Delivering a budget for national renewal – how well did Reeves do?

The Budget is critically important. If it is well-formulated, it gives ministers the space to address the issues facing the country; if it is not, then whatever promises they may make, they will not be able to keep.

Frequently, Budget analysis in the media does not look at it this way and instead focuses on two relatively inconsequential questions:

1. The Chancellor has defined some so-called Fiscal Rules for him/herself – does the Budget conform to these self-imposed rules?
2. What is the short-term impact – ignoring wider economic impact – of the personal tax changes?

Rather than do that, this article aims to follow the tips we suggested to the editors of our media and explore the real question about yesterday’s Budget: does this Budget provide a foundation for national renewal?

Our analysis suggests that the first Reeves Budget is a significant and welcome step in the right direction, but that its impact on national renewal will depend on how well it is implemented:

• The UK badly needed a radical Budget for renewal after a succession of damaging Budgets over the last 14 years:
• This Budget is a significant step towards renewal, and if it succeeds will make a tangible difference to the lives of UK citizens and provide a foundation for further renewal in the future;
• To ensure that the Budget does succeed, the government must rewire some of our key institutions. 

We needed a radical Budget for renewal

There is little question about the need for national renewal. Before the election, voters’ top two issues were the cost-of-living crisis and the state of the NHS.

Median earnings are lower today than they were in 2007; our public services – including the NHS – are gravely weakened, the economy has been weak, and there has been no effort to protect the environment.

Our household finances are in almost unprecedentedly poor shape: real (adjusted for inflation) wages are lower today than they were 17 years ago – you would have to go back to the 1920s to find a comparably bad period.

As a result, almost one in three children in the UK are living in poverty, and the median British household is set to be poorer than the median Slovenian household. That kind of wage slump has not happened for a century – we had all got used to progress: the dotted red lines show what we might have expected. That is voters’ #1 issue.

Our public services have been badly hit by austerity. Even the supposedly ‘protected’ NHS is close to breaking point. As Lord Darzi’s recent report said,

“Austerity: The 2010s were the most austere decade since the NHS was founded… Until 2018, spending grew at around 1 per cent a year in real terms, against a long-term average of 3.4 per cent. … In 2018, for the service’s 70th birthday, a more realistic promise was made of a 3.4 per cent a year real terms increase for five years in revenue spending. … The 2018 funding promise was broken. … Capital: The NHS has been starved of capital and the capital budget was repeatedly raided to plug holes in day-to-day spending.”

He concluded that, “the NHS is in critical condition, but its vital signs are strong.”

Restoring the NHS (and other public services) is vital for the UK and for the economy, as our report The Rational Policy-maker’s Guide to the NHS explained, and recent data have confirmed.

Accelerating rates of ill-health are not just a healthcare disaster but an economic one as well. Fixing the NHS is voters’ #2 issue.

Although the Conservatives constantly claimed – and still claim – that the economy was exceptionally strong under their watch, the data show otherwise, particularly since Brexit.

On the environment, the news is no better: the last government supported fossil fuels at the expense of renewable sources of energy. And they allowed water regulation to become so toothless that many of our rivers and coastal waters now flow with sewage.

The Budget is a significant step towards renewal

We recently pointed out in an open letter to the Editors of our media that a responsible Budget would not ‘forget’ that the UK has a fiat currency system in which governments can and do create money whenever there is an urgent need. Among other implications, this means that government finances are nothing like household finances and the level of government debt is not an obstacle for a government which wishes to rebuild.

A government serious about renewal would ask itself three questions:

1. How much growth should we stimulate? Given the poor growth over the last 14 years, the answer must surely be quite a lot;
2. What public services does a civilised society need? Both our own pre-financial crisis history and comparison with other developed countries shows that we need to strengthen ours considerably;
3. How much risk-free savings does the private sector require? The fact that bond rates have been so low over the past 14 years suggests a very considerable appetite.

The answers to these questions shape a responsible Budget, as the diagram below illustrates.

In contrast to what we are normally told:

• A government deficit equals stimulus to the economy (spending more money into it than we take out in tax), something which has been inadequate for the last 14 years – a deficit is not something to be eliminated;
• Public services are a critical part of being civilised, not a profligate indulgence;
• The private sector needs risk-free ways to save (eg for pensions etc), and this is provided by government borrowing.

And there is really no risk of our government debt becoming unsustainable.

So how did this Budget answer the questions?

Economic responsibility

The Office for Budget Responsibility (OBR p27) says that the increase in deficit – which is equal to the increase in Economic Stimulus – compared with the Spring Budget’s forecasts is £40 billion in 2024-25 and then declines. That is an additional stimulus of around 1.4% of GDP.

A greater stimulus is tempting, but inflation has only just returned to target and the UK does not have an adequate inflation management toolkit – the only mechanism currently in place is to raise interest rates which, as we saw even before the Truss Budget, can be extremely damaging to the economy.

Social responsibility

In his Spring Budget, Hunt planned to cut spending this year by a further 0.5%, further weakening public services; Reeves has replaced this plan with an increase in spending of 4.3% worth around £54 billion (vs last year). Much of that will go into rebuilding the NHS, with significant amounts to schools and smaller amounts to other departments. This is the right order of magnitude to make a substantial difference to the quality of public services over time, although it will remain very tough for most if not all departments.

To keep the additional stimulus to £40 billion, Reeves has had to raise taxes by around £10 billion.

The Treasury has estimated the impact of the Budget on households at different income levels as in the diagram below (Autumn Budget 2024 p45).

They also say, “Real household disposable income (RHDI) per capita, a measure of living standards, is forecast to grow by 1.4% in 2024-25 and 1.1% in 2025-26 and is no longer set to decline in the near term.”

Assuming that their analysis is correct, then most normal households will be better-off, especially when taking into account the value of public services, than they would otherwise be.

To take the example households from our open letter, working-class Dan and Janice from Bradford are far less likely to have to find £15,000 to pay for Janice’s hip replacement; middle-class Susan from Islington is slightly less likely to need to fund her father’s care and – one hopes – much less likely to find her daughter ignored by CAMHS; only upper-class Jonathan from Holland Park is likely to be fuming as his non-dom status has now been removed.

Our analysis of Hunt’s last Budget suggested that there is far greater scope for raising revenue, and therefore spending, which the Budget could have exploited – and it is to be hoped that the government will address these opportunities in future Budgets.

Financial responsibility

As is conventional, the government has said that it will borrow to finance the difference between its revenues and its expenditures. This may or may not be sound. What the UK cannot afford now is for interest rates to rise again; and this could happen if the Bank of England allows it to. But it need not do so – during COVID, the Bank of England stepped-in to buy the government debt, and thereby kept interest rates and bond rates low.

This brings us to the need for rewiring.

The government must rewire for success

Truss’s Budget had little to recommend it – but the reason that the catastrophe became evident so quickly was that Truss failed utterly to consider the institutional response to her Budget.

The government cannot afford to ignore its institutions: the continued need to rewire some of our key institutions is demonstrated by the words of the OBR:

“This temporary stimulus fades to zero over the remainder of the forecast as we assume monetary policy acts to rein in any excess demand. Budget policies also have lasting impacts on the supply potential of the economy. The employer NICs rise is estimated to reduce labour supply by 50,000 average-hours equivalents, while the net fiscal loosening would crowd out some private investment in an economy with little spare capacity.”

First it assumes that if inflation rises as demand (and hence GDP) rises, it will be choked-off by an automatic reaction from the Bank of England to raise interest rates (“monetary policy acts to rein in any excess demand”) – and growth will be choked-off, too. This is a real risk, as we have highlighted before, but by no means an inevitable one – avoiding it will, however, require the government to undertake some rewiring of our key institutions.

Secondly, it assumes that increased demand in the form of more public spending (“net fiscal loosening”) will cause a reduction in private investment, rather than boosting it – this assumption is based on the idea of a fixed amount of loanable funds in the economy: if those funds are borrowed by government, there is less that could be borrowed and invested by businesses – private sector investment will be ‘crowded-out.’ This would have been incorrect but understandable as an assumption until 2014 when the Bank of England explained publicly how money is created in a modern economy. It showed that there is no fixed pot of deposits which banks lend out; on the contrary, commercial banks create money by lending: “Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.” For the last decade, this crowding-out idea is a once popular misconception the OBR should have known to be false.

The OBR was set up under Osborne with a remit and an analytical framework designed to make austerity and the regress it caused seem responsible. Both its remit and its analytical framework should now be adjusted to make progress the natural order once more.

In 2022, the Governor of the Bank of England told MPs, “To forecast 10 per cent inflation and to say there isn’t a lot we can do about it is an extremely difficult place to be.” He knew that raising UK interest rates would be ineffective in reducing globally supply-driven inflation, and that it would harm the economy – but he felt that he had to follow the remit the Bank had been given.

A high-performing government needs high-performing institutions; both the OBR and the Bank of England are important. The government should make sure they are performing well for the good of the country.

There are other aspects of rewiring that would make a difference. Brexit has done enormous damage to the UK economy, and rewiring our relationship with the EU would be hugely beneficial. Those who understand the politics better than I do suggest that this is a decade long challenge, not a quick win. The UK planning system acts as a brake on progress – and the government already has plans to rewire it. And better exploiting – and retaining for the public purse – the immense value of the intellectual property developed by UK universities could be a huge long-term benefit to our economy.

Failure to address the issue of institutional response was what caused the Truss Budget to fail so badly; it could also be the undoing of this Budget.

Conclusion

After 14 years of regressive Budgets, this Budget represents an important and overdue return towards progressive policy-making, but it is not perfect, and it could still fail.

The quality of the analyses of the Budget by most of the press are summarised by their headlines below.

These are in stark contrast to the welcome many of them gave to Hunt’s last, dismal Budget.

The Telegraph is particularly revealing. The Editor of the Sunday Telegraph wrote of Reeves’s Budget, “This was the worst Budget I have ever heard a British Chancellor deliver, by an enormous margin…” There is a curious echo of his delight at Truss’s Budget, “This was the best Budget I have ever heard a British Chancellor deliver, by an enormous margin…”

If you think more people deserve to see a Budget analysis that looks realistically at the issues and shows what could be done, please share this article with your friends and family, and on social media using the buttons below.

If you have a Labour MP, make sure they read this – especially the section on rewiring for success.

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For more articles from Mark E Thomas, click here.