Labour’s economic tightrope

Having raised taxes and spending, Labour must now deliver improved services.

Photo by Hollie Adams / AFP via Getty Images

In the last Labour Budget 14 years ago, the then-chancellor Alistair Darling spoke of “choices that will shape our economy and society for decades to come”. The late – and much missed – Mr Darling was a politician of integrity. He was also prescient.

Labour’s election defeat was followed by a long period of Conservative austerity that had baleful consequences. The UK’s crumbling public realm and stagnant productivity can be traced back to the decisions made by George Osborne from 2010-16. Unprotected areas such as local government, transport and justice endured severe cuts and public investment withered. Brexit, Covid-19, the energy price spike and Liz Truss’s farcical premiership further diminished the UK’s economic standing. Of the G7 countries, only Germany has performed worse over the last five years and average real wages are little higher than in 2008.

This is the legacy that Rachel Reeves – the first female Chancellor in the role’s 800-year history – is grappling with. Her Budget, delivered today, will shape the destination of the Labour government and the country.

Mindful that this is her moment of maximum political strength, Ms Reeves used the opportunity to significantly increase taxes in order to fund public services. The Conservatives’ pre-election decision to cut National Insurance (NI) by 4p (at a cost of £20bn) left her with little choice. Rather than simply reversing this measure, Ms Reeves increased employers’ NI and technically kept her pledge not to raise taxes on “working people”, now a much-derided phrase. Yet, as economists know, higher taxes on companies are ultimately paid by workers. Labour is vulnerable to the charge that it failed to level with voters before the election.

But Ms Reeves’ economic judgement is ultimately the correct one. As Paul Johnson, the director of the Institute for Fiscal Studies, tells George Eaton, the UK is still a relatively low-tax country by western-European standards (even as levels rise to a postwar high). “There’s no point getting richer if we’re sick or dead, is there?” he said of the need for higher spending on the NHS.

Polls suggest voters broadly support Labour’s approach. Forty-eight per cent, the National Centre for Social Research has found, favour higher taxes and spending on public services, while just 10 per cent support lower levels (42 per cent want levels to remain the same). Libertarianism, as ever, remains a minority pursuit. But having raised taxes and spending, Labour must now deliver improved services. Reform of an antiquated and often pre-digital state is essential – as the Health Secretary, Wes Streeting, has recognised. Should voters conclude they are paying more for less, they will not hesitate to punish the government.

Ms Reeves’ second defining judgement is to borrow more for infrastructure investment. For both economic and social reasons, she is right to do so. The UK has had the lowest investment in the G7 for 24 of the last 30 years – something that has hindered both growth and productivity. Britain’s crumbling schools, run-down high streets, crowded railways and potholed roads have become a source of national embarrassment.

Until Ms Reeves’ Budget, investment was forecast to fall from 2.4 per cent of GDP in 2024-25 to just 1.7 per cent in 2029-30. Reversing this trend is essential to the “securonomics” agenda that the Chancellor first explored in this magazine in June 2023. In a new era of geopolitical disorder, fierce competition over essential resources and climate crisis, the state must be an active economic agent.

Ms Reeves’ aim is to raise growth, improve public services and maintain fiscal responsibility. In vowing not to borrow for day-to-day spending, she has sought to reassure the markets by adopting a tougher rule than the last Conservative government. There have been early blunders: the decision to means-test winter fuel payments – removing them from all but the poorest pensioners – was wrong, and continues to anger Labour MPs.

The government’s early unpopularity has increased the pressure on Ms Reeves to deliver. Labour hopes that gradual improvement will provide it with a path to re-election. But should it fail, public disillusionment could reach new heights. Populists of left and right will argue that a more radical rupture with the past is necessary. Labour MPs will demand the Chancellor further loosens her fiscal rules. For Ms Reeves, even tougher tests may yet lie ahead.