{"id":25932,"date":"2024-10-24T16:48:25","date_gmt":"2024-10-24T15:48:25","guid":{"rendered":"https:\/\/ounews.co\/?p=25932"},"modified":"2024-11-04T14:05:42","modified_gmt":"2024-11-04T14:05:42","slug":"reeves-predicted-fiscal-caution-is-actually-the-start-of-a-more-radical-strategy","status":"publish","type":"post","link":"https:\/\/www.open.ac.uk\/blogs\/news\/arts-social-sciences\/reeves-predicted-fiscal-caution-is-actually-the-start-of-a-more-radical-strategy\/","title":{"rendered":"Reeves\u2019 predicted fiscal caution is actually the start of a more radical strategy"},"content":{"rendered":"

Alan Shipman<\/em><\/a> 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\u2026 but it\u2019s all part of a bigger plan.<\/em><\/p>\n

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.<\/p>\n

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.<\/p>\n

They are the Growth Group<\/strong>, which wants a rise in public investment, and the Modern Money<\/strong> 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.<\/p>\n

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.<\/p>\n

According to the Growth Group\u2019s research, public investment can pay for itself through the extra production and income stimulated and the revenue produced.<\/p>\n

Modern Money sees no harm in \u2018unfunded\u2019 spending as long as it is matched by unused resources in the economy, and that governments may need<\/em> to run budget deficits when private investment is too low.<\/p>\n

According to this view, it\u2019s 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.<\/p>\n

Why the Chancellor is ignoring them\u2026 for now<\/h2>\n

The Chancellor has teased these groups by changing the \u2018fiscal rules\u2019 to allow more borrowing for investment. But her Budget won\u2019t 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:<\/p>\n

    \n
  • Rules were already being broken:<\/strong> It has become well known she has discovered a \u00a322bn \u2018black hole\u2019 of inherited spending not matched by revenue. At least another \u00a320bn may be needed just to pay for current plans after taking account of inflation.<\/li>\n
  • Borrowing costs are rising:<\/strong> The interest rates on Treasury borrowing have returned to levels reached when Liz Truss made her short-lived dash for growth in 2022. This makes it expensive to refinance the debts falling due, which past governments ran up in from 2008-22 at near-zero costs.<\/li>\n
  • Most public infrastructure doesn\u2019t produce income:<\/strong> While pro-Growth economists can show that public infrastructure spending has a high rate of return, the Treasury can only tap into that income via taxes. It\u2019s hard to find new taxes that don\u2019t hit middle-income-earners hardest, and any \u2018stealth taxes\u2019 smuggled through on Budget day are quickly exposed.<\/li>\n
  • Public services aren\u2019t really investment:<\/strong> Growth lobbyists like to count spending on education, healthcare, policing and other public services as investment, since they lower costs and boost profit opportunities for private enterprise. But these are really just running costs, which get bigger as services expand, and borrowing to fund them is hard to justify even under the new relaxed rules.<\/li>\n<\/ul>\n

    So what is<\/em> the Chancellor doing instead?<\/h2>\n

    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\u2019s why the big pre-Budget pledges include:<\/p>\n

      \n
    • Building more affordable housing<\/strong> and a new generation of New Towns<\/strong>, which can generate direct revenue from residential and commercial rents<\/li>\n
    • Setting up Great British Energy<\/strong>, giving the state a direct stake in green electricity provision<\/li>\n
    • Renationalising railways<\/strong> as the current franchising system winds down, recapturing revenue from fares<\/li>\n
    • And the new National Wealth Fund<\/strong>, which builds on the previous government\u2019s efforts to channel pension-fund wealth into infrastructure and small business but aims to bring the Treasury its own flow of interest and share dividends<\/li>\n<\/ul>\n

      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.<\/p>\n

      The new government can\u2019t afford much renationalisation, and wants to avoid just accumulating lossmakers whose shareholders bailed-out. But with technologies changing rapidly in pursuit of \u2018net zero\u2019, the government can\u2019t 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.<\/p>\n

      So, Labour\u2019s first Budget signals a return to its more radical pre-Blair vision, even though it will be criticised as too cautious by the party\u2019s left wing.<\/p>\n","protected":false},"excerpt":{"rendered":"

      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\u2026 but it\u2019s all part of a bigger plan. Rachel Reeves is seeking to re-embed […]<\/p>\n","protected":false},"author":18,"featured_media":22221,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,15],"tags":[858,860,869,1525,1640,1865,2198,2199],"class_list":["post-25932","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-arts-social-sciences","category-society-politics","tag-faculty-of-arts-and-social-sciences","tag-faculty-of-fass","tag-fass","tag-news-home","tag-ou-home","tag-rachel-reeves","tag-the-budget","tag-the-chancellor"],"_links":{"self":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/25932","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/comments?post=25932"}],"version-history":[{"count":1,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/25932\/revisions"}],"predecessor-version":[{"id":26118,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/25932\/revisions\/26118"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media\/22221"}],"wp:attachment":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media?parent=25932"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/categories?post=25932"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/tags?post=25932"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}