Despite relatively stable inflation and the prospect of further interest cuts – the Bank of England held its base borrowing cost at 5pc last week, having lowered it from 5.25pc in August – the economic outlook is gloomy. Following the partial withdrawal of winter fuel payments, and clear signs taxes are going up, companies and households are nervously awaiting Labour’s Budget.
Government borrowing increased to £13.7bn last month, up £3.3bn on the previous month and the third-highest August gap ever between state spending and taxation. Total national debt has soared 4.3 percentage points over the last year, we learned last week, topping 100pc of GDP – so the overall debt pile now equals the annual value of everything produced in the economy.
With the public finances so weak, Labour’s first budget is set to be focussed on revenue-raising measures, not crowd-pleasing give-aways. What a contrast to Labour under Tony Blair, who came into office with the national debt at just 36pc of GDP, providing ample scope for the government to borrow and spend more.
Most significantly of all, the UK economy grew no less than 4.9pc in 1997 – and at an average rate of 3.4pc over the rest of Blair’s first term, leading to another convincing election win in 2001.
Steady growth leads to higher living standards, spreading a feel-good factor. It means higher tax revenues even at constant tax rates, facilitating more government largesse, while the national debt burden still falls as a share of a bigger GDP. That in turn keeps the bond markets happy, so the state can borrow more cheaply.
Yet UK GDP flatlined in both June and July, with the economy set to grow by barely 1pc during 2024 as a whole and the outlook sluggish for several years to come. Labour desperately needs the economy to kick into gear, not only to avoid a fiscal crisis but to reverse Starmer’s plunging approval ratings and ensure this isn’t a one-term Government.
With the best will in the world, though, I fail to see how any of Labour’s plans, at least those announced so far, will spark growth. Labour has emphasised the need for planning reform to boost house building and other much-needed infrastructure projects – and I couldn’t agree more.
But the Party’s plans to railroad applications through, against the wishes of local communities, will result in endless legal challenges. So too will proposals to obtain agricultural land for building using extensive compulsory purchase orders.
Labour’s “job-boosting green energy revolution” also won’t boost growth any time soon – on the contrary. Moves to close down much of the UK’s oil and gas industry have openly alarmed trade unions – mindful the sector provides 250,000 well-paid jobs.
Proposals to restore the ban on sales of new petrol and diesel cars by 2030 meanwhile risk handing much of the UK’s car market to Chinese manufacturers, which are way ahead when it comes to electric vehicles. That threatens the million or so jobs across our automotive production industry.
The best way to foster growth is to lower the tax burden from today’s 70-year high while introducing more commercially-savvy regulation across a range of sectors. Labour is about to do the opposite.
In his new book, Return to Growth, the businessman Jon Moynihan presents OECD data over the last 50 years to demonstrate that “small state” economies – those where taxation and government spending are relatively low as a share of GDP – have tended to grow much faster than their competitors.