In the 19th century, the British state spent its money on two things: defence, and interest on the national debt. To borrow from Voltaire, the country was a navy with a nation attached. Today, Britain increasingly resembles a health service with a vestigial economy clinging on.
After yesterday’s Budget, Labour’s much vaunted emphasis on growth is dead in the water. The promise to run a “pro-growth” Treasury and mission to achieve the “highest sustained growth in the G7” have been left by the wayside in favour of shovelling more taxpayer cash into the NHS furnace.
Not only do the Office for Budget Responsibility forecasts accompanying the Budget suggest that Labour is set to fall well short of its goal, by 2030 the effects of higher taxes and higher borrowing are also expected to lead to a smaller economy than would otherwise be the case.
That Rachel Reeves, the Chancellor, decided to implement these policies regardless indicates that growth is at best a secondary concern. Ms Reeves might argue that longer term forecasts suggest that public sector investments may eventually generate meaningful growth, but it would be optimistic, given recent experience, to take this for granted. In the short run, we are left with very definite costs, and a tight squeeze on the public sector in order to fuel lavish spending on a staggeringly unproductive public sector.
The assessment of the markets – with bond yields rising and the pound slumping – certainly appears to be negative. Ms Reeves’s attempts to calm jitters by insisting that the Government’s “number one commitment” is “economic and fiscal stability” may not prove particularly persuasive relative to the actual behaviour of the Government. As things stand, the only things that seemed primed for growth are prices, taxes, and interest payments on the national debt.
Alongside the verdict of the markets, Labour should also be concerned about the future judgment of the electorate. The party has already suffered a stunning slide in public support since the election, with more and more voters appearing to suspect they’ve been sold a pup.
There was little in the Budget to disabuse them of this notion. The Institute for Fiscal Studies (IFS) now believes that this will be the second worst parliament on record for living standards, with real disposable household incomes growing just 0.5 per cent per year. This is a substantial downgrade on the March forecast, and 85 per cent of the fall is directly attributable to the choices taken by Ms Reeves and Sir Keir on Wednesday.
Disingenuous arguments about whether or not raising employers National Insurance Contributions (NI) is a tax on “working people” are unlikely to carry much weight with a public that can feel the effect of Labour’s taxes in their lightened pockets, particularly given it is unlikely to be the last raid of this Parliament.
It is worth noting that the numbers put forward in the Budget have already taken a battering. The IFS has pointed out that the NI increase will yield far less than the £25 billion claimed by the Chancellor, and that current plans to tighten future spending are unlikely to be adhered to. The surge in borrowing costs triggered by the Budget’s debt binge has further eroded her room for fiscal manoeuvre.
Those hoping for a focus on growth closer to the election would be well-advised to hedge their bets; faced with a choice between short-term fixes and the hard work of meaningful reform of public services, it already appears clear which path Labour will choose. Having taken a hammer to the private sector once, they will likely do so again, resulting in further demands on the taxpayer’s wallet – and an opportunity for the Conservatives.
After years of a stifling consensus, there is now potential to bring back economics as the major dividing line between the parties. Rather than nodding along to public sector demands for more spending, more borrowing, and more taxation, there is space for the Conservatives to rediscover their Thatcherite roots.
If the party can offer a persuasive vision for reforming public services to lower tax, shrink the state, and put the country back on the path to economic growth, it is likely to prove highly appealing to an electorate labouring under the heaviest tax burden on record. The next leader should be willing to make this offer.