The morning after the Budget is announced is usually a moment for reflection.
In the Osborne and Hammond years the reflection usually focussed on the gaffe that they had made which was bound to result in an urgent backtracking, very soon. Caravans, pasties and national insurance contributions for the self-employed all come instantly to mind.
Sunak appears to have been relatively gaffe free, at least on the day. Regressive national insurance increases; harsh universal credit cuts and double counted expenditure promises had all been got out of the way before the announcement this year. A crass announcement on reducing the tax on domestic air travel, which was so inept a few days before COP 26, was the closest thing he came to an outright mistake.
The issues were as much in what was not said. He did not say Brexit is now causing more loss to the economy than Covid. The Office for Budget Responsibility (OBR) was left to do that.
Nor did he highlight his inability to find any green measures. Nor, come to that and air tax cuts apart, did he find any supposed economic benefits from Brexit.
The OBR pointed out too that freeports provide no net gain to the economy. So much for Sunak's big idea.
In fact, of big ideas there were few. What the government's industrial plan might be is anyone's guess. None was in view.
Instead, and as I noted yesterday, the whole budget edifice has been built on two explicit beliefs. They are that consumers are going to spend like never before and that businesses will be pouring money into investment. The evidence to support either contention is hard to find.
Without these two assumptions Sunak's new fiscal rule - to balance the current budget and to only borrow for investment - cannot work. So it was simply assumed that the growth will happen to make the rule seem watertight. That's the way the OBR has always worked: it delivers forecasts a Chancellor wants.
Like the dozen or more fiscal rules that have existed since 1997 this one will fail. All the previous ones have. That is why they are continually reinvented. Chancellors really should stop promoting them. But they still do, and as a result the political careers of Chancellors have all been scarred by them. Sunak's will be too.
The talk in newspapers today is that Sunak is going to use the proceeds of growth to build a war chest for pre-election tax cuts. It's extraordinary that as far as I can see none of the journalists reporting this seem to doubt the growth forecasts. They take them as read, although growth forecasts from the OBR have always been wildly optimistic and this one is no different. It's my quite strong belief that there will be no war chest for this purpose, not least because, as these journalists do not seem to appreciate, there is no Treasury piggy bank. The reality is that borrowing is forecast into the foreseeable future.
However, the City bought the line that about £25 billion less will be borrowed next year, and the interest rate on gilts rose considerably as a result. They too are buying the growth forecast for now. They seemed not to notice the plan to unwind QE: pressure resulting from that appears intended to keep interest rates up. I suspect none of these forecasts are true. I think borrowing will be higher than forecast and QE unwinding will be on hold. Interest rates may well have to be cut again if the Bank is so unwise that it increases them soon.
So having noted what will not happen, what in the Budget will stick? One thing will. That is bigger spending. The reason for that spend is that it is needed. Across the piste there is a backlog of public services to be supplied, from health, to education, to social care, to justice, to transport, to the environment: in every case there is a decade or so of austerity to reverse. Sunak tellingly kicked Osborne and Hammond, and so Cameron and May, very hard yesterday. He used Labour spending levels in 2010 as his benchmark. It's as if he wants to be the heir to Brown.
There is good reason for this. The last decade has left a legacy on public service provision that means there is an enormous frustration within government - which ministers will hear daily - and beyond it, which they will get in their inboxes, that what is essential is not happening. There have been real cuts, and simultaneously real inflation in the cost of providing services to the levels now required which productivity cannot compensate for. The result is a pent up and growing frustration at government failure that has to be addressed.
The message from yesterday was then a simple one. It may not have been said but the message was that big government is essential. The obvious hint is that big government would be better still. Sunak has reluctantly realised this. It is time Labour did too. Sunak has not worked out the financial consequences of this. That is, in fact, the big challenge for all politicians: understanding modern monetary theory would really help them on the way. The rest follows from that.
But what has really to be appreciated about yesterday is that austerity did not happen. It is, in fact, over. The plans may still be inadequate, but at least cuts were not on the table. Instead it took a Tory - and a hardcore Thatcherite - to admit that what this country really needs is more government spending.
Will other parties jump on this? Will the plan also survive the recession that is more likely to happen than the growth that Sunak predicts? Those are issues to follow up on. The point for now is that even the Tories have admitted government spending as a proportion of GDP has to grow to meet need. And for recognising that, albeit without clearly saying it, this might be a significant budget. But, time will tell if the Tories will let Sunak get away with this. If they do their electoral prospects increase considerably. Labour should be worried.
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Labour’s leadership aren’t worried – they have no intention of winning the next election. What they may be underestimating is just how badly they may lose it. If the electorate see the result of the election as a foregone conclusion they will be less inclined to vote and those that are not Tory voters may see little reason to give their vote to Labour rather than another smaller party.
Excellent post.
On the final point though, I slightly disagree. Labour could do very well out of this budget if it plays its cards right, so rather than be worried it should exploit the opportunity it has been given. The problem is, as always, the Tories have plonked their tanks on Labour’s lawn. For some reason this always seems to cause uncontrolled panic. But if Labour took a deep breath before panicking, it could seize an opportunity.
Sunak’s budget, as your post confirms, realises that big government intervention is unavoidable – a big turnaround in Tory thinking. Labour should be very pleased. It can now offer its own ambitious programme with immunity from criticism. The boringly predictable question on how it’ll pay, has already been answered. The same way as the Tories will pay. Labour will only have to prove it has the better plan.
Furthermore, the Tories will be split on Sunak’s budget. The mad-arsed right wingers will secretly hate it, so Labour has a further opportunity to sow division among their ranks.
It requires a political adeptness that has proved so far lacking, but a clever strategist I’m sure could make considerable progress in getting Labour on the front foot.
‘Labour’s own ambitious programme’? Seriously, from Starmer’s Labour? Real pie-in-the-sky thinking there! That Starmer has any programme at all is a grasping assumption, his actions to date show no inclinations to any vision whatsoever. As to ambition, aside from remaining in his office, he seems unaware of the meaning of the word. He refuses to score the easiest of open of goals, and offers nothing that the public can latch onto to positively distinguish him from the buffoon in charge, coiffed hair aside. If simply Not-Being-Boris is enough to win office, then certainly there are dozens of Tory alternatives better positioned than Starmer, and with clearer articulated convictions (even if any same person would find them repulsive).
I quite agree! Starmer is hopeless. I joined and left the party because of him. Paul Mason (New Statesman) advocated a Starmer/Reeves double act. That would be something I suppose. He’s unlikely to be replaced, so put up someone at least half-convincing. I know you’re right though. There are many of us with the same opinion. I put my ideas forward in the forlorn hope someone will listen.
Agree that Labour should be worried but to their credit, I thought Rachel Reeves made an excellent comment about the rich sipping champagne on the marvellous climate change breaking increase in domestic air travel.
It was the zinger of the day
Then the Labour Party should be worried: the Tories are as divided internally as their main counterparts but have a far better instinct for survival and understand the need for cohesion. Labour’s so-called ‘centrists’ appear unable to rip their gaze from their collective navel for even the briefest of moments as they continue to pursue their vendetta against anyone in the party with a desire for electoral success or suggesting an actual policy. The Labour Party is dead in the water for the foreseeable future with resolution only being possible if and when either its derranged right-wing manage to oust everyone they dislike from the party (it’ll be a very small affair if they get their way) or the frankly utterly miraculous occurs and someone competent from the party’s soft-left or socialists manage to take the reins. The former situation would see the Labour Party in an even weaker position than it is now with precious little hope for recovery, while the latter I wouldn’t dare to contemplate the odds for.
Yesterday’s Mirror headlines touted Reeves as the “Demolition woman” following her take on Sunak’s budget but I couldn’t help thinking that there was some posturing in this – are we going to see the shadow chancellor throw her hat into the ring when the party’s right have decided that the dead horse of Starmer has been flogged for every last scrap of value? Even by the pollsters that normally produce favourable figures for the Labour Party still have them trailing way behind Johnson’s Tories – after all of the corruption, cronyism and outright failures. Meanwhile Starmer is setting new records for personal unpopularity. I also strongly suspect that Reeves would struggle to perform significantly better than Starmer has should this be the case. There’s a few rough diamonds in the PLP but I have considerable doubts that they’ll get near the top positions.
The Greens are very far from perfect – very far indeed, but I can envisage them being more likely to step-up to the plate and give a greater challenge to the Tories on the economy (as well as climate change) than the Labour Party could possibly muster. I certainly hope that they (the Greens) do otherwise yesterday’s uncharacteristic outburst by a Labour front bencher will be close to the sum total of push-back that Sunak experiences.
Having seen The Blair/Brown documentary, it became even more starkly obvious how critical the leadership position is. If Labour had a credible leader the party would unite, its confidence increase, and the Tories would quickly find themselves in trouble. With Starmer, the trajectory is the other way. He is the problem. My view is that Starmer ducks issues and confrontation because, frankly, he’s a coward. It’s as a simple as that. As I said in my first post, the opportunities for beating the Tories are there. Nothing is more damned infuriating than seeing them thrown away.
” But, time will tell if the Tories will let Sunak get away with this. If they do their electoral prospects increase considerably. Labour should be worried.” Precisely! Labour don’t seem to have a clue how to provide a positive narrative. I thought you sounded authoritative on the Jeremy Vine show yesterday, such as “We need a lot of debt…because we need a lot of investment”. Poor Lucy Fraser was wildly out of her depth. To be fair to the usually suspect Wes Streeting, he made the point you make above quite well, that Sunak was essentially just making up (partially) for the consequences of the Conservative cuts since 2010. Jeremy Vine was making a big point of “The National Debt of 2.3Tn, you don’t seem to want to pay it off etc”-was he playing devil’s advocate, or does he believe the myth, I wonder? Also, thank you for pointing out the very dubious role of the OBR.
JV believes the myth….
Would JV be able to explain (a) the last time the national debt was paid off (or even reduced) and (b) what the consequences would be if there was no public sector debt.
No
I promise, I have discussed it with him
I agree with your post because it is essentially what I’ve been getting at in your other posts.
The Tories are still signalling to their constituencies (vested interests, funders etc.,) that their economic polices etc., are still Tory.
But the reality is something more contingent, more reactionary if only to soften certain positions to keep themselves in power.
They are walking a tightrope of their own making – but none of this of course is what we actually need – which is more money and more of the essential action you rightly speak of.
What Sunak didn’t mention was that Brexit has cut annual tax revenues by around £30bn. This means that without the Brexit shock most of the past year’s £40bn tax raid would have been unnecessary.”
UK’s exit from the single market has hit our £2.2 trillion economy for 4 percent of GDP, worth about £88bn. Taxation at 36 percent of GDP, as the OBR claims, means tax revenue is down by about £31.5bn, precisely the amount raised by all the corporate and personal taxes Sunak announced last March.