We knew before yesterday’s Budget that what Labour said on tax in the manifesto, on which it was elected in July, could be filed under fiction. But post-Budget we now know something even more significant: after barely four months in power Labour’s economic strategy is already holed below the water line.
The party insisted during the election campaign that its plans were fully costed and that it had no need of major rises in taxation. That, of course, was a bare-faced lie. In the first Labour Budget for almost 15 years, Chancellor Rachel Reeves increased taxes by £40billion – in money terms the biggest tax rise ever.
Labour repeatedly insisted there would be no tax rises for ‘working people’, even if it could never quite explain what it meant by working people. That also turned out to be an untruth. Yesterday, the Government increased employers’ National Insurance contributions by £25billion, which the Office for Budget Responsibility (OBR), the official watchdog, says will be largely borne by workers in lower wages and fewer jobs in the years to come. So, effectively, a tax on working people.
Reeves insisted before the election that Labour would be fiscally prudent, that there would be no return to its bad old days of tax and spend. Gullible folks in business and the City even believed her. Now they know better.
Between now and the end of the decade Reeves will borrow a staggering £140billion more than the OBR projected at the time of the last Tory Budget in March — including an extra £50billion in the current financial year.
It will use this extra borrowing along with its increased taxes to go on a massive public spending splurge, with £22billion more for the NHS alone in the next two years.
Labour said there could be no extra funds without NHS reform. But the money is being stuffed down its voracious gullet even though we still have little idea what reforms are in prospect.
In a manner, Reeves was right. It’s not a return to tax and spend. It’s a return to that Old Labour habit: borrow, tax and spend. It’s also where her party’s whole economic strategy starts to unwind.
The short-term cost is already apparent. As the scale of the borrowing binge sunk in, the debt markets where the Government goes to raise money started to take stock. They are still minded, for now, to lend Labour the money. But the more it borrows, the greater the cost.
Yields on government bonds started to creep up the moment Reeves sat down. And that’s bad news. ‘Higher yields’ is City speak for higher interest rates. Last month, the interest on 10-year bonds was 3.75 per cent. Yesterday it was edging closer to 4.4 per cent. And it’s not only the Treasury that will have to shell out more, you will pay directly for Labour’s profligacy in the shape of higher interest and mortgage rates. The longer-term consequences are even more serious. Prime Minister Sir Keir Starmer assured us countless times that economic growth would be the central mission of his government. The extra revenue generated by growth would pay for better public services and more public investment, not higher taxes or more borrowing.
He even promised sustained growth to make us the fastest-growing economy in the G7 club of the world’s leading market economies (a stupid goal since he was benchmarking against economies over which he has no control). This is where he has come unstuck.
For, despite all that extra borrowing, despite pumping up public spending by almost £80billion between now and the end of the decade, despite all manner of extra public investment through a National Wealth Fund and GB Energy, newly-created vehicles of which Labour is so proud, there is simply no growth dividend.
Don’t take my word for it. Just look at the OBR, which has rained on the leadership’s parade with its new growth forecasts. Taking all the new taxes, extra borrowing and increased spending into account, it projects growth to be a little faster this year and next, then it falls back again to a sluggish 1.5 per cent or 1.6 per cent as the decade draws to an end.
The OBR concludes that, by 2029, UK GDP will be largely unchanged from its previous projections last March. In fact, it forecasts it will be a wee bit smaller.
So much for Starmer’s sustained growth. So much for becoming the fastest growing economy in the G7. As Reeves droned through her 90-minute marathon speech, it was announced that the US economy was still growing at a healthy annual rate of almost 3 per cent – a rate the UK will not come anywhere near in this decade.
There should be no mystery about this. The fastest-growing economies have vibrant, dynamic private sectors brimming with innovation, new technology and entrepreneurs. Yes, government has a role in providing good education, decent public infrastructure, sensible regulations and a fair legal system. But the growth is generated by the animal spirits of private enterprise.
Consider how different is Labour’s approach. In her first Budget, Reeves took £40billion from business and people to give to various public sector agencies to spend in ways of which she approves. In doing so she makes it impossible for Britain to join the fast lane of dynamic nations, such as America, Singapore or South Korea, and condemns us to the sluggish slow lane now congested by the sclerotic economies of the European Union.
In fairness, the process started under the last government.
Using figures from the International Monetary Fund, which allow for international comparisons, the Conservatives left behind a tax burden, at 39 per cent of GDP, which was not only the highest for 70 years but only 6.5 percentage points behind the EU average, a record low gap.
The Tory legacy on public spending, at 43.4 per cent of GDP was well above pre-pandemic levels (41.2 per cent) and only 5.4 percentage points below the EU average, another record low gap.
The strategic import of Reeves’ first Budget is that she has propelled Britain, in terms of tax burden and public spending, even closer to European levels, a strange course to chart, you might think. After all, European economies, with few exceptions (such as Spain), are these days synonymous with stagnation and decline.
But ideology has trumped reality – and common sense. Starmer may have quickly junked the more outlandish aspects of Corbynism which he has espoused to become leader but the Starmer-Reeves project is still dominated by the world view that all good things come from the state, that the primary purpose of the private sector is to provide it with funds to spend and that the more the state does, the better.
Reeves delivered a seriously socialist Budget. It takes vast sums from business and individuals (especially the most successful) to extend the power and reach of the state. It borrows billions more on top of that for the same purpose.
Labour thinks that billions of state investment in what it calls ‘cutting edge’ (i.e. untried) technologies, like carbon capture and so-called ‘green’ hydrogen, will generate the growth of the future. Some of it might. Most is likely to be just money down the drain.
The state can help facilitate economic growth. But it cannot generate it. That is the fatal flaw in the whole Starmer-Reeves project. The vainglorious dirigiste aspirations in yesterday’s Budget are doomed to failure.
Billions will be squandered before reality dawns. By then it will probably be too late to turn things around – and Britain will have endured another lost decade.
