Reduced to an autumn leaf twirling in the wind, this Labour government’s Budgetary preparation has been a process like no other, battered by forces the government has lost control of. Under pressure from a resurgent left, in the form of Zack Polanski’s Greens, unable to push through further spending cuts against the wishes of deeply unhappy backbenchers, and above all chained to a sputtering economy, Labour has found itself locked into a chaotic surrender. The whole process is organised around meeting self-imposed fiscal rules, which were drawn up in happier economic times and were ironically intended to guarantee stability, are now a driver for higher borrowing costs and increasingly wild lurches in market sentiment.
But just as Labour has turned sharply against its own promises, so too have Reform, the current unofficial opposition. Gone is the pledge to raise the personal allowance to £20,000. Gone are the pledges to nationalise industries on principle. Gone are the promises to protect public spending. Nigel Farage’s brief left turn has been corrected as the party lurches back to its more natural home, pledging an extraordinary £50bn of spending cuts while ditching their £90bn tax cut pledge.
No longer the insurgent populists, after 12 months of skipping with merry abandon across the political battlefield: one week Farage will nationalise British Steel, the next he will weep for the victims of the two-child benefit cap. The appearance of the Greens as a serious force has closed down Reform’s options to its left flank. And as the party sniffs power (polls now promising a landslide are likely three years and a long, hard road away from an election), they know they have to do “serious” politics. That means nodding sagely along with the Treasury and its assorted outriders and muting any complaints about the institutions themselves.
Both parties’ sharp political turns have the merit of drawing a clear dividing line. Alas, it is not between Labour and Reform, but around both of them. On one side, Labour tax rises and misery; on the other, Reform spending cuts and misery. Is there no alternative economic thinking left in Britain?
Both parties blame the state of the economy. The much maligned Office for Budget Responsibility at least gets this much correct: the downgrade in their forecasts for UK productivity growth is likely to prove right. Across the world, productivity growth – the engine of economic expansion since the Industrial Revolution – is sputtering. Even China, having moved into a dominant position in the key industries of the electrified future, from EVs to critical minerals, is finding producing more for less increasingly difficult. Technological disappointments, ageing and more sickly societies, geopolitical shocks, climate change and worsening resource shortages all add up to world in which the relatively easy economic growth of the past will not be a part of our shared future.
Britain is tangled up with this, of course, as attested, for example, by two-fifths of recent food price inflation driven by climate change. But it is doing so much worse than other, similar economies. This is the product, above all else, of the most spectacular economic mismanagement over a lengthy period, but most critically in the last 15 years. The decade after the financial crisis of 2008 created an unprecedented, never-to-be-repeated period in global economic history, during which borrowing costs plunged to the lowest levels human history and inflation, yet to suffer the influence of climate shocks and geopolitical turmoil, was low and stable.
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Market prices could not have sent a clearer signal that now was the time for governments to spend, spend, spend. A battered, misshapen economy could have been rebuilt around strengthened local communities and a revitalised industrial base. Instead, we cut, cut, cut, doubling down on our failures. It was one of the most spectacular self-inflicted economic disasters in recent memory, compounded a few years later by the rushed Brexit deal. Those who argued, right at the start of the process, against mockery from George Osborne and the Treasury’s media outriders, that we would likely end up in this mess have been vindicated. And yet even a change of government has left the austerity bias locked in place. The sensible arguments against indefinite austerity, raised by those across the left the last decade and a half, now have to combine with a critique of Britain’s dominant economic institutions: the Treasury, the Bank of England and the financial sector.
These failures have real consequences. Rachel Reeves’ poorly drafted fiscal rules have rightly attracted ire. But changing those rules – a delicate task, now requiring also changing the Chancellor who clings to them – will not change our real economic circumstances. Productivity will remain low. Inequality will remain high. Nothing will work properly, and everything will remain too expensive – including the cost of government borrowing.
There are, however, two perverse advantages the decades of failure have created for the UK. They are a peculiar, developed world version of what economic historian Alexander Gerschenkron called the “advantages of backwardness”: we are now so far behind other, similar developed world economies that we have plenty of room to catch up quickly. Our wealth inequality could, paradoxically, be a hidden strength. Britain’s shockingly low rates of wealth taxation mean we have plenty of scope for increasing the taxes on the otherwise socially useless hoards of the super-rich. A relatively light-fingered Robin Hood could make a significant difference here. A 2 per cent annual charge on those with over £10m net assets could raise around £20bn, even after allowing for the inevitable attempts to duck the tax. Over time, reforming the mess that is the property tax system is an essential.
And our regional inequalities – the worst now in Europe – mean much of the country can be rapidly transformed. Every overcrowded, rattling train in the north of England is an opportunity. The self-absorbed fixation of our economic institutions, led by the Treasury, on gilding the lilies of the “Golden Triangle” – the City of London, Oxford, Cambridge – while starving the rest of our country of investment creates huge scope for catch-up growth.
It is those institutions, led by the Treasury and the Bank of England, that form our national doom loop whereby high government debts drive flawed policy that strangles incomes, demand and investment. The annual payment of £20bn from HMT to BoE, a tribute from taxpayers organised by – who else? – Osborne in 2012, is an absurdity. Zack Polanski is one of the very few frontline politicians to raise it, as is Reform’s Richard Tice. As interest rates have risen, the Bank is paying out more in interest payments on the reserves it created through quantitative easing to buy bonds than it is getting in interest payments from the government bonds it bought, creating a notional loss. Even returning a fraction of this sum would make a difference to government revenues.
So, too, would a recognition that in a world beset by shocks both geopolitical and environmental, the Bank’s current mandate is inadequate. As a minimum, as a recent LSE paper argued, coordination between fiscal and monetary policy, Bank and Treasury working together, is needed to deal with sudden, erratic price shocks and shortages. And the Treasury itself, with its jealous hoarding of power and myopic view of the world – barely seeing, it would seem, beyond the horizon of the City of London – demands urgent reform. Breaking the department’s monopoly on economic policymaking would be a start.
Exiting the doom loop means leaving the fiscal and monetary consensus that Labour and now Reform are signed up to. Labour runs up the loop one way round; Reform angrily demands it goes in the opposite direction. The result, if they are allowed to continue, will be ever-decreasing circles of national decline.
[Further reading: Rachel Reeves is trapped by history]
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