The highly consequential budget on October 30th marks the latest piece in the still-to-be-completed giant jigsaw puzzle that will finally tell us what this Labour government is about. The Labour election campaign seemed deliberately designed to say as little as possible about how the party would govern if elected. At a time when ‘get the Tories out’ seemed to be the overwhelming public sentiment, this worked. Only now can we start to catch a glimpse of the government’s direction.
What does it look like so far?
The Budget
The Chancellor had a difficult job to do. Move towards fixing the public finances, find money for investment, avoid burdening ‘working people’ (a group seemingly as difficult to define as are women), and, maybe, even being able to claim that it stuck loosely to manifesto commitments, such as they were.
While the chancellor has done a creditable job, it was clearly going to be impossible to square all those circles neatly.
What we have seen is a move towards a massive expansion of the state. Changing the fiscal rules to allow substantial new borrowing and a massive increase in taxation mean that state expenditures are now forecast to account for some 45% of GDP. Some would argue that this takes us back to Old Labour ‘tax and spend’ ideology – exactly the impression that the party tried to avoid during the election campaign. Others argue that the determination to balance current expenditure with revenue (let’s see if that holds) mean that this is more of a ‘borrow to invest’ budget.
Statism is Back
One thing, however, seems clear. This is a government that believes in a big role for the centralised state. Statism is back as a matter of policy rather than as a matter of regret imposed by external events such as the financial crash and the Covid pandemic. In this regard, Old Labour is back.
In education, private education is not seen as something to be encouraged as a way of improving educational standards and relieving the burden on thinly stretched public education resources. Instead, slapping VAT on private school fees will further stretch public education resources and deprive many middle-class families of opportunity. Traditional levelling down driven by the politics of envy. Old Labour.
More money is to be poured into that other big black hole – the NHS. A black hole that is much bigger than the reputedly unspotted £22bn one in the public finances. There is talk of reform but, as yet, no clear direction other than some warm words about digitisation. If previous government digital projects are anything to go by, let’s not hold our breath.
As expected, this government, like those before it, doesn’t have the courage to state the obvious – that the current financing system for the NHS is unsustainable in the long run. It would be an ideological no-no to encourage those who can afford it to move towards private health insurance thereby reducing pressure on the NHS.
No additional monies announced for local authorities. The power will continue to be hoarded by the centralised state.
Investment
Money for investment to drive growth and shared prosperity.
This is the sound bite the Chancellor would doubtless like to be the summary of her budget. In that regard, she has done well in finding the money and has been praised by technocrats like Mario Draghi who considers the budget an example that other European countries might want to follow.
Less impressed have been the bond markets that have pushed up the cost of government borrowing. And the OBR that has failed to confirm that the budget will lead to sustained economic growth. It’s all very well to find the money, but past history on successive UK governments’ ability to deliver major infrastructure projects on time and on budget do not inspire confidence. It can be no more than an article of faith that this government will magically be able to do better.
And herein lies the central issue. However statist a government, healthy, sustained economic growth can only be created by releasing the people’s animal spirits and by crowding in private investment. Yet everything the government has done in its first three months in office seems designed to do the opposite. From increases in the minimum wage, enhancing labour rights, increased national insurance bills for business (and their negative downstream effects on real wages that will reduce demand), an increase in capital gains tax, higher inheritance tax bills, and all the rest. All will act to dampen private investment. The government’s consistent and tiresome miserabilist stance will do nothing to release any animal spirits.
The Prime Minister has stated that “This government is determined to make the UK one of the best places to invest and do business, not just in Europe but the world. Only by working in partnership with the private sector can we deliver change, fix the NHS, rebuild Britain and make good on our promise of a decade of national renewal.” Yet business leaders will evaluate the government by its actions not its words. And, to date, the actions are at odds with the words.
This may yet change. If the government could deliver on at least some of its promises for major reform – both in public services and in the byzantine planning regulations; if it structures the way it uses the newly found investment monies cleverly – then maybe the climate for private investment will improve.
Most of all, the government should, maybe, bear in mind the words of Ludwig Erhardt, the German Chancellor who presided over what became known as the German post-war ‘economic miracle.’ In his 1958 book, Prosperity through Competition, he wrote: “What has taken place in Germany . . . is anything but a miracle. It is the result of the honest efforts of a whole people who, in keeping with the principles of liberty, were given the opportunity of using personal initiative and human energy.”
Success did not come from statism.
