Dear Rachel Reeves, Austerity Is Never The Answer

October's budget presents Labour with a chance to reverse nearly two decades of wasted potential and set the country on a different track. Will they take it?

Rachel Reeves, the Chancellor of the Exchequer, is expected to deliver the 2024 Autumn budget on the 30th of October after weeks of mounting pressure and media speculation. It’s not a task she relishes. And why would she? Faced with stagnant economic growth, chronic under-investment and a dwindling housing stock, she will likely be forced to make many tough decisions, some of which may, in fact, contradict the manifesto Labour ran on just a few short months ago. After a series of unforced errors, the government needs to seize back control of the political narrative. This is their chance, not just to rehabilitate their image, but to steer the UK economy from the turbulent storms awaiting it on the horizon.

While ours may be an age of polarisation, a rare zone of consensus in British politics is the admission that the country is struggling. Unfortunately, the agreement ends there. Because while declinist rhetoric is now so commonplace as to be mundane, what the country does next, in attempting to overcome our malaise, remains as contentious as ever. Ask any economist and they’ll deliver the same consensus: the future of the UK economy does not look promising. Following a shallow recession at the end of 2023, the UK grew solidly during the first six months of 2024, recording the fastest growth of all the G7 counties. Inflation has nearly fallen back to the Bank of England’s annual target of 2%, thanks to actions taken by the government and favourable energy price developments.

Despite these glimpses of hope, the overall picture remains bleak. That recovery at the beginning of the year began to stall as quickly as it recovered, with growth plateauing once again in June and July, where it has barely moved from since. The labour force remains volatile, wages are well behind basic necessities and certain industries still haven’t recovered from the pandemic and the Ukraine war, which continues to throttle global supply lines. Fourteen million people, including 4 million children, now live in poverty. Wages have stagnated since the banking crash, while low-paid insecure employment has spread like an epidemic. Year after year of underfunding has pushed our public services into crisis.

Their position, already daunting enough, is made even more tenuous by the red lines they set themselves during the election campaign, where tax rises on working people were ruled out, which means the rates of income tax, VAT, employees national insurance contributions and corporation tax. Together, these account for about two-thirds of all tax raised, so raising the revenue to pay for the spending increases requires some ingenuity and has sparked a semantic debate over who constitutes as a ‘working person’. While this may have given them some valuable political capital to crawl over the finishing line, it has now cornered them, with very little room to maneuver, especially if Starmer hopes to revitalize the economy following 14 years of conservative mismanagement.

With growth slowing and consumer confidence dented by all the repeated warnings about how draconian Reeves intends to be, it could all go horribly wrong. Granted, not all of this bleak atmosphere has been manufactured by Labour themselves. Most of it can be attributed to newspapers, such as the Daily Mail and Telegraph, weaponising the media to unleash a storm of reprisals with sensationalist ragebait, intended to sow doubt and scepticism. But Labour have not helped their situation with their incoherent messaging, lack of discipline and the leaks to the press, which have all undermined their authority. It has created a sense of disorder at a time when the country most needs stability.

There are two fundamental but straightforward questions guiding a chancellor’s thinking. The first is what society do they want to create? The second is what are the economic measures that will aid its creation?

While the full details of what we can expect from the budget remain clandestine, some decisions have already been leaked to the press. Just the other day, it was reported in The Times that Rachel Reeves is planning to cut the £2 cap on bus fares in a bid to remove ‘unnecessary expenditures’. At a time when most governments are trying to shift away from car dependence and encourage more public transportation use, the Labour Party is removing one of the best financial incentives, impacting some of the poorest in society for the most superficial of savings by increasing pricing on one of the greenest forms of transport. It was a hugely successful scheme that helped boost patronage on networks that were desperately struggling after Covid. Scrapping it will only further the cost of living for those that can’t afford it.

This suggests Reeves is willing to flirt with the idea of embracing austerity, the extent of which remains to be seen. If so, Labour will be making a critical mistake. Returning to the destructive orthodoxy that has decimated communities across the country, not only stymied prospective growth but cultivated the fertile ground for disillusionment to grow. Of course, with public debt hitting 100% of GDP over the summer, Reeves will need to strike a delicate balancing act between reducing the debt and improving public services. This does not mean, however, that austerity is the answer. In fact, austerity has never been the answer. It was one of the reasons so many European countries languished behind America, which used macroeconomic reforms, after the 2008 Crisis.

Since its inheriting the worst set of financial circumstances since WW2, it would be prudent, perhaps, for Labour to take inspiration from the Attlee Government of 1945-1951. The postwar Labour government faced a country on the brink of bankruptcy, yet managed to introduce the most civilising innovation in the country’s history, the welfare state, funded by a redistributive system of taxation. Any budget under a Labour government since then should be measured on its contribution to achieving this mission.

Eight decades later, the case for government investment remains a strong one. There are areas in which, without government support, both financial and over important matters such as planning laws, the UK will continue falling further behind other countries. That was true back in 2010 and it is just as true today. The prolonged period of rock-bottom interest rates after the global financial crisis provided an opportunity for a succession of Conservative governments to borrow cheaply for investment. Sadly, that opportunity was squandered.

Nevertheless, the UK is an immensely wealthy country, the sixth-largest economy in the world. The debt-to-GDP ratio is now just at 100%, but Clement Attlee carried a 250% debt to GDP and still constructed the welfare state. In fact, 100% is about average historically.

With such a large majority, it seems fairly likely Starmer and Reeves can bear the full brunt of the turbulent economic and political storms that await him. Why worry about the blowback when the next election is five years away? Starmer may be calculating that if short-term pains can secure long-term prosperity, the temporary hit, both economically and politically, may be worth it. Ultimately, the challenge that is overshadowing Starmer is more than just navigating the UK through uncharted waters. He will be forced to confront whether Labour’s founding orthodoxy, its commitment to alleviating economic injustice, can be reconciled with the harsh and, frankly, ruthless decisions his government will be forced to make to ensure future prosperity. In light of this, budget hawks in the party will no doubt be tempted to settle on measures governments for the last two decades have relied on - slashing spending.

Reeves said last week that she intends to make it easier for the government to borrow by changing the rules on public debt. Analysts estimate that her planned new measure – which takes into account the state’s financial assets and liabilities – could increase the scope to borrow by about £50bn. In reality, Reeves will only use some of this additional headroom and may borrow only enough to avoid the £24bn cut to investment inherited from Hunt. This is a good start and the fact Labour doesn’t seem to be cowered by the media is reassuring. But, this budget needs to be more than just papering over the cracks. Deep structural reforms are needed and more investment in public services neglected since 2010.

There are other ways to raise revenue, even without raising taxes. Why not, for instance, place a temporary moratorium on foreign aid for the duration of the parliamentary term? Such a measure would be popular with voters and provide much-needed financial space, saving £16bn per year, an amount that would reach £80bn by 2029, starving off further cuts to the public sector. It’s not as if adhering to the flimsy commitment to foreign aid helps the average worker in the UK. Soft power, that is, the diplomatic capital yielded by this investment, is minimal and has done nothing to rehabilitate the UK’s image abroad with its former colonies.

There is also a wide-ranging vista of tax reforms based upon the principle of the broadest shoulders bearing the heaviest burden that cumulatively would provide the resources to enable the rebuilding of the UK’s public services. This is even before the inevitable debate about how wealth and land are taxed fairly. Changes to NI contributions alone could generate as much as £17 billion annually. Stealth freeze to income tax thresholds could bring in an additional £7 billion.

This budget therefore has the potential of being the much-needed, radical break from the dark years of austerity. However, it will be totally undermined if the government goes anywhere near policies that maintain the Conservatives’ assault on the poorest in our society. The only serious response will be accepting that the country needs to become more productive, make hard choices and raise taxes on the wealthy. The alternative is further austerity, further impoverishment and something resembling state failure. If Labour is sincere about averting managed decline, Wednesday’s budget is the best chance to show this.