Gambling on Growth
Without shifting the balance of wealth and power between workers and bosses, Rachel Reeves is banking on economic growth to make everyone richer. But if this fails and living standards continue to decline, it will be the far right that benefits.
Rachel Reeves' budget relies on the private sector to boost living standards. (Footage by Christopher Furlong/Getty Images)
Rachel Reeves’ first budget as Chancellor has put to bed the debate on whether Starmer’s government will attempt to return to austerity. Reeves was adamant that her budget meant austerity was over — and with government borrowing set to increase by more than £50 billion this financial year, it is hard to argue with that assessment. Austerity, remember, means net cuts to public spending.
But Reeves’ budget does not mark a clean break with the austerity years, and it certainly doesn’t prepare the UK economy for the challenges ahead — from climate breakdown to demographic ageing. We’re heading into a massive storm in a boat that’s covered in holes, and Reeves has announced that she’s not going to make any new ones.
The headlines focused on Reeves’ ‘massive’ £40 billion increase in taxes, which is indeed significant.
The lower rate of capital gains tax (CGT) will rise from 10 percent to 18 percent and the upper rate will rise from 20 percent to 24 percent. But she’s failed to equalise CGT tax rates with income tax rates, meaning that many of those who derive most of their income from wealth will pay a lower effective tax rate than those who actually work for a living.
The most significant increase — and the one expected to raise by far the most revenue — is employer national insurance contributions. These will increase by 1.5 percentage points to 15 percent, leaving many small and medium sized businesses facing a massive bill. There is no telling what the impact of this change will be on wages and employment.
Then there are the spending changes, with departmental spending set to rise by 1.5 percent per year in real terms. Education and the NHS will both see significant increases in current spending, including £2 billion to support hiring new teachers and a £22 billion increase in the day to day health budget. Defence spending is also going to rise by nearly £3 billion and local government will get an extra £1.3 billion
But the increases for health and local government in particular do not go nearly far enough to offsetting the impact of 14 years of austerity. And once protected departments are removed from the equation, real spending in other departments will fall by just over 1 percent per year.
Fixing the Foundations?
Reeves’ big pitch, however, is on investment. She’s planning an additional £100 billion of capital spending over the next five years. And she’s changing the way government borrowing is calculated to facilitate higher rates of public investment.
To understand this move, you have to understand the difference between investment and current spending. Investment is spending that creates or improves an asset — for example, building a new hospital, or upgrading an existing one. The key point here is that the spending results in the existence of an asset whose value is measurable and which can therefore be placed on a government balance sheet.
The idea behind Reeves’ accounting changes is that the calculation of government debt should account for the value of the assets created by government investment. Kind of like how, when you take out a mortgage, you don’t just consider fact that you’ve had to borrow £400,000 — you also consider the fact that you’ve acquired an asset that’s probably going to increase in value over time.
Current spending, on the other hand, doesn’t create assets that can be placed on a balance sheet. For example, while building a hospital counts as investment, hiring more doctors and nurses doesn’t.
Doctors and nurses are, of course, an asset. You can build as many hospitals as you like, but without doctors and nurses they won’t function. But the value created by investing in doctors and nurses can’t easily be measured, and nor can they be sold. The value of this ‘social infrastructure’ is not easily captured by existing accounting tools (this is a point I’ll come back to in another piece).
Smart investment creates the foundations for economic growth. When you build necessary roads and bridges and buildings, you create jobs today and expand the capacity of the economy tomorrow. It’s not a coincidence that Reeves’ two favourite buzzwords are ‘growth’ and ‘investment’. She believes that one will beget the other.
And this push for growth is Reeves’ gamble. Because the changes announced in this budget will not improve people’s living standards by much.
Sure, their taxes aren’t increasing, but nor are they likely to see an immediate, significant improvement in public services. Spending increases may begin to alleviate some of the strains in the NHS, but they’re not going to solve the problem driven by decades of austerity, privatisation, and increasing demand.
Nor are there any policies aimed at shifting the balance of power in the economy to ensure that working people receive a higher share of national income than bosses. The minimum wage increase is welcome, but she could have gone a lot further on workers rights. The ideal situation would have been the announcement of wealth taxes and a Green New Deal.
Betting It All on Growth
Without fundamentally altering the balance of taxation and spending, and without trying to shift the balance of wealth and power between workers and bosses, the only thing left to do is to try to increase the size of the pie for everyone. Reeves believes that the best way to do this is to unlock economic growth through capital investment.
But there are two problems with this strategy. First, growth in the UK depends on what happens in the global economy. And the global macroeconomic picture doesn’t look too rosy at the moment. Geopolitical conflict and climate breakdown also present real and imminent threats to global stability.
Second, she isn’t promising enough investment to really make a difference to economic growth in the short term.
This is where we start to see the true nature of Reeves’ gamble. She doesn’t just want to unleash growth through public investment. She wants to do it through ‘partnership’ with the private sector.
I’m almost certain that Reeves has been working behind the scenes in an attempt to mobilise private capital for investment. She will have been talking to people who manage large pots of money — pension funds, insurers, wealth managers — and persuading them to sign up to her investment push.
The idea is that the government announces new projects and private sector money follows because the government has taken on all the risk. But there is no guarantee that this money will appear, especially not if the mood of pessimism continues to cloud the outlook for the UK economy.
And as I wrote in a recent piece for Tribune, the history of public-private investment is not pretty. Cooperation between the state and private financial institutions creates plentiful opportunities for inefficiency, and sometimes outright corruption.
Such a strategy won’t necessarily raise living standards, but nor can it be described as austerity. Instead, Reeves’ philosophy can best be described as a kind of neoliberal developmentalism: public-private partnerships in pursuit of economic growth. Or, in simpler terms, socialism for the rich and ruthless competition for everyone else.
If Reeves’ gamble doesn’t pay off, which the odds suggest it won’t, then working people are facing another Parliament of falling living standards. It doesn’t take a political scientist to realise that disappointment with the Labour Party is only likely to benefit the far right.