Given the tone and content of much of the coverage in the British press, you would be forgiven for thinking that the Labour government’s first budget in 14 years was a bust, and that is putting it nicely. Yet this is more than unfair. It obfuscates four important aspects of the budget, sidelines three lessons for the future and undermines today’s good news from the Bank of England.
In the run-up to the budget on 30 October, I was among those warning that the announcements from the chancellor, Rachel Reeves, would “please almost no one” and that they should not be assessed “according to their ability to meet all the demands that have been placed on them”.
This view was based on the reality of a British economy characterised by many years of low growth and sagging productivity, deepening structural problems, high debt and heavy deficits, crumbling public services and inadequate public investment. It is an awful combination that produces that unreconcilable mix of massive demands on budgetary resources and neither the headroom nor the operational flexibility to come anywhere near meeting them.
In such a situation, it should come as no surprise that, depending on which news media you read and listen to, there are loud complaints that the budget will destroy jobs, lower wages, increase mortgage payments, steal hard-earned inheritances, boost inflation and destabilise financial markets.
The protests do not stop there. Some have claimed that the budget is ripping apart the fabric of the economy and killing business and farming. Others view it as harming elderly people to benefit the young, who should be encouraged to work harder rather than being pampered.
Now don’t get me wrong. The budget is far from perfect. Indeed, I would have liked to see a few things done differently. Having said that, the long list of complaints voiced over the past two weeks is excessive, and not only because it ignores the reality of Labour’s complicated inheritance.
Narratives matter in economics and finance. Regardless of how partial and unfair they are, they can acquire a damaging life of their own. The risk here is not only that of pulling the rug from under the overdue economic and financial realignments that the International Monetary Fund has welcomed. It could also interrupt the positive spillovers from the Bank of England’s newfound confidence, bolstered by lower inflation, to embark on a more aggressive path of interest-rate cuts.
With this in mind, here are four important budgetary messages that have been drowned out by all the loud complaining, with some lessons that should not be lost.
The budget makes room for higher investment, the desperate lack of which has undermined growth and future prosperity. For decades, the UK has lagged behind all the other G7 economies, not just in maintaining its existing engines of productivity and growth, but also in enabling future ones. A further fall was on the cards, had it not been for the chancellor’s decision to devote more than a third of the extra spending to public investment and accompany this with institutional mechanisms that support efficiency, cost-effectiveness and impact. New “guard rails” involve the Office for Budget Responsibility, the National Audit Office, the National Wealth Fund and the National Infrastructure and Service Transformation Authority. A significant part of the UK’s future economic and social success depends on maintaining adequate public investment that also crowds in private investment.
It is also positive that, in order to make room for higher investment, the chancellor took a first step in changing fiscal rules that many economists believe require modernisation. She cautiously adjusted the definition of government debt to account for its financial assets. Some would have liked her to go further on this and on other aspects of the fiscal framework. Instead, she reiterated the importance of the “golden rule” that constrains spending in line with revenues.
The treatment of the NHS is the third aspect that is underappreciated. By seeking to generate £40bn in additional government revenues, the budget allows for a significant increase in operational funding for the NHS (an additional cash injection of £22.6bn over two years for the NHS in England), as well as a higher allocation for investment spending (another £3.1bn).
If accompanied by reforms, something that the prime minister has committed to, this promises an improvement in many aspects of the health service, including preventive care. The impact on the long-term wellbeing of the economy would come from higher workforce participation and greater productivity, both enhanced by the additional support for education.
The chancellor needed big revenue-generation tools to fund this. Yet in the run-up to the 4 July general election, the Labour party ruled out two of them: higher income tax and VAT. Seeking not to break election promises, the chancellor was forced to rely heavily on employer national insurance contributions in order to limit the increase in the public sector borrowing requirement.
This takes us to the final issue being obfuscated: the reaction of the financial markets. Traders and investors pushed up the government’s borrowing costs, leading some to warn that Keir Starmer faced a “Liz Truss moment” – that is, a disorderly increase in government bond yields that would severely damage the pension system, the housing market, business investment and more. Yet the rise in UK yields, a portion of which has been part of a global phenomenon led by the US, was a small fraction of what happened in response to the Truss mini-budget, and lacked the disorderly market functioning of two years ago.
It is important to put these four issues front and centre to counter false narratives that can create damaging dynamics. It is also important because they point to three early lessons.
First, political parties should be cautious in limiting their potential room for manoeuvre in the run-up to elections, especially if they are on the verge of inheriting a particularly tricky economic and financial situation. Second, proactive communication is critical lest a false narrative undermine the country’s wellbeing. Third, never lose sight of the importance of explaining over and over again how a difficult journey can lead to a better destination. It is “prudence with a purpose”, as Gordon Brown framed his budget some 25 years ago.
This Labour government’s first budget never stood a chance of pleasing many, if any. Yet to trash it without acknowledging its advantages and lessons only retards the collective buy-in that Britain desperately needs to break out of its low-growth and high-inequality rut.
It would be doubly unfortunate to do so at a time when the Bank of England feels more confident in providing interest-rate relief for an economy that stands to benefit from lower borrowing costs and more affordable mortgages. Let’s not throw the British economy under the bus just because the budget failed to meet an unrealistic set of expectations.
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Mohamed A El-Erian is the president of Queens’ College, Cambridge, and a part-time professor at the Wharton School of the University of Pennsylvania