November 2024

Economist Michael Burke on Labour’s 2024 budget

By Diane Abbott MP

Budgets are accompanied by a blizzard of documentation designed to illuminate the detail of the big fiscal events. But the real effect can be to obscure what the real thrust of policy is and what its impact is.

The confusion surrounding the October 2024 Budget is even greater than usual. Essentially, what is being discussed as a huge tax-and-spend Budget is in reality, a Budget which not only extends austerity but actually deepens it.

First, let us highlight some of the things that have happened (or not) that give the lie to the idea that this is a big tax-and-spend Budget. One striking development is that the IMF has welcomed the Budget. The IMF has never supported what might be called “Keynesian” increases in taxes and public spending; it is an institution gripped by neoliberalism. But it specifically welcomes the central aim to “reduce the deficit by raising revenues.” As we shall see, the burden of that deficit reduction will be taxes on ordinary people.

Similarly, despite all the nervous chatter about how the markets would react to claims of enormous spending increases, the government bond market was largely unmoved. In effect, 10-year borrowing costs for the government are no different from those of the US government, which seems far from a crisis.

But fundamentally, any significant changes to both taxes and spending ought to have large economic impacts, as the government is the biggest single actor in the economy. Huge increases in both ought to have commensurately large economic impacts.

Yet the official forecasts are for almost no net economic impact over the next five years at all. Media outlets which continue to parrot both the size of the Budget measures and the meagreness of the economic response risk making themselves look ridiculous.

This is a pack of dogs that did not bark. The explanation is quite simple. The “huge” rise in both tax revenues and even larger rises in spending are a mirage.

In March 2024, the Tories announced huge cuts in spending and tax increases, timed to be implemented after the election, for obvious electoral reasons. These are the fiscal plans that Labour inherited.

They were so draconian it is doubtful the Tories could have implemented them without huge social unrest (as well as financial market turmoil). The Tories’ poll position suggested there was never any intent to implement them.

Comparing new tax-and-spend plans against these fictional levels does not amount to huge increases in either taxes or spending. By the same token, not imposing most of those reckless Tory cuts does not mean that austerity is ending.

The reasonable comparison is to compare the fiscal plan now with the actual outturn in the previous fiscal year 2023-24. Once the correct comparison is made, all the confusion disappears. So, the Office for Budget Responsibility (OBR) shows that what is presented as an enormous increase in employer’s National Insurance contributions (NICs) is, in reality, nothing more than making good the big loss of government revenue by Jeremy Hunt’s cut to employees’ NICs in March.

So, before Hunt made his NICs giveaway to middle and higher earners, NICS as a whole contributed government revenues equivalent to 6.6 per cent of GDP. After Hunt’s cut, the revenues fall to 5.9 per cent of GDP. After the November Budget move on employers’ NICs, it goes back to 6.6 per cent of GDP over the next few years, a change back and forth of 0.7 per cent of GDP.

To be clear, although higher earners would not be a priority for most progressive taxation policies, the combined Hunt and Reeves moves amount to a transfer of incomes from business to workers.

However, much bigger measures, which are undoubtedly austerity, are taking place. In the same OBR documentation (table 4.1 of the Economic and Fiscal Outlook, for the economics nerds), income tax revenues will rise from 10.2 per cent of GDP to 11.6 per cent by 2028-29, a rise of 1.4 per cent of GDP.

This is double the change in employers’ NICs. It is achieved by freezing the income tax thresholds. Depending on the degree of wage inflation that takes place, this means more ordinary workers will pay some of their income at higher rates of income tax. It is a stealth tax which will clobber ordinary workers.

This is undoubtedly austerity. The same applies to departmental spending. All of it looks incredibly generous when compared to Hunt’s plans for slash and burn. But the actual picture is somewhat different, as shown by the OBR. Total managed expenditure for all government departments goes from 44.9 per cent of GDP in 2023/24 to 44.5 per cent in 2029-30 (OBR, Table 5.1). This is a tightening of government departmental spending.

It is only fair that “resource” spending does rise modestly. But the multiple crises in health, education, transport and housing are, in many cases, near a tipping point. They cannot be cured, or in some cases even ameliorated, by additional resources of 0.6 per cent of GDP. Yet this is what is on offer.

The Chancellor and the Prime Minister, in particular, argued that growth was key to improving public finances and funding sustainable improvements in public services. Public-sector investment is crucial to that, they have argued, not least in drawing in private sector investment. I largely agree with those propositions.

Yet, as we have already shown, the official real GDP forecasts over the next few years are no improvement on previous forecasts and are actually slightly lower.

This should be no surprise, as, despite all the talk, public-sector investment is not increasing. While the average annual real GDP forecast is approximately 1.5 per cent over the next few years, the government’s plans for public sector investment amount to yearly increases of about 1 per cent. In three of the next six years, public sector investment is projected to fall, and it falls as a proportion of GDP.

As a result, the government is left hoping, Micawber-like, that “something will turn up” in the world economy in the next few years to lift the dilapidating British boat. Meanwhile, the Tory plans to introduce “reforms” to the work capability system aimed at cutting the flow of people by two-thirds as well as clamping down “benefit fraud.” Austerity for disabled people has been unremitting since 2010 and is set to remain so.

The outlook is for an economy crawling along at a snail’s pace, hobbled by austerity. This means workers and the poor will continue to pay for a crisis made by others.

Diane Abbott is Labour MP for Hackney North and Stoke Newington. Follow her on X @HackneyAbbott.

The above article was originally published here by the Morning Star.