In presenting a macroeconomic fiscal stance, Rachel Reeves and Labour need to talk about improving public services rather than book balancing

Most of this series will be about the
economics behind the budget. So far we have had why tax
increases rather than economic
growth is how to end austerity. Later posts will look
at fiscal rules, public investment and what tax rises are possible
within the Chancellor’s commitments. This post is more political.
It looks at the extent to which Labour can blame tax rises and
continuing poor public services on the last government, and how
Reeves needs to frame her forthcoming budget.

As is well known, the 2010 Coalition
government did a highly effective job in placing the blame for its
own spending cuts on the previous Labour government. As a
consequence, and incredibly, more
voters blamed Labour than the Coalition government for spending cuts.
It was incredible given the macroeconomic reality was very different
(see
here and initial link to my article). Given the
reality of the terrible economic record of the 2010-24 Conservative
government, it is quite understandable that the current Labour
government wants to place the blame for its unpopular decisions on
the last government where it can.

A lot of the criticism of this attempt
by Labour is based on vibes. It makes Labour seem gloomy, it is
argued, whereas what people want is hope and optimism (usually adding
references to the Harris campaign in the US). I prefer to think about
the different contexts of 2010 and 2024. In 2010 voters were still
recovering from the major shock of the Global Financial Crisis, and
were seeing the start of the Eurozone crisis, after a previous decade
of what looks by today’s standard pretty good times. In contrast,
the whole 2010-24 period has been pretty gloomy in terms of real wage
growth and public services.

In 2010 there was therefore a single
bad economic event that everyone experienced, and it was natural
(though wrong) for ‘low information’ voters to blame that on the
government in power at the time it happened. With the Eurozone crisis
constantly in the news, and seeing it generally portrayed (wrongly in
most cases) as a crisis caused by fiscally profligate governments, it
was easy for the Coalition government to argue that it too was having
to deal with a fiscal crisis caused by the previous profligate
government, and easy to suggest it needed austerity to avoid a market
crisis like that happening in the Eurozone. As I have noted so many
times, most of the media were happy to promote or go along with this
narrative.

The clearest example of this Labour
government trying to do something similar was Rachel Reeves statement
on 29th July, where she talked about how the fiscal
situation she inherited is even worse than the OBR had thought, and
outlined the cuts she was making as a result. What evidence we have
suggests she failed to transfer the blame for this on to the previous
government (source
and details).

Since the election Labour support has
fallen and Conservative support has risen in the polls, such that the
Conservatives are just 4% behind in a recent poll. While it must be
true that a lot of this is due to the unpopularity
of ending the pensioner winter fuel payment [1], this is also a continuation
of a trend that began well before the General
Election, a point I will come back to later.

So why is Labour not succeeding in
transferring blame to the last government when much of that transfer
of blame is justified, while in 2010 the Coalition government
succeeded in doing so when it wasn’t justified? There is an obvious
caveat and also a partial explanation. The caveat is that it is too
early to tell. The Coalition’s ‘it is all Labour’s fault’ was
a theme pursued relentlessly for years. The partial explanation is
that much more of the media will resist that transfer of blame today
compared to the period from 2010. It is also possible to argue, as
I suggested here, that this transfer of blame might
have worked if Reeves had simply reversed recent Conservative tax
cuts rather than hitting pensioners, because then the association
with past actions would have been clearer.

However I think there is another
explanation, which has an important political lesson for the October
budget. Even before 2010, the Conservative party managed to convince
many voters (again erroneously) that reducing the government budget
deficit was the economic problem, and they had considerable
support in that from the Labour Chancellor as well as the media. The
Eurozone crisis, and the global turn to austerity in 2010, appeared
to back them up. So cutting the deficit was what the Coalition were
elected to do.

In contrast, this Labour government was
not elected to reduce a huge budget deficit. It was elected, in large
part, to fix the NHS and other public services. A ‘senior Labour source’ said recently that Labour were elected ‘first and foremost to sort the public finances’. This is nonsense. The election campaign was not about the public finances, as it was in 2010. What the public were concerned about was the NHS. As a result, justifying cuts to
fill ‘black holes’ rather than to improve public services was
never going to be popular, because that is what the Conservative
government did repeatedly and voters wanted a change.

In this respect it is important to
ignore what much of the media writes or says. Journalists are
obsessed by what they call black holes in the public finances. The
term black hole is mediamacro for a gap between a forecast for the
government’s deficit and what the government’s chosen fiscal rule
says that number should be. [2] This black hole is the slender reed
on which to write speculation about what a future budget may contain
in the way of tax or spending changes.

Understandably, people tend to care
much more about tax increases or spending cuts than black holes.
Journalists know this, which is why the ridiculous term black hole is
used in the first place. It is designed to transform what is in
reality a highly uncertain forecast about budget arithmetic related
to something largely artificial into a number that readers should
regard as very important and potentially even dangerous. Of course it
is neither very important nor dangerous.

Such tricks might get an article read
but it doesn’t stop most people thinking poorly of a politician
that cuts spending or raises taxes just to fill a black hole, unless
there is a general consensus that this black hole threatens a crisis.
What the Conservatives did from 2010 onwards, with the help of
Labour, the media and the Eurozone crisis, was create that consensus.
The consensus today (if you exclude the Conservatives) is that public
services need fixing, and not that we are facing a fiscal funding
crisis. Attempts by Labour’s Leader of the House to suggest that
the financial markets would have reacted badly if Labour had not
immediately filled part of the black hole they discovered were
met with general and justified derision. Suggestions
that cuts were required immediately to fill an unexpectedly high in
year deficit are also economic nonsense.

The script for the Budget at the end of
October is already being written by the media. Rachel Reeves will
increase taxes to fill the part of the black hole she failed to fill
in her recent statement. It would be a big mistake if the Chancellor
followed this script. As one of the main thing most voters want to see from
Labour is an improvement in public services, it would be much better
to justify tax rises as enabling additional public spending rather
than filling black holes.

What economists call balanced budget
increases in public spending, higher spending matched by tax
increases, are likely to be popular among most voters when public
services are under stress, particularly if those tax increases mainly hit the better off. The 2017 election campaign clearly shows this,
and public service provision has deteriorated significantly since
then. In contrast, Labour lost votes during the last campaign, in
part I suspect because they kept to what Marc
Thomas calls their small target strategy, when many
voters were looking for something more substantive. They are still
looking.

Taxes are bound to rise in October’s
budget, and the Conservative opposition will say I told you so. The
way to respond to that is not to talk about black holes that Labour
inherited, but talk about the woeful state of public services Labour
inherited, how Labour are beginning the long process to restore those
services, and that this process requires those with broader shoulders
to contribute more to enable that to happen. That is what Labour
governments are elected to do, and they
are popular when they do it.

[1] Why was cutting the winter fuel allowance so unpopular? After all, it
is absurd to give wealthy pensioners hundreds of pounds every winter for something they can easily afford. Some of this is just the power of this voting group. But a real problem I suspect is that there is a large group of
pensioners whose income is above the level at which they can obtain
pension credit, but below a level where it is easy to save in summer
months to prepare for higher winter fuel bills, particularly after
recent increases in food prices. The UK state pension is
low
compared to most other countries. I cannot see any reason why the allowance shouldn’t be taxed. 

[2] Which in turn is based on a
forecast for GDP, as fiscal rules tend to have GDP in the
denominator.