It’s not that any one month’s data should necessarily fill us with hope or fear. It’s the overall trend that matters. And while forecasts for the UK economy have significantly improved since the start of the year, Britain is nowhere near the growth levels it needs to sustain the current promises politicians have made to the public – let alone fund more giveaways.
That’s the message of the Institute for Fiscal Studies’ (IFS) Green Budget this week, which has estimated that Rachel Reeves will need to find an additional £25bn in tax revenue if spending is to keep rising with national income.
The IFS isn’t making a pro-tax or anti-tax argument: it’s shining harsh light on the reality of the UK’s fiscal situation, which was largely evident ahead of the election, yet no political party wanted to address.
This Parliament was set up to be a hospital pass long ago: thanks to the flexibility of the fiscal rules (which Reeves is looking to make even more flexible), a chancellor can keep making spending promises and rack up more debt – so long as they insinuate that big spending cuts will come at the end of a five-year (rolling) forecast period. All the major spending decisions were pushed into this Parliament, especially around public spending for non-ring fenced departments.
If Reeves is going to make good on her pledge not to implement “austerity”, she has billions of pounds to find in a matter of weeks leading up to her first fiscal announcement.
Of course, talk of tax hikes (which are also a form of “austerity”) was kept to a minimum during the election. Instead, Labour (and every other party) talked about filling in the major spending gaps by going for growth. No doubt it’s a vital component to fix the messy state of the public finances. But it was always for the birds that “growth” was going to fill in the gaps overnight, and render talk of trade-offs – and tax hikes and spending cuts – obsolete.
Growth doesn’t happen by elusive means. Say the word all you want but results require serious supply-side reforms – and time – to reap the benefits that would translate into more resources for the Treasury.
It’s not just Labour that says the word, seemingly executing some magical result. The Tory leadership election has not, so far, suggested that the opposition party has come to grips with this either.
Each Tory leadership candidate has in their own way insisted that long conversations are needed about why the party lost. But broadly speaking those conversations don’t include what really went wrong inside the Treasury, under successive chancellors, due in large part to the demands of fellow Tory MPs.
The demands to keep spending, alongside demands for more tax cuts, meant the party was playing an impossible game: hiking taxes in one area (employee National Insurance) and hiking taxes much more significantly in others (by freezing tax thresholds).