The Budget suggests the Chancellor is thinking too much about short term management and too little about long term legacy

My posts come out on
a Tuesday and Budgets are on a Wednesday. Not great timing, which is
why in the past I’ve often done special posts one or two days after
the budget. But so much of last Wednesday’s budget had been
pre-announced that it didn’t seem worth doing this last week. So
the question is whether there is anything interesting to say a week
later?

For the mainstream media the answer appears to be no. Rather than using time to take a longer view, some in the media seemed to have descended into trivial detail about process and come up with a question that just gets things completely wrong. As Stephen Bush says, the idea that the Chancellor can be accused of exaggerating the pessimism pre-budget is absurd. 

If only to bring discussion back to reality, some basic points need to be made. The first is that in macroeconomic terms spending has not changed by much.
Here are two charts, showing OBR projections for current public
spending and receipts (mostly taxes) both before and after the
budget.

In 2029/30, total
spending is up 0.3% of GDP. Compare this to the previous budget, where there were much larger increases in spending compared to previous (nonsensical) plans.

I had expected spending as a share of GDP
to rise further, because of the OBR’s downgrade to expected
productivity and therefore real GDP, but this was largely offset by
additional
forecast inflation, meaning expected nominal GDP
hardly changed. The declining share of spending in GDP over time
remains unrealistic: not only does health spending tend to increase
as a share of GDP, and defence spending is committed to increase,
there are also known
pressures that will become critical over the next few
years. This is the main reason why claims of exaggerating pessimism are silly.

The increase in
taxes is larger, at 0.6% of GDP by 2029/30, the difference being the
additional headroom created on the current deficit target (going from
0.3% to 0.6% of GDP). As the second chart
shows, taxes only go up at the end of the period, reflecting the
decision not to increase future tax allowances with inflation.

Because taxes went
up rather than spending being cut, this can be described as a left
wing budget, as some in the media have. [1] However the reason why, in
macroeconomic terms, this doesn’t feel like a left wing government
can also be seen in the charts. Spending as a share of GDP is pretty
well where it was at the end of the last Conservative government.
This government had reversed the additional austerity the last
government had pencilled in, but once you allow for trends in health
spending and debt interest the substantial reduction in the level of
public service provision that we saw under fourteen years of Tory
rule has not and will not be significantly reversed.

The budget was also
left wing in terms of the detailed tax increases imposed. Tax rates
on interest income were raised. We had a form of wealth tax, where
wealth is in the form of housing. Tax and spending changes were
progressive, as this chart shows

This, and in
particular getting rid of the child cap on benefits, is all
good. Ian Dunt is absolutely right when he writes:

“Rachel Reeves did
numerous admirable things in the Budget. People should bear this in
mind the next time they claim there is no difference between the
Conservatives and Labour. There is. You are mad if you claim
otherwise.”

But the reason that
those on the left are not dancing in the streets is that some of
these changes were hard won. There is little more than a year between
Labour MPs losing the whip because they voted to end the child
benefit cap and Starmer or Reeves saying they weren’t going to
apologise for actually doing so.

What is missing from
this budget, and is also missing from this government, is any sense
that it has a long term plan and is putting in place the resources to
achieve it. Yes Labour has its missions (or maybe not), but the whole point about
successful missions is that you put substantial resources in place to
achieve them. This government is either in denial that it needs to do
this, or is too scared to do so. [1]

Fourteen years of
Conservative government achieved two major economic goals: it
crippled our public services in order to cut tax, and it crippled our
economy by first macroeconomic mismanagement (austerity)) and then by
leaving the EU. One key goal of this Labour government should be to
reverse both. But this government has deliberately chosen to carry on
starving the public sector of resources because it was too scared to
tell middle-earning voters that their taxes had been comparatively
low for too long and needed to rise. It has
deliberately chosen to keep in place the essentials of Brexit, a
policy that ensures that the standard of living for most UK voters
has and will continue to stagnate, because it is too scared to tell
some voters that they made a big mistake.

Undoing fourteen
years of damage of course takes time. There is nothing wrong with
saying we need to raise headline taxes gradually, or that we need to
improve trade with the EU one step at a time. But you need to set out
the roadmap. You need to tell voters where you want to go and how you
are gradually going to get there.

A good example of
this lack of ambition is the new mansion tax. It represents an ad hoc
adjustment to a council tax system that is in urgent need of reform.
Even with the new tax in place, those in less expensive houses still
pay a much
larger proportion of the value of the house than those
in mansions. As a first step in a gradual process of updating and
reform of the council tax system the mansion tax might represent a
useful short term step, but there seems no appetite from the
government to undertake such a reform.

Instead this
government still seems to be operating in opposition mode, where
every move it makes has to be measured not in terms of what the
country needs but in terms of how it will play with the media and
voters. How else can you explain the nonsense of leaks and briefings
before the budget. This is doubly annoying because they are not very
good at managing public opinion in the short term. The polls show
that, but Reeves herself has made a large number of political
mistakes in a relatively short amount of time.

To take one example,
raising the income tax rate would have been more sensible than not
indexing allowances, and it could have been done earlier. It wasn’t
done because of the tax pledge, but not indexing allowances raises
taxes on working people. Saying the pledge was about tax rates not
only doesn’t wash with most voters, but it has allowed the media to
spin
out the discussion of taxation. In truth, saying you
had to break the pledge because of events sounds way better
politically than saying that technically we didn’t break the pledge
because the wording in one part of the manifesto mattered more than
the wording elsewhere.

I really wish Reeves
and Starmer would stop thinking about how their policies will play
with focus groups and instead start thinking about their legacies.
Within a year and a half of becoming Chancellor, Gordon Brown had
radically reformed how macroeconomic management was done by making
the Bank independent, had introduced a new and very different set of
fiscal rules (that lasted for 10 years), and set out the criteria by
which the UK would eventually decide not to adopt the Euro. There are
a host of economic or political projects that a Chancellor wanting to
actually make a significant long term difference could choose. The
only thing that approaches such a project that I can think of with
Reeves is stability, but Chancellors who offer stability when public
services are in perennial crisis and living standards are stagnanting
will not be fondly remembered.

[1] It is possible
that there is a long term reform plan for reform, but we are not
being told about it, because saying what the plan is would incur
political costs. For example, maybe there is a long term plan to
phase out ISA’s for savings that don’t go into buying stocks and
shares. It is, after all, not clear why such savings are subsidised.
But if that is true, is the political cost best incurred now or
nearer the election. The obvious answer suggests there is no hidden
long term plan for reform.