Prime Minister Keir Starmer has warned the British people that the October Budget is going to be ‘painful’. He has once again blamed the Conservative Party for reckless economic mismanagement, which has left a £22 billion black hole in the nation’s finances.

It is undoubtedly true that successive Conservative governments managed the UK economy particularly poorly, with consequences for productivity, output, and equity. But the idea that the UK government is facing some sort of fiscal black hole that will be impossible to fill without swingeing cuts to public spending is simply absurd.

As economists from across the political spectrum have been pointing out for decades, government spending in a wealthy economy like the UK is not constrained over the short term by tax revenues.

First, the government is capable of issuing new debt to cover expenditure. As long as that debt is used for productive purposes — like educating the workforce, expanding physical and social infrastructure, and promoting decarbonisation — it will be recouped over the medium- to long-term.

This debt-financed productive investment is precisely how the UK successfully reduced its debts following the Second World War. Higher taxes on the wealthy and big businesses also meant that the wealth accrued from economic growth was shared much more equally than it is today.

Second, the British state controls the UK’s monetary system. After the banks nearly crashed the economy in 2008, the Bank of England pulled out all the stops to protect the interests of asset owners. Interest rates were slashed and vast sums of money were pumped into the financial system.

Now, higher interest rates mean government borrowing is much more expensive, and taxpayers have to foot the bill. But it doesn’t have to be this way. The government could manage inflation in much more targeted and effective ways through, for example, taxing the big corporations that have been profiteering through the cost of living crisis, or by more directly controlling how commercial banks issue credit.

Instead, the British state continues to rely on the blunt tool of higher interest rates, which lead to higher bills for working people struggling to make ends meet as well as higher interest payments on government debt.

In fact, the legacy of quantitative easing (QE) means that taxpayers are sending billions of pounds to commercial banks every year. In 2023, the government had to pay £44 billion to cover the Bank of England’s costs, most of which went straight to commercial banks. Over the long-term, the bill for QE is likely to top £100 billion.

In short, and as I recently argued in Tribune, there is a lot the government can do to deal with the economic problems currently facing the nation. Austerity is a choice — not a necessity. So, why do Keir Starmer and Rachel Reeves continue to tell the nation they have to impose it?

For many decades now, one of the favoured tactics of neoliberal policymakers has been to claim that, in the modern globalised economy, the nation-state is too powerless to effect meaningful economic change. If a government tries to raise taxes or impose new regulation, wealthy individuals and corporations will simply leave.

As former Chair of the Federal Reserve Alan Greenspan once put it, ‘Thanks to globalisation, policy decisions in the US have been largely replaced by global market forces’. The state, in other words, is powerless.

This argument, however, always seems to go out of the window as soon as capital finds itself in crisis.

When the banks needed a bailout after 2008, the state was there to provide it. When asset markets failed to recover in the wake of this crisis, the state once again stepped up. When big businesses needed rescuing during the pandemic, the state was there to provide support. In that period, the state was even powerful enough to shut down the entire economy.

Whenever anyone has attempted to resist the exercise of its power, similarly, it has become very clear quite how powerful the state really is. Whether imprisoning peaceful protesters or imposing brutal anti-union legislation, the British state has had no problem exerting extreme force against any groups that pose a threat to the status quo.

The problem is not that the modern state lacks power in a globalised economy. The problem is that the state’s power has been captured by vested interests, and is therefore only ever used to support them.

The idea that the state is powerless nonetheless allows politicians to publicly justify their failure to address deep-seated economic and social problems, while using every mechanism at their disposal to satisfy the interests of their allies and donors behind the scenes.

Lobbyists are deeply embedded within the current Labour government and are using this power to promote their clients’ interests. Despite Rachel Reeves claiming that her aim would be to significantly reduce the amount the government was spending on private consultants, KPMG recently won a £223 million government contract — the second largest contract the firm has ever won.

Keir Starmer would never admit it, but he has the power to raise public spending and investment, increase taxes on the wealthy and big businesses, and properly regulate big businesses and financial institutions. Instead, he will impose renewed austerity on those least able to bear it. Not because he has to, but because he wants to.