Andrew O’Brien
The country’s credit card has been maxed out. Not the words of David Cameron or George Osborne but Keir Starmer.
In her Mais Lecture, Rachel Reeves maintained her iron commitment to ‘fiscal rules’. Labour is not going to see spending significantly increase in the short term. The Green Prosperity Plan has been trimmed. Jeremy Hunt has further laid booby traps for a new Labour Government by stealing its own limited revenue raising ideas for tax cuts. Understandably, Labour Shadow Ministers, MPs and supporters are getting nervous about what all this means for a future Labour government. However, Keir Starmer is right. The country’s credit card has been maxed out.
The facts speak for themselves. The UK will still be running a budget deficit in 2028 – nearly two decades after the Conservatives made it their mission to eliminate it. Public sector net borrowing is estimated to be £39bn in 2028/29 – that’s equivalent to over five of Labour’s ‘National Wealth Funds’. The UK is also running a huge balance of payments deficit, £135bn in 2023. This means that we have to sell tens of billions of assets every year to pay for all the things we import. This is directly contributing to our housing crisis and it is leading to the firesale of the UK’s stocks, which means that we are trading our future income for present comforts. Borrowing is not the easy solution it appears.
In the short term, we will have to continue to borrow, but we need to knock on the head that we can afford tax cuts. Increases in public expenditure, for public services or public investment, are risky unless they are properly paid for. This is why the language of austerity has come back.
But not all austerity is the same. The ‘45 Labour Government, celebrated by the Labour movement, was an austerity government. However, they chose a particular form of austerity, one that focused on limiting household consumption to create the financial space to invest in public services, public infrastructure and the country’s productive capacity. This was private austerity and, unlike the public austerity of the Coalition Government, it worked. New public services were created, productivity improved substantially and the foundations for higher levels of economic growth were put in place. Public debt also fell sharply during this period. Austerity can work, but only if policy is strategic and focused on improving the competitiveness of the UK over the long term.
Post-war prosperity was based on securing the proceeds of global growth. The good news for policy makers is that although the rate of growth has slowed since the 1940s, the global economy is still on track to be 50% larger than it was in 2020 according to Capital Economics. This means that there are opportunities for higher levels of growth over the coming years, but we currently lack the means to exploit them. What the UK needs to do is to focus on rebalancing its own economy to focus on how the UK can produce the goods and services required for the rest of the world and not just focusing on our own consumption. Growth is possible, but to unlock it, the UK will need to make adjustments. Just as in the post-war period, the new government needs to make tough choices that prioritise production and long term investment. Private restraint must be the order of the day. However, the sacrifices are justifiable in the medium term, as the potential growth is there.
In the current climate, this would mean maintaining taxes at their current levels and finding new sources of revenue. We need to sustain higher levels of taxation to maintain ambitious infrastructure investment plans, prioritising public service spending that can improve the health and productivity of the workforce (current and future) and strategic support for industries that have export potential. It is certainly not the time to try and abolish National Insurance and lose over £40bn in tax revenue each year. Labour must banish the very idea of tax cuts for the foreseeable future and prepare the public for a difficult few years. All investment must be judged, in the short term, on cold hard economic imperatives rather than loftier notions of social justice. If investment is needed, Labour needs to be brave enough to raise taxes to pay for them, not just rely on borrowing.
The danger for Labour is that it repeats the mistakes of the Coalition Government by excessive focus on short-term political considerations. Cameron and Osborne only saw austerity as coming through cutting investment to free up consumption, “private opulence and public squalor” in the words of JK Galbraith. Corporation Tax was cut 65 times, Income Tax was cut 119 times and National Insurance was cut 66 times according to the Taxpayers Alliance. The tax cuts did not fundamentally improve our economic performance, if anything they weakened it by restricting productive public investment. What looked like political sense at the time has now created conditions that threaten to cast the Tories out of office for a generation.
It is right for politicians to be cautious about the politics of austerity. The public has been living with public austerity and its consequences for a decade and a half. It is hard to tell voters that much of that pain was in vain, wasted on ill-judged tax cuts and short-term popularity. It is even harder to say that another decade of austerity, this time in the form of higher taxes, is necessary to get us back on track is a hard message to deliver. However, now is the time to make it. Waiting to get into government to break the news will create political problems of its own. The one lesson that Labour should learn from the Cameron and Osborne years is the need to use the period up to the election to make sure the public know who to blame and what the remedy is.
Ultimately, no decade of national renewal will be possible without a politics of sacrifice, to borrow a phrase from Helen Thompson’s excellent article in the New Statesman. The new politics of sacrifice will be different from the old. Food won’t be rationed. Bombed out homes will not be left as rubble on the street. That does not mean it will not be difficult in its own way. But ultimately, politicians must put their trust in the people. Attlee was not afraid to do so in 1945, he believed that Labour could appeal to the civic virtue of the people to think about the long term good of the nation. It is true that Labour lost in 1951, but the number of votes cast for Labour steadily increased during this period. Keir can do the same, but he must prepare the ground now. People can understand the need for private restraint, if they are given the arguments. At the heart of this is the need to build a new citizenship, not simply social but economic, based on a recognition of our need to make sacrifices to boost our collective productive capacity. In this new economic citizenship, saving money which can then be used for investment is as important as signing the national anthem. The times call for nothing less for a bold articulation of our shared responsibilities.
Andrew O’Brien is Director of Policy and Impact at Demos