In his new book, commentator Will Hutton argues that “the government must escape the serial mistakes of the past 45 years, of trying to shrink the state and promote a self-organising market”. This drive towards a smaller state funded by lower levels of taxation, a Conservative policy, has left the UK in terrible condition.
‘Broken Britain’
The well- worn phrase ‘Broken Britain’ captures the condition of the UK. Evidence can be found by looking at the state of our NHS, where queues for treatment have been dramatically lengthened. Using 2011 as a baseline, the number of people waiting more than 18 weeks for treatment compared with today, has risen thirteenfold.
But it is not just the NHS that is struggling. Public buildings like schools are crumbling, our prisons are overcrowded, and the court system is facing huge backlogs. Also, real term wage cuts in the public sector have led to strikes.
This means local governments are on their knees. Meanwhile, the Conservative government has failed to balance the nation’s books, leaving the new government with an increasing deficit.
A promising start for Reeves
As chancellor, Reeves has done some good things in her first one hundred days. For example, the government has resolved some of the public sector strikes by agreeing to the pay awards recommended by independent pay review bodies.
Also, the once moribund market for renewables via offshore wind, has been brought back into life by an injection of government assistance.
However, in the two-year run up to July’s election, Labour’s economic plan became less and less ambitious. The £28bn per year Green Investment Plan, was first pushed back in terms of its start date, and then virtually abandoned. There was a promise in government, not to raise income tax rates, VAT nor national insurance. Gradually, Reeves and Starmer boxed themselves in to the point where their policies can be described as ‘Tory Lite’. Adding to this growing timidity, the failure to address the problem of Brexit, is acting as a drag anchor on the UK economy.
Caution and mixed messages
It may be said that there is justification for Reeves’s caution. Two years earlier, the disastrous Kwarteng budget spooked the markets and Labour felt the need to build confidence that it was not too radical. Additionally, prior to 4 July 2024, it had been thought necessary to reassure ‘soft’ Tory voters that they could vote Labour this time. ‘Stability’ was the recurring catchphrase, uttered time and time again by Labour leaders.
Was this approach following too closely in Jeremy Hunt’s footsteps?
However, in early 2024 Reeves delivered the prestigious Mais Lecture, which was well-received by leading economists and noted for its progressive in content and tone. So, what we have been getting from Reeves and Labour, is mixed messages.
Abiding by fiscal rules
Currently, there is considerable attention on fiscal rules as an important element of budgetary responsibility. As chancellor, Hunt followed two fiscal rules. The first, known as the golden rule, has wide support among economists. This rule states that the government should aim to align its current spending with its tax revenue (the time frame being a rolling five-year target).
The second fiscal rule requires that the government debt-to-GDP ratio decreases over a five-year period. Simon Wren-Lewis has described this rule as “terrible” and not being “fit for any purpose except keeping economic growth down”, an opinion shared widely in the economics profession. Wren-Lewis would urge Reeves to discard this rule as soon as possible, as it inhibits investment.
This is something to watch out for on 30 October 2024. Reeves has strong incentives to eliminate this rule, especially since her mantra in recent months has been ‘investment, investment, investment’.
Encouraging deficit spending
The golden rule presupposes that uncorrected budget deficits year after year, are a bad thing. However, according to Keynesian theory, deficit budgeting should be encouraged when both the economy needs to recover from recession, and interest rates are at or approaching zero. In this context, government deficit spending is intended to stimulate the economy and facilitate recovery (with the deficit expected to self-correct as the economy expands).
Raising tax and changing attitudes
Almost certainly, Starmer and Reeves were too precipitate to close off their options of raising more tax revenue via income tax, national insurance or VAT. However, there are other options for raising more tax. Capital remains woefully under-taxed, and the current rating system is 30 years out of date. Introducing land value taxation would give a whole new flow of revenue.
Further, as a society, the UK population is relatively lightly taxed compared with many other developed nations. Attitudes towards taxation may be changing as people grow fed up with shoddy public realm and poor public services. For example, Danes are cited as one of the most content of populations and they pay a higher percentage of their income in taxes than any other European nation.
In the interests of full disclosure, having read Keynesian economics at university in the 1960s and as a long-term member of the Liberal Democrats, I have felt very frustrated by the Labour government’s lack of boldness.
Whilst I can acknowledge the need for stability, this must be balanced by investment and growth. Therefore, Reeves’s first budget later this month is an opportunity to get the trade off right and get the UK economy growing again.
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