It was as anticipated a big Budget, a big occasion with big measures. Some might prefer to call it a horror show or a nightmare, but it was always going to be notable as the first Labour Budget for 14 years. But also, let it be acknowledged, the first by a woman Chancellor of the Exchequer. Rachel Reeves was entitled to take some pride, but it was a pity she couldn’t play her role a little bit more gracefully instead of with crude partisanship.
The Budget, according to the Chancellor of the Exchequer, was designed to produce stability and growth. It was, we can now acknowledge, a massive throw of the dice with massive increases in public spending – £70 billion pounds a year, borrowing massively up – £142 billion over five years and taxes at a new post-war level, even higher than that of the Attlee government after the war.
The risk, of course, is that interest rates will be higher than they otherwise would have been. The OBR said that the Budget could lead the Bank of England to set interest rates around 0.25 per cent higher than otherwise would have been the case. The risk is, however, the UK can get away with such big increases in borrowing given its heavy reliance on foreign lending.
As has been remarked, seldom has a government broken its election promises so quickly and so dramatically. During the election campaign, Rachel Reeves and the Prime Minister promised that growth was the top priority and they boldly promised that Britain would enjoy, under Labour, the fastest growth of any G7 country. How this was to be achieved was always a bit of a mystery, but we had nothing in the Budget speech about having the fastest rate in the G7, and the OBR forecasts showed future growth rates to have been lower compared with the forecasts the OBR made in March under the Conservative government.
Rachel Reeves clearly stated in the election that she would not alter the fiscal rules, governing how much the Government could borrow and defining what debt is, but she has certainly broken her campaign promise. The motive was clear to give herself more room to go on a borrowing spree.
The Chancellor made a spurious claim that the previous government had left her with a ‘black hole’ of over 20 billion pounds. Her response to this was to go on a borrowing spree of 142 billion pounds over five years. A normal response to overspending or an increased deficit would be to look for savings elsewhere rather than increase borrowing.
Rachel Reeves may be the first female Chancellor of the Exchequer, but the first female First Lord of the Treasury, who was also the first female prime minister, would be turning in her grave. Mrs Thatcher never let chancellors forget she was the First Lord of the Treasury. I remember all too clearly her rebuking the Treasury Bench of the Callaghan government with the words “borrow borrow borrow, that is all they know and their answer to everything”.
As it turned out, I suspect to Rachel Reeves surprise, the OBR did not back up her claim of a black hole of over 20 billion pounds, it was perhaps unwise of her to attack Jeremy Hunt in the way she did.
‘Borrow to invest’ is the new mantra. It is argued that investment by the public sector will produce returns so that the investments pay for themselves. Of course, it may well be true of some investment in infrastructure, power generation, digital connectivity or transport. It reminds one rather of Lenin’s definition of communism being ‘socialism plus electricity’.
But for these investments to be profitable, they need to be completed both to time and to cost. Alas, our experience has been that is not always the case.
The biggest increases in investment are to be in the health service. Investment in health is of course valuable in itself, but may be less likely to predict measurable economic returns. This is especially true if the investment is not accompanied by policies to increase productivity. This is true, not just of the health service, but generally of the public sector where productivity is still well below its pre-Covid levels. Without serious measures to increase public sector productivity, much investment in the public sector will be wasted.
Nevertheless, the OBR believes the investment measures in the Budget will be positive for the economy but – wait for it – only from 2032 onwards. That is to say over the very long term, the boost to capital spending will raise potential output by 1.4 per cent if it is maintained for 50 years! Is this what Labour meant by having the fastest rate in the G7, but only after 10 years?
The Chancellor claims there will be no return to so-called austerity, or what some prefer to call, living within one’s means. In fact, what the Government have done is merely to switch the so-called austerity to the private sector.
The truth is Labour do not understand economic growth. Growth does not come from the state; growth comes from innovation and individuals. Governments can prevent or wreck economic growth, but growth is not automatically in their control. Contrary to what many people think, growth is the natural state of an economy because the natural instinct of some people is always to try to make two blades of grass grow where one grew before.
This is what Mrs Thatcher once said rather clumsily, that the role of the Conservative Party was to “support the furtherance of extraordinary people”, by which she meant the entrepreneurs, small businesses and wealth creators. No government that understands economic growth would have introduced such large increases in employer’s national insurance contributions, nor would they have withdrawn inheritance tax relief on business assets and farms.
Labour believe in their heart that governments create growth. They talk of ‘partnership’ between the private sector and newly established bodies like Great British Energy or the British Wealth Fund. They say they won’t be picking winners, but they talk of backing the technologies and the sectors that will be the future. Alas, the history of UK governments backing particular sectors or technologies is not a happy one.
Sir Keir Starmer has said one Labour prime minister he particularly admired was Harold Wilson, Rachel Reeves in her Budget speech went out of her way also to praise Wilson for the white heat of the technology revolution. But the reality was that the interventionist industrial policy of the Wilson government, similar to the present Government’s industrial strategy, was a disaster. We must hope that we are not heading back to the dark days of the seventies, with all its chaos and stagnation.
Norman Lamont was Chancellor from 1990 to 1993