Stop me if you’ve heard this one before: the Labour Party wins office and immediately sets about preparing the ground for higher taxes. If it sounds familiar, it should: no Labour chancellor since 1970 has left office with the country facing a lower tax burden than when they started.
Rachel Reeves appears to be in no mood to buck this trend. Over the course of the election campaign, the new chancellor and her party slowly shifted from denying any “additional” tax rises would be needed beyond those in its manifesto, to a woolier pledge about avoiding taxes on “working people”. By the time polling day came around, party figures were making dark noises about what might happen if Reeves were to “open the books and discover the situation is even worse” than suspected.
Now safely ensconced in the Treasury, Reeves is picking up where the campaign left off. In her first speech as chancellor, earlier this week she claimed to have inherited the “worst set of circumstances since the Second World War”, and warned that she had ordered “Treasury officials to provide an assessment of the state of our spending inheritance so that I can understand the scale of the challenge”.
This is obviously nonsense. As Institute for Fiscal Studies director Paul Johnson pointed out last month, the Government’s books are “wide open, fully transparent”. Everyone – you, me, and most certainly the bond markets – can see exactly what’s going on at any given point in time. It would be a very brave lender who chose to fund the UK’s debt if this weren’t the case.
Equally nonsensical is the idea that this is the worst economic inheritance in 79 years and counting of British economic history. You don’t have to look back to the Second World War to find a more challenging set of circumstances for an incoming government. You don’t even have to look back to the last millennium.
The deficit today stands at around 4.5pc of GDP. In 2010, the coalition government took over a country running a deficit more than twice that ratio at a whopping 10.3pc. It took years of work to bring it back down under control.
In contrast, the deficit inherited by Labour is already due to fall substantially. By 2028-29, the Office for Budget Responsibility estimates that it will be around 1.2pc of GDP. Some of this fall is based on spending assumptions that are, charitably, challenging to meet.
But a good 1.5 percentage points is due to come from increases in revenue and falls in interest rates that are, in the absence of any further bad news, pretty much baked in. Many of the hard decisions in terms of tax rises and frozen thresholds have already been taken.
It’s true that the debt burden is larger than it was in 2010, standing at a little under 100pc of GDP. But it’s worth remembering that a good deal of this rise was the result of pandemic measures enthusiastically supported by the Labour Party, which called for extensions to the furlough scheme and bigger pay rises for NHS “heroes”.
It is also true that the Labour Party had itself overseen a rise in debt to 65pc of GDP in 2010 from a starting point of 38pc, without the excuse of having put the economy into deep freeze for a year.
If Reeves wants someone to blame for Britain’s precarious fiscal state, Gordon Brown would be a better target than Rishi Sunak.
As for interest rates, yes Labour will be paying out a higher rate on government debt than the Conservatives were in 2010. But what matters for the sustainability of government debt is the difference between this interest rate and the growth rate of the economy. And just as inflation has led to higher interest rates, it has also pumped up nominal GDP growth. Once this is taken into account, the difference between the two scenarios is substantially reduced.
All this is to say that the Labour Party is not facing a uniquely poor inheritance. It is facing some difficult decisions, with some of the spadework already done for it. Nor is it facing an unexpected set of spending pressures. Instead, it is simply trying to wriggle out of the tax promises it made to win the election because it knows it can’t keep them.
Even with the best will in the world, the party’s grand plans to improve public services will require money as well as reforms. Money, however, is scarce. Over the next half century, an older population means spending on health, social care, and the state pension are set to eat up another 10pc of GDP, while Labour’s plans for energy and defence are likely to require substantial spending increases of their own.
Putting it all on the credit card isn’t an option. Our toxic combination of demography and state generosity led the OBR to comment that our fiscal trajectory is “unsustainable” in 2011, 2012, 2013, 2014, 2015 – the 2016 report was cancelled – 2017, 2018, 2019, 2020 – 2021’s publication focused, understandably, on the pandemic – 2022, and 2023. The 2024 report was delayed by the election, but I think I can just about guess about what it will say, too.
Reeves knows that abandoning the party’s fiscal rules – or trying to get too clever with definitions of “investment” – would spook the markets into a catastrophic backlash.
Going through with the cuts pencilled in to public services in the last Budget, meanwhile, is unthinkable for the party of state expansion. And while a burst of economic growth would do a great deal to resolve our problems, Liz Truss is an ever-present warning to those who spend the fruits of such expansions before setting out how they are to be achieved.
This leaves the party with only one palatable choice: break its promise, raise taxes, and try to pin the blame on the Tories.
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