the importance Badenoch places on remodelling the role of the state in her political and economic philosophy. 

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Dividing lines with Labour

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The clearest articulation so far of Badenoch’s position on economic policy came in her interview with Laura Kuenssberg on Sunday.

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Badenoch argued that “as a country we are getting poorer, we’re getting older, we’re being outcompeted by many other competitor countries and we need to look at how we can reorganise our economy to be fit for the future.” She immediately drew a dividing line with Labour, saying “thinking about the economy in a different way, in my view, is going to be completely the opposite of what Rachel Reeves is doing.”

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Dividing line 1: growth and investment 

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Badenoch stated that one of her guiding economic principles is that ‘it is not the government that creates growth’, pointing instead to business as the growth engine. Given the Budget’s strong focus on public investment as a critical driver of long-term growth, this is likely to develop into a key divide between the government and the opposition. 

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Labour has committed £100bn more in public investment over the course of the next Parliament compared to the plans they inherited from the last Conservative government. Those plans implied a real-terms cut in public investment of 7% a year until 2028/29 – despite growing consensus from economic experts that “under-investment is a central cause of the UK’s poor recent economic performance and the root of many of the problems we now face as a country.”

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Labour is already keen to play up this divide: on Sunday the Chancellor threw down the gauntlet, saying “if Kemi Badenoch opposes this budget, then she has to tell the country if she opposes investment to cut waiting lists, investment to recruit teachers and investment to build critical infrastructure. Labour has made its choices, now the Tories need to make theirs.” Senior Labour frontbencher Pat McFadden was equally bullish, saying “if the Tories want to go round the country opposing every new public investment, they can be our guests.”

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Dividing line 2: tax and public services

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Unsurprisingly, another dividing line is emerging on tax and public services. Badenoch admitted to Kuenssberg that she believed the tax burden was too high under the previous Conservative government. However, she implied that lower taxes “doesn’t mean we have to cut public services”. 

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Badenoch’s claim has already been refuted by Henry Hill, Deputy Editor of Conservative Home. Responding directly to Badenoch’s comments, Hill argues that “if you want taxes to come down, spending has to come down, and that means services and entitlements need to be cut. Accepting this is the difference between paying lip-service to the principle of lower taxation and actually holding it.”

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It is also important to remember that the previous government’s manifesto – which Badenoch stood on – was criticised for promising dubiously funded tax cuts while also committing to spending plans that implied massive real-terms cuts to public services. In fact, both the Conservatives and Labour were accused of a "conspiracy of silence" about these implied cuts in the run-up to the general election. 

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Indeed, the rationale Rachel Reeves gave for raising taxes at the Budget was that they were necessary to keep public services adequately funded. 

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The path to power?

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Ultimately the Conservative economic message will need to be shaped by the political context. In recent history oppositions have tended to need an economic crisis to turf a sitting government out of office. However the ‘sandcastle’ nature of the current government’s majority may mean the next election bucks that trend. But this will only be possible if the Conservatives are clear about what their economic vision is and which voters it is designed to appeal to. 

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With the Conservative vote now largely concentrated among pensioners (who tend to be the main users of public services), how much room is there for a ‘shrink the state’ economic offer? If the plan is to appeal to younger voters then will the Conservatives back radical planning reform even when their voter base and many of their MPs oppose this? Will tax cuts be seen as credible in 2029 if public services are still struggling? And if the Conservatives are to argue for even stricter controls on immigration in a bid to win back voters from Reform, how will they account for the impact this would have on economic growth and public services? 

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Stephen Bush argues in his FT column that “ it is only when you have decided what services you are going to provide and who is going to provide them that you can start thinking about what level of tax you need to pay for it all”. Ultimately the grim nature of the UK’s fiscal position could leave the new Conservative opposition with as few options as it did the old Conservative government.

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