News from The Open University
Posted on • Arts and social sciences, Society and politics
Alan Shipman is an Open University Senior Lecturer in Economics, with a macroeconomic accounting focus. Here he points out how challenging it will be for the Chancellor to produce a Budget that will please two different camps in her own party… but it’s all part of a bigger plan.
Rachel Reeves is seeking to re-embed the government in the economy, so that it shares in the gains when its current or capital spending boosts output and profit.
This means prioritising public projects that pay back directly, without relying on taxes which are already taking a record peacetime share of national income. But her first Budget will set up a clash with two powerful lobbies within the Labour party.
They are the Growth Group, which wants a rise in public investment, and the Modern Money movement that urges governments to spend on everything that makes the economy more productive, ditching the view that extra tax or debt are always needed to pay for it.
Both are backed by influential economists and financial experts and the two camps, while not always in tune with each other, have been making the case for an immediate rise in Budget funding to road, rail, green energy, and other infrastructure spending.
According to the Growth Group’s research, public investment can pay for itself through the extra production and income stimulated and the revenue produced.
Modern Money sees no harm in ‘unfunded’ spending as long as it is matched by unused resources in the economy, and that governments may need to run budget deficits when private investment is too low.
According to this view, it’s only when resources are fully employed, and inflation threatens, that governments need to raise taxes or issue more debt. That threat has currently faded, with inflation down to 1.7% in September, below the 2% target.
The Chancellor has teased these groups by changing the ‘fiscal rules’ to allow more borrowing for investment. But her Budget won’t break away from the tight constraint built into the five-year plan left by the Conservatives. Some of the reasons she is willing to hold out against them are:
Because most public investment gets no direct payback, Reeves is focusing on building up assets whose income flow goes straight to central or local government. That’s why the big pre-Budget pledges include:
Her Budget will give further clues on how the government plans to re-expand its non-tax revenue base, which dramatically shrank when the Conservatives sold-off most state-owned assets (including council homes) between 1979-1997.
The new government can’t afford much renationalisation, and wants to avoid just accumulating lossmakers whose shareholders bailed-out. But with technologies changing rapidly in pursuit of ‘net zero’, the government can’t avoid getting more involved in private-sector industry and finance. It has plenty of scope to build up stakes in sunrise industries like green energy, new materials and AI, especially with the UK no longer bound by EU industrial policy rules.
So, Labour’s first Budget signals a return to its more radical pre-Blair vision, even though it will be criticised as too cautious by the party’s left wing.