This coming week will see the Public Spending Review: probably the most difficult test of this Labour government since it was elected a year ago.
The Chancellor, Rachel Reeves, will be attacked from all sides. Friday’s newspapers write themselves: hostility from the ‘over-taxed’ tribunes of the Right, much of it wrapped in misogynist language about bird-brain ‘Rachel from Accounts’; frustration from the Left that the Magic Money Tree is not producing the expected crop of seasonal fruit; and disappointment from everyone else that she isn’t, after all, the Growth Fairy promised in the Labour manifesto.
In fact, the Chancellor is a competent and decent, economically literate individual, tied hand and foot by political and economic bondage. She inherited an almost stagnant economy burdened by barely sustainable public debt, the legacy of a series of damaging economic shocks: the financial crisis; Brexit; the Covid lockdown; the Ukraine War and ‘cost of living crisis’. She also inherits a nonsensical set of commitments on tax from the Labour Manifesto. And to add to all that, the madness and badness of Trump are creating chronic uncertainty in global markets.
Nevertheless, and acknowledging some silly mistakes, she has done three good big things. The first is to promote public investment. Gordon Brown, for all his formidable qualities and that he operated in easier economic conditions, was never able to persuade the Treasury to borrow to invest. Public investment took place through the expensive and over-complicated PFI scheme. Infrastructure was starved of investment capital.
Then, in the Coalition years, those of us who wanted more public investment faced implacable opposition from the Treasury. It was terrified of alarming the bond markets, even if that meant cutting productive projects. Yet Rachel from Accounts has managed to master public debt accounting, allowing an extra $113 billion in capital spend. The markets bought it.
Her second big achievement has been to stick to unpopular disciplines on current – day to day – government spending. There is virtually unlimited political demand for spending on the NHS, benefits, industrial subsidies, and higher pay for everyone in the public sector. And there are compelling arguments to spend lots more on defence, policing, science, early years education and to rebuild the broken aid programme. But these must all be paid for to satisfy the basic fiscal rule: to balance current spending with tax.
The Labour Party was so insecure about the outcome of the last election that it was unwilling to commit itself to a higher tax/higher spend, socially democratic, future: Copenhagen-on-Thames.
So, Rachel Reeves has been left to perform the role of Scrooge in Skirts.
In defending this uncomfortable position, she owes a big debt to the ludicrous Liz Truss. Ms Truss single-handedly destroyed the Conservatives’ claim to economic competence and, more importantly, provided a demonstration of what happens when governments try to teach the bond markets that 2+2=5. But, still, it requires competence and courage to be a Labour Chancellor faced with brutally hard choices, in the mould of Cripps, Jenkins and Healey.
The third positive is directionally right, even if badly executed: recognising that one of the biggest and most damaging inequalities in Britain is between, on the one hand, young working families in precarious, badly paid jobs and rental accommodation, and better-off retired people with appreciating property assets, generous pensions and heavily defended state entitlements. Some redistribution from the asset-rich to those at the bottom of the pile will be a measure of this government’s claims to social justice. Rachel Reeves understands this.
The end of Winter Fuel Payments was meant to signal intent. After all it makes no sense for a fiscally constrained government to pay well off pensioners, like me, a tax-free bung. Had the WFP been taxed there would have been few complaints; but outright abolition affected even the poorest pensioners. That said, thanks to the Coalition’s ‘triple lock’, pensioners have been largely shielded from the worst of post-financial crisis austerity and pensioner poverty is- thankfully – much reduced since the turn of the century.
From the standpoint of inter-generational fairness, it was also right for the Chancellor to attack the loopholes around Inheritance Tax though, surely, someone in the Treasury should have spotted that family farms present special problems. The next big step will be making council tax more progressive to reflect the value of property. Taxing high-value property will also go a long way to meet Angela Rayner’s demands for a ‘wealth tax’ since half of household wealth is unproductive, in the form of property. But property millionaires will howl with rage.
Unless her boss panics in the face of Reform’s shameless populism and sacks her, Rachel Reeves faces even sterner tests ahead. Most of these centres on taxation, since more will be very likely be required in the autumn budget. She will need to confront the popular myth that Britain is a relatively highly taxed country. Tax as a share of GDP is in fact close to the OECD average.
It is surely time to slaughter the sacred cow of manifesto commitments which were made in wholly different geopolitical and economic circumstances. But fear of deepening public cynicism and inflaming populist politics of left and right probably makes that impossible. Absent a rethink about tax, the Chancellor will be forced into measures like a continued freeze on tax thresholds which is a more regressive way to raise income tax than the manifesto pledge not to raise rates. Or raiding business in ways that hit productive investment.
The pain would be eased if Rachel Reeves does turn out to be the Growth Fairy after all. She could be excused if she isn’t. Beyond short-term bursts, no post-war Chancellor -from George Brown to Thatcher’s Chancellors to Gordon Brown – has been able to do much to shift the long-term trend growth in productivity upwards. But some hope lies in her creative ideas for steering British savings into British investment and in the welcome return of industrial strategy.
* Sir Vince Cable is the former MP for Twickenham and was leader of the Liberal Democrats from 2017 until 2019. He also served in the Cabinet as Secretary of State for Business, Innovation and Skills from 2010 to 2015.
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11 Comments
Struggling to disagree with any of this
“…..to satisfy the basic fiscal rule: to balance current spending with tax.”
Why is this *the* basic rule?
If I understand this correctly, the idea is that spending on building a new school or hospital is good capital or investment spending because the costs of the school or hospital can be marked down on the balance sheet as an asset to counterbalance any costs associated with a loan.
That either will be extremely unlikely to be sold any time soon doesn’t matter at all.
On the other hand, to pay the salaries of those who work in the new school or hospital, to enable it to function as it was built to function, is not-so-good current spending.
I really struggle to make any sense of this kind of thinking. Is that because it doesn’t make any? Of course if the total spending on either investment projects or current spending, together with all the private spending, exceeds the productive capacity of the economy we could have an inflation problem and there will be a need to cut back on one or both or alternative raise some extra taxation to give the Govt more fiscal space.
If this is Rachel Reeves’ concern this is what she should be saying.
@Peter: It makes sense from the point of view of the investors who would lend the money to the Government because, although there’s obviously no intention to actually sell – say – a new school – that could theoretically be done if the Government got hopelessly in debt and needed to get money quickly: That’s important if you want to convince people it’s worth lending to the UK. Also significant is the investment is a one-off: You build the school or whatever it is. You pay for it once, and then you have it in perpetuity (minus maintenance costs). That’s in contrast to current spending – for example someone’s salary – where as soon as you’ve spent the money, it’s gone: You have nothing to show for it in future years, and if you want to keep doing whatever you’re doing (Employing that person) then you have to spend the same money again and again every year.
The other point with investment is it usually secures a return: Once you’ve spent the money, you get ongoing income from the initial one-off investment. Probably easier to see this with building factories or transport projects than schools or hospitals, though even for something like a new hospital, you could argue the investment makes it easier to keep people healthy in the future.
Those are the reasons why (quite correctly) we distinguish current and capital spending in the Government’s deficit calculations.
Any private enterprise ultimately has to geneate surplus cash flows (over the longer term) in excess of the capital it raises in the form of equity and debt and return that surplus to shareholders and lenders in the form of dividends, gains on shares and interest.
In the public sector the focus is on achieving value for money and is measured in tems of economy, efficiency and effectiveness, the so-called three Es’.
Value for money is not simply about minimising cost. To use the UK National Audit Office’s definition: “Good value for money is the optimal use of resources to achieve the intended outcomes” where ‘optimal’ means “the most desirable possible given expressed or implied restrictions or constraints”.
Sometimes a fourth ‘E’ is also included when measuring value for money performance: equity. This reflects the extent to which services are available to, and reach, the people they are intended for, and whether the benefits from the services are distributed fairly.
The currency we use is a public utility and the purchasing power of that currency is directly impacted by the stability of public finances.
The impact of 15 years of QE and near zero interest rates has driven inequality by the accumulation of assets in the form of bonds, equity and property by a small % of the population. Ever greater returns on these inflated assets have to be paid by the great majority with few or no assets in the form of interest, consumer prices and rents.
The distinction between investment and current spending isn’t as clear cut as suggested. It’s easy to identify a physical structure as an asset, but surely a well educated and skilled workforce is also an asset. Arguably too this is likely to improve productivity more than a new road or railway line. Yet the cost of training is regarded as revenue expenditure because it is recurring, even though the cumulative impact of such expenditure may well outweigh the cost.
We get the services we pay for. That is through increased taxation or increased income through
‘growth’. Growth is not a given especially in turbulent times. Tax increases may become the main route if only by not increasing thresholds. I am OK financially and will donate any wfp I receive to Charity.
Hope we manage our public investments better than HS2.
Growth would be a lot more possible if we were in the EU. Today I can’t see where the markets are to generate private investment.
@ Simon R
I don’t see how there is even a theoretical possibility of selling a school or hospital for anything like the build cost. I doubt if anything like this would have happened even during WW2 when it could be argued Govt really did need the money. Although I would put it that they really needed to mobilise the resources of the economy in the interests of the war effort.
“That’s important if you want to convince people it’s worth lending to the UK”
This sounds like you want people to lend to the UK. This means the Government will in more debt. But maybe you want more lending to the UK without anyone being in more debt? Especially the govt!
If there was no net lending the capital account would balance and the current account would have to balance too. This would, of course, mean that the pound will fall. The Govt account would also balance. I’d explain it with reference to the sectoral balances. The mainstream have their ‘twin deficit’ theory. This is more an observation than a theory , though.
But, no more govt deficit! A good thing or a bad thing?
There’re arguments either way. However, it’s plain to see that we only have these deficits because people want to lend to us.
Of course, what everyone does want is a freely floating high pound at the same time as we have balanced trade, and a balanced Government budget too.
It just isn’t possible, I’m afraid.
However, Rachel from Accounts doesn’t accept is the huge damage done to Local Government over the last 15 years, with in ever greater problems with social care coupled with a perennial and ever increasing slanting of what there is available to urban councils – Labour’s heartland.
This has resulted in perennial cuts in rural areas, areas which we control and represent these days. Labour are hoping to tar us with the same brush as Reform, blaming us for ever more potholes, poor bus services, social care crises etc. while protecting their own. However, Reform will probably be successful by combining local discontent but amplifying it using the ever-present Nigel Farage on TV blaming it all on Central Government (which will be true to a significant extent).
We will need to match them on this, with a co-ordinated campaign both national local hammering the message rural government is being deliberately starved of funds. Otherwise our we will find our magnificent gains made in Shropshire, Devon, Cornwall, Somerset etc all being undone with losses of MPs and councillors inevitable.
What will not suffice (as far as the electorate are concerned) will be the traditional Lib Dem ‘We can make the best of a bad job, then it’s up to the electorate in 4 years time’. That would be naive beyond belief.
The battle to save our councils begins today and what Ed and others say has to set the tone – Rachel from Accounts can’t balance her books by breaking our councils.
David Evans. Please stop being sexist/mysogynist by belittling Rachel Reeves. You may not agree with her solutions but please give respect and treat her as Chancellor of the Exchequer and not like a mischievous girl.
I don’t agree with either her analysis or her solutions but that does not give me or you the right to treat her as you are doing.
@ Mick,
I understand where you’re coming from but I’m not convinced that the “Rachel from Accounts” jibe is misogynistic.
If you or I had grossly exaggerated our experience and qualifications for the job as RR has done then it’s quite likely we would be nick-named “Peter/Mick from Accounts”.
I would say the slogan “Ditch the B……” which was regularly heard about Mrs Thatcher at one time was misogynistic.
This isn’t quite the same thing.