What’s The Point Of A Labour Government If There’s No Money To Spend?
Andrew Willshire
October 13, 2022.
“History does not repeat itself but it rhymes” is an aphorism usually attributed to Mark Twain. It certainly holds true this week; the present is rhyming with the mid-1990s like William McGonagall on a particularly bad day.
An exhausted, fractious, wildly unpopular Conservative Party is crawling over broken glass towards a seemingly inevitable crushing defeat by a rejuvenated Labour Party, shorn of the troublesome left-wingery that they indulge themselves with from time-to-time.
Keir Starmer, for one, is leaning hard into this story. His exhumation of the turgid Blair-era catchphrase ‘the political wing of the British people’ is testament to this, as is the swagger and the belief in winning that suffused the recent Labour conference. But then, a 30-point lead in the opinion polls will do that to a party, and it’s hard to begrudge them it, given their last few years.
These stonking poll-leads are, of course, due more to the remarkable self-immolation of Liz Truss and Kwasi Kwarteng who, with the sense of timing that a stand-up comedian would kill for, managed to claim the whole of the primarily inflation-driven increase in mortgage rates as the sole responsibility of the Conservative Party. Rarely has the notion that ‘oppositions don’t win elections, governments lose them’ looked so apposite.
So, rather than dwell on the travails of the Tories, let’s look ahead to what a future Labour government might have to deal with, and consider whether things really can only get better from this point.
The trouble is that the country that Tony Blair found on arriving in Downing Street is really quite different to that which would face an incoming PM. In 1997, the UK was still basking in the economic boom that followed Black Wednesday, and the previous Tory Chancellor, Ken Clarke, had bequeathed a golden legacy, with government debt at a mere 35% of GDP and declining.
The global economy was also rather benign for the majority of the New Labour years. Mobile phones and the internet were starting to take off and a booming China was admitted to the World Trade Organisation at the end of 2001. Although the bursting of the dotcom bubble in 2000 had an impact, growth accelerated in the following period. In each of the four years from 2004 to 2007, global GDP growth was above 4%, while at the same time the UK had an almost limitless supply of cheap EU labour.
To paraphrase Peter Mandelson, City bigwigs were getting filthy rich and paying their taxes, so revenues to the Exchequer soared. Some even went so far as to pronounce the end of boom-and-bust. Arguably there had not been a better time to be in government since before the First World War.
As part of their election pitch in 1997, Labour had pledged to follow Tory spending plans for the next two years. As such, public sector spending as a proportion of GDP was stable at around 35%. It would never be so low again; from 2000 onwards, Blair and Brown turned on the spending taps. The chart below shows the real-terms (2022 prices) change in government spending and tax revenues. For comparison, along with a straight-line projection of Ken Clarke’s spending plans from 1992-2000.
Almost immediately after being released from their manifesto commitment, government spending started to exceed revenues, driven primarily by growth in current spending. By 2007/8, public spending had increased to 40% of GDP, soaring to 46% in 2009/10 following the financial crisis.
The second chart shows how real-terms spending in the biggest four departments changed over the same period.
Spending on health increased by almost 100% in real terms during the New Labour years. Spending on protection increased by 50%, and education by 75%. By any standards, these are dramatic shifts – the question is, does anyone seriously think that these sorts of increases will be replicable by any future government? Increasing spending by 5 percentage points of GDP would now cost £141bn per year.
One key problem is that public sector salaries and social protection make up a huge proportion of government expenditure, so there is enormous pressure to increase them in line with inflation. For example, the Royal College of Nursing is seeking a pay award of 5% above RPI inflation, i.e. about 17% in total – why would any other public sector workforce settle for less? Labour has a further disadvantage in that, unlike the Tories, it has to at least pretend to like the public sector unions which are so crucial to its funding.
As for welfare, it now looks highly unlikely that Liz Truss will be able to uprate benefits in line with earnings rather than inflation, and isn’t brave enough to scrap the ridiculous triple-lock on pensions either. The likelihood of Labour making savings in this area must be close to zero.
Neither are there are any obvious sources of sustainable additional revenue. Labour have made great play of extending the existing windfall tax on energy companies, but the estimated revenue from that would only be around £8bn, about 1% of total government spending of £1.1tn. Matching Rishi Sunak’s proposed corporation tax rate of 25% might bring in as much as £17bn per year, but potentially at the cost of longer term growth and investment. Likewise, increasing taxes on higher earners is unlikely to yield much either – the 45p rate only brings in around £2bn.
Consider what else has changed since 1997. University graduates now pay an additional marginal rate of income tax of 9% (16% if they have a postgraduate loan), at the time in their lives when they should be trying to get on the housing ladder and start a family. The ratio of average house prices to median earnings increased from 3.5 in 1997 to almost 7 by 2010 (yet another example of the Bank of England misjudging serious inflation). After a decade of cheap money, that ratio seems stuck at around 8-9, unless a housing crash results in a painful correction. To the extent that the boomers are wealthy, much of it is tied up in property and the value of their pensions, so they don’t necessarily feel rich. Who, exactly, is in a position to pay higher taxes?
Finally, government debt now sits at around 100% of GDP, and as the last few weeks showed, the financial markets are in no mood to lend more without evidence of sustainability.
In short, the fiscal paralysis that bedevils the current administration will be just as stark should Labour come to power – strident demands to increase spending across the whole of government, no additional sources of income and far less scope for borrowing than in recent decades.
Some people on the right will have been asking in recent days: What’s the point of a Conservative government if they can’t lower taxes and cut spending?. Well, soon enough, the left will have to answer the question: What’s the point of a Labour government that doesn’t have any money to spend?
Things can only get better? Unfortunately, I doubt it.
© Andrew Willshire / CapX 2022
Image and graphics via CapX
