Our government faces stiff challenges and if it is to meet them and deliver the promised national renewal, it will need a rapid and significant shift in mindset.

Before the 2024 General Election, Sir Keir Starmer explained that the UK needed a decade of national renewal. He was undoubtedly correct. The Chancellor recently commented that: 

“The world has changed, [we] can see it before our eyes, in a whole number of respects … greater instability and insecurity in the world, Europe having to take on a bigger role in our continent for our own defence.”

 She is also undoubtedly correct.

The big question is how is she changing her policies in response to these challenges? Our analysis shows that:

• The choices she has made will not help with the task of national renewal;
• This was not inevitable given the state of the world – a crisis need not lead to disaster: it can be a time of opportunity;
• Delivering national renewal will need a major, and fairly rapid, change of mindset in the Treasury and beyond: we must rewrite the fiscal rules, rewire our key financial institutions and plug the enormous leakage of public money.

This Statement will not help national renewal

What do we mean by national renewal? Voters’ greatest concerns are the economy (and its impact on families – the cost-of-living crisis), the NHS, immigration and defence and security. The Spring statement will do little to nothing on most of these:

• It will not help the cost-of-living crisis;
• It will not drive strong economic growth or even help reduce debt: GDP;
• It will not repair public services (except for defence and security); and overall,
• It will not provide a foundation for future renewal.

It will not help the cost-of-living crisis. The previously announced rise in the minimum wage will help many people, but that was not part of the Spring Statement. The greatest impact on living standards from the Spring Statement will be the targeted reduction in health and disability benefits. The Department for Work and Pensions assessed the impact as follows: “we estimate there will be an additional 250,000 people (including 50,000 children) in relative poverty after housing costs in 2029/30 as a result of modelled changes to social security, compared to the baseline projections.”

It will not drive strong economic growth or even help reduce debt: GDP. The four components of GDP are:

• Public (or government) spending; plus
• Household spending (or consumption); plus
• Business investment; plus
• Trade surplus (or a negative figure if, like the UK, you run a trade deficit).

If you wanted to drive growth, you would take steps to support all four of these components.

The Chancellor has done very little of that: public spending will be reduced, household spending – especially given the forecast level of interest rates – is unlikely to rise. Exports are likely to be hit by Trump’s tariffs, and we have no (or at least no publicly-announced) plans to improve trading relationships with our most important trading partner, the EU. Business investment in capacity is, as we have explained before, driven by a combination of demand and profitability – the factors above mean that demand will not be there to drive investment. All four components are therefore likely to remain subdued. And this means that the ratio of debt: GDP is unlikely to fall – never in the last 300 years have we seen debt:GDP fall when growth was subdued.

It will not repair public services. The chancellor has pencilled-in £3.6 billion in departmental spending cuts. As the IFS commented, “There were two notable features of the Chancellor’s updates to her plans for public service spending. First, the cash injection provided last autumn will, in the face of higher inflation (3.8% in 2024–25 as measured by the GDP deflator, up from 2.4% in the October forecast), provide less of a real-terms boost. As a result of this and other factors, today’s figures suggest that day-to-day spending will be 2.6% higher in real terms in 2024–25 than it was in 2023–24; in the October forecast, it was supposed to be 4.2% higher. Given how much the government was relying on this short-term cash injection to get public services back on their feet, this is significant.”

In summary, the Statement will not provide a foundation for future renewal. When we briefed MPs ahead of the October 2024 Budget, we said that if by October this year, progress towards national renewal was not evident to voters, the Government would be left with an uncomfortable choice between a 180° U-turn in both policy and the rationale for that policy, or continued failure. As the arguments above make clear, unless action is taken soon, that is where we will be in October.

But none of this is inevitable.

A crisis need not to lead to disaster

In 1939-1940, John Maynard Keynes was looking at a world changing even faster than today’s world. As Britain faced the might of the axis powers, without yet having paid off the debt from World War I, the then Chancellor Sir John Simon and his successor Sir Kingsley Wood had to work out how to pay for re-armament at a time when government debt:GDP already stood at well over 150% (far higher than today).

Keynes set out a solution to the problem, one which did however require changing one’s mind quite fundamentally about things like borrowing, taxing, saving, benefits, etc. He did not suggest paying for the war by impoverishing the most vulnerable. Indeed, in his 1940 book, How to Pay for the War, he wrote,

“I have endeavoured to snatch from the exigency of war positive social improvements. The complete scheme now proposed, including universal family allowances in cash, the accumulation of working-class wealth under working-class control, a cheap ration of necessaries, and a capital levy (or tax) after the war, embodies an advance towards economic equality greater than any which we have made in recent times.”

Although Rachel Reeves is facing a lesser crisis, the choices she is making will not lead to any such advance.

So what should she do now?

National renewal needs a major change of mindset

The government has boxed-in its policy options, probably as a result of its successful ‘small target strategy’. While this worked as a strategy to get elected at a time when Labour could not be held responsible for government policies, it would be a disaster to continue with it in government now that they are responsible. The result of sticking to it is that all the options that would deliver national renewal would have to be ruled out on political grounds.

What national renewal requires is a large number of significant policies in the green area. With a small-target strategy, there are none.

To deliver national renewal:

• We need to stop ruling out all the good options;
• We need to completely redefine ‘Budget responsibility’; and
• We need to stop the leakage.

We need to stop ruling out all the good options

The first thing that must go is the nonsense of ‘non-negotiable fiscal rules.’  Fiscal rules are not iron-clad rules of economics, they are political devices used by each Chancellor to give cover for what they want to do, and to enable them to argue that there is no alternative.

Each Chancellor has at least one set, and many have had more than one. According to the Institute for Government, the UK is now on its 10th set of unchangeable Fiscal rules! In her Autumn 2024 Budget, the Chancellor made her first change to the fiscal rules so that:

• Day-to-day spending (not investment spending) should be matched by revenues by 2029/30; and
• The ratio of debt:GDP should be falling by 2029/30. Debt is now defined as Public Sector Net Financial Debt (PSNFD), a broader measure of debt than the one used by the previous government.

This in turn means that the notion of a ‘Chancellor’s headroom’ is nonsense – the headroom is simply the difference between the forecast level of (for example) debt:GDP and the level set in the current version of the fiscal rules.

We need to redefine Budget responsibility

The Office for Budget Responsibility (OBR) was created by George Osborne when he wished to introduce austerity. At that time, many UK economists were saying that, to recover from the Global Financial Crisis, ensuring growth was the key, and that austerity would weaken the recovery. So, to make his austerity appear respectable, Osborne set up the OBR with a brief to focus on debt:GDP as a key measure of Budget responsibility and an assessment framework that assumes that government spending crowds out the private sector – thus ensuring that any expansionary Budget would be ‘irresponsible.’ On the other hand, a Budget which weakened public services, constrained growth and impoverished many of the UK population would be deemed ‘responsible.’

After 14 years of this, we have seen that the 57 economists were right, and  Osborne was wrong.

It is time to redefine Budget responsibility. Here is a simple framework for doing that.

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) and the UK financial system is also dependent on gilts as risk-free collateral and these are provided by the government issuing bonds – there is no real substitute.

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

If we look at it this way, we start with the presumption that we need a lot more economic stimulus. But that would produce a risk of inflation – and with our current institutional framework, that would force the Bank of England (BoE) to raise interest rates even at the risk of doing more damage to the economy. So, if we want national renewal, we need to rewire some of our key institutions, like the BoE and the OBR.

This framework also says that if we want to spend more on repairing public services without triggering inflation, we may need to take more money out of parts of the economy – and fortunately, there is enormous scope for leakage prevention.

We need to stop the leakage

A huge amount of what should be public money finds itself either not going into public services, being misspent, or simply not being collected in the first place. We call this ‘leakage’.

The amount of leakage is mind-blowing: because HMRC has been under-resourced, avoided tax is estimated at £2.7 billion per annum; evaded tax (that is the illegal one) is estimated at £4.6 billion per annum; and uncollected tax at £35 billion per annum. In recent years, we have seen COVID fraud at £7 billion per annum; and general fraud, estimated at £52 billion per annum. Then there is  taxing capital gains at the same rate as earned income, which could generate a further £42 billion per annum. A wealth tax is practically difficult to implement, but could raise up to £24 billion per annum.  Public money given to the railways totalled £21.1 billion in FYE March 2023. And what about turning some or all of the £50 billion per annum of government grants to business into equity purchases and starting to build a sovereign wealth fund?

When you add it all up, you get a picture like this.

The total opportunity runs into the hundreds of £ billions. In total, if all the leaks were completely plugged, the benefit to UK citizens in general (though not those who have been on the receiving end of the leakage) would be a truly staggering £250 billion per annum.

Now, of course, identifying these leaks is easier than actually plugging them all. Most of them could not be plugged easily or quickly – for example rebuilding tax enforcement capability in HMRC would take time. And not all of them – eg the conversion of subsidies into equity – would result in more cash being available in the short term. But it is not unreasonable to suppose that £60 billion per annum of spendable cash could be realised from a combination of these sources.

An additional £60 billion per annum would be enough to produce a Budget for national renewal that tackled the nation’s problems without increasing taxes on ordinary working people.

Conclusion

With this Spring Statement, we are not currently on track for national renewal: we are heading for further decline. This is not justified by the state of the world: when governments are prepared to erase their red-lines, they can do extraordinary things in the face of far greater crises. We are systematically ruling out all the actions we should be taking, partly because we have institutionalised doing the wrong things.

So, if we want national renewal, we need a change of mindset, we need to redefine what a responsible Budget looks like and rewire our institutions accordingly, and we need to take steps to stop the leakage.

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