If Labour wins the next general election, it will inherit not just an economy in the doldrums but also a fiscal straitjacket designed to perpetuate the old orthodoxy of “sound money”. Sluggish growth, flatlining productivity, low business and public investment, as well as “the largest reduction in real living standards” since the 1950s, as the Office for Budget Responsibility reported alongside last week’s Autumn Statement.
The Tories’ pre-election tax cuts, which Labour won’t reverse, will be paid for by post-election spending cuts. While health and education appear to be ring-fenced, other departmental budgets face unrealistic, real per-person reductions of about 15 per cent – worse than austerity after 2010. And to make the sums add up, central government will reduce capital investment by some £20bn over the next five years. The country seems trapped in a vicious circle of high debt, high tax, low growth and crumbling public services.
Having witnessed Liz Truss and Kwasi Kwarteng engineer a demand-side boom that so nearly ended in a national bust, both the Conservatives and Labour are pinning their hopes of economic recovery on a supply-side strategy. The Tories hark back to Margaret Thatcher’s model of rolling back the frontiers of the state and expanding the reach of the market, allied with deregulation and lower taxes. Except that the growing demands on the state to provide health and social care, housing and energy security could never be met by the free market. Liberal-libertarian dreams of a small-state, low-tax economy clash with national and geopolitical realities of insecurity and disorder that require state action.
Despite cuts to National Insurance contributions and business tax, the overall tax burden is going up not down. That’s because the government has frozen the tax thresholds, which means an extra four million people will pay income tax at 20 per cent and three million more will pay the 40p tax rate. What is commonly known as “fiscal drag” amounts to pre-distribution from low- to middle-income families to everyone else. So much for trickle-down economics.
And with the uncapping of bankers’ bonuses, it’s a case of “heads the City of London wins, tails the rest of the country loses”. After 13 years in office, the Conservatives still cling to the same economic liberalism underpinning the broken model of market-state capitalism that centralises power in Westminster and concentrates wealth among people in top 20 per cent. The UK resembles a rentier economy dominated by a financial and tech oligarchy that extracts excess profits while the country does not own or produce much.
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Labour’s supply-side economics is more state-centric than the Conservatives’, combining greater supply-chain resilience with a publicly owned energy company and a sovereign wealth fund to unlock billions more of private investment. Key to this is a strategic, smart state promoting the UK’s productive capacity based on an interventionist industrial policy and a new “British Infrastructure Council”. Yet having ruled out new taxes and new borrowing, one could call the shadow chancellor Rachel Reeves’ “securonomics” approach “Bidenomics without the subsidies”.
The British economy is much smaller, more open and less able to absorb budget deficits and public debt than the US, which has the “exorbitant privilege” of issuing the world’s most important reserve currency. But the UK not only consumes too much and invests too little. It’s also the case that the rules governing fiscal policy are too rigid and deflationary to kickstart a virtuous investment cycle on which greater growth depends. When, in a downturn, debt goes up as a share of the economy or day-to-day spending exceeds tax receipts, the first thing that gets cut is public investment. And without greater public investment in digital and physical infrastructure, research and development, skills, affordable housing and renewable energy, big business will continue to hoard cash and reward its executives and shareholders rather than invest in production.
Thus, Labour’s promise to provide a “decade of national renewal” is hamstrung by its adherence to a set of fiscal rules that are arbitrary, and that virtually every chancellor for the past 25 years has broken. Shifting the goalposts just before or after an election is politically convenient but not exactly a mark of competence and credibility, or a recipe for sustained economic revival.
The alternative to the status quo and the Truss-kamiKwasi experiment is a focus on fiscal objectives such as sustained and sustainable growth, higher living standards and greater well-being. That should be combined with fiscal instruments such as falling budget deficits and public debt as a share of the economy over five to eight years, and a target of public investment at least 3 per cent of GDP per year. Together with the recent business tax cut, this will provide a big boost to private investment.
Since Westminster doesn’t always know best, we could set up a national development bank that designs and targets public investment to the sectors and places that need it most. It would bring together existing initiatives, including the UK Infrastructure Bank, the National Infrastructure Commission and the British Business Bank. All of them are important but too small in scale and too restricted in their remit to transform the broken model.
There are constructive alternatives, and the country is crying out for a convincing vision of national renewal, combined with a long-term, credible programme of investment. Only bold reform may now be remotely realistic.
[See also: Jeremy Hunt’s plan for chaos]
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