Reeves missed her chance to bet on growth
The budget was much like those of the past 16 years: a funnel for pouring money into an unsustainable state sector
Having the government dig holes in the ground, Keynes once claimed, is better than having it do nothing. And from Rachel Reeves’s first budget, a moment that will define an era of Labour governance, we can conclude she too is a believer in the utility of digging holes. The chancellor wants us to believe she “discovered” a particular “black hole” in the public finances and that her budget is all about filling it in.
To be fair, there are black holes aplenty in the public finances, but no one can credibly argue they were hidden from view. Since 2008, British indebtedness has been stuck in a one-way ratchet, from 35 per cent of GDP before that crisis to 90 per cent today. Every few years the Treasury has a crack at trying to close the gap between public revenues and expenditure, only for another crisis to come along and blow its efforts out of the water. But the underlying ratchet is not actually operated by these crises. It is a function of two factors: slow growth and a failing state, at the centre of which lies the super-massive black hole of the NHS.
Reeves makes much of her supposed determination to address Britain’s economic stagnation. But growth was not at the heart of this budget. In fact, she chose largely to stick with the existing model, in which the productive economy is increasingly cannibalised to feed the beast of our ageing population and the unreformed services it relies upon.
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This is evident in the choice to raise the majority of additional revenues, some £25 billion a year, from higher employer national insurance contributions. This is indisputably a tax on work, whatever sophistry the government may deploy about sparing the “payslips” of “working people”. It opens up an ever wider black hole, so to speak, between what it costs to hire and what the employee takes home, extracting yet more from the working-age population to fund unsustainable pensions and inefficiently delivered medical care.
Likewise with the rise in capital gains tax on shares, but not on property, the second-largest tax rise in the budget. This will see the Exchequer yet again whack productive, risk-taking investments rather than increasing the tax burden on passive property ownership. Where the budget does tax property more, it does so in the worst way by raising stamp duty on second homes, a choice that is far inferior to the alternative of sorting out council tax.
And while the promise to unfreeze income tax thresholds is welcome, it won’t be implemented for another four years — until the next election year, in other words. At least the chancellor held off raising taxes on fuel, though she seems determined, with her oil and gas tax rises, to ensure we should buy more of it from abroad.
It is, in the end, always the NHS that is used to justify the pain. Even during the coalition’s austerity years, total spending on the health service rose 15 per cent, while local council and welfare budgets were almost halved and transport was slashed by more than 60 per cent.
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It was the NHS that Brexit campaigners stuck on their big bus and the NHS we were told we had to save from Covid, when its productivity went through the floor to a level from which it still hasn’t recovered. It is the NHS that will suck in all of that national insurance tax rise and more, yet again without a convincing plan to get back even to pre-Covid levels of productivity, let alone to levels that would make it sustainable in the long run.
Despite its co-operation in the digging of Reeves’s politically convenient black hole, the Office for Budget Responsibility provided little cover for the chancellor’s claim that her budget will enhance growth. The economy will get a boost from the budget, the quango declared, but only for one year, after which we will sink back down to an ever lower baseline.
In short, the OBR concludes, the government is borrowing more up front to bring forward economic activity that might have occurred in later years, without changing anything substantive about the country’s real ability to generate wealth.
There was, however, one counterpoint to this rather gloomy picture and it is an important one. That was the decision to raise capital spending. Reeves began her tenure, in July, by slashing infrastructure projects, a bizarre act for a chancellor who claimed to want greater prosperity. But in the budget, rather than allowing public investment to shrink, as the Tories had planned, she has now found the money to keep it at a higher level for the length of this parliament. This includes a big expansion of capital spending in the health service, one of the few tangible ways in which the government has shown an interest in improving its performance. In her decisions on capital spending, then, Reeves is at least partly following through on her promise to prioritise growth.
But this brings us back to digging holes. Productive investment is not just about what you spend — how many holes the government can make us dig — but whether these resources are spent wisely. The OBR’s current model assumes that higher government investment will largely displace private sector investment: if both are competing for a fixed supply of workers and resources, after all, the overall production of houses or infrastructure or services does not necessarily rise.
But why should the supply be fixed? It is only fixed because incentives to reallocate resources, assess opportunities, train new staff and deploy capital are thwarted, in both public and private sectors, by our dire planning system, bad management, poorly designed environmental regulation, high energy costs, expensive housing, a terrible migration policy and so on.
If the government can address some of these problems, in part by spending wisely on capital investments like roads and power plants, then, as the OBR predicts, Britain’s potential growth rate can rise over time. That timescale, however, runs beyond the electoral cycle, which is why governments facing tight finances always end up cutting their long-term capital budgets. Reeves has refrained from doing so and, for that decision, should be applauded.
For 16 years British fiscal policy has been a story of servicing pensioners at the cost of everyone else. George Osborne chose to visit pain upon the country via spending cuts. Reeves is doing so with large tax rises on the working population. But even with £40 billion of new tax rises and a slug of extra borrowing, the numbers are barely adding up any more.
This ought to have been a budget aimed single-mindedly at changing the game by betting everything on growth. Instead, growth played a distant second fiddle to spending. In the long run, it won’t be enough.
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