Labour is pioneering the Blackadder approach to public finances

Telegraph

25-05-2025

After Labour took office in July 2024, ministers talked relentlessly about 'finding a £22bn black hole in the public finances on entering office'. It was a cynical, deeply misleading narrative, used to justify hefty tax rises unveiled by Rachel Reeves, the Chancellor, in her October Budget but omitted from Labour's election manifesto.
For the 'black hole' was, according to Paul Johnson of the Institute of Fiscal Studies (IFS), probably the UK's most respected analyst of our national accounts, 'obvious to anyone who dared look'.
Labour deliberately ignored fiscal reality to serve its own political ends – a governing strategy the party now looks set to test to destruction.
During the second half of 2024, the Government's endlessly downbeat 'black hole' rhetoric and tax increases hammered business and consumer sentiment, stopping economic growth in its tracks as GDP flatlined.
The 0.7pc GDP uptick during the first three months of this year was a chimaera – driven above all by a 4pc surge in exports ahead of President Donald Trump's expected move to raise tariffs on goods sold in the US.
The UK economy is dangerously fragile. Inflation soared to 3.5pc during the year to April, up from 2.6pc the previous month, as firms passed on Reeves's £25bn annual rise in employer National Insurance contributions (NICs) and a hefty increase in the minimum wage. That's getting on for twice the Bank of England's 2pc target, ruling out any more interest rate cuts for some months.
That same NIC rise, introduced last month, meant April should have been a bumper month for tax receipts. But Labour's inflation-busting public sector pay rises and soaring welfare payments saw the Government take on £20.2bn of extra debt last month alone.
Meanwhile, borrowing for the financial year ended March was £148bn – a cool £11bn more than the Office for Budget Responsibility (OBR) forecast just weeks ago in Reeve's 2025 Spring Statement. And it's an astonishing £61bn more than the watchdog's estimate back in March 2024.
UK government spending has long outstripped the economy's ability to generate tax revenues, as massive annual borrowing totals add to our growing stock of national debt. The last time we ran an annual budget surplus was in 2000/01, almost a quarter of a century ago.
Each year, the OBR pretends borrowing will be much lower than it actually will be – then the media fails to compare current outcomes with previous estimates, focussing instead on the political drama of future forecasts.
This result is a collective obsession with ideological narrative over fiscal reality. Between 2010 and 2019, for instance, the UK's national debt ballooned from 50pc of GDP to 80pc – a period absurdly dubbed 'the austerity years'.
In her Spring Statement, Reeves boasted about £9.9bn of 'headroom' she had allowed for on total spending of £1,351bn in four years' time – a contingency of well below 1pc, so small as to be meaningless. Yet she was dubbed 'the Iron Lady'!
That contingency has now completely gone, in part because financial markets, alarmed at Labour's high spending, have pushed up gilt yields and, therefore, debt service costs.
No less than £9bn of the £20bn borrowed last month was spent on debt interest. The annual debt service bill is now a grotesque £105bn – more than the state spends on transport and schools combined.
But the main reason Reeves's 'headroom' vaporised is that growth has slowed, resulting in weaker tax receipts, and Labour's tax rises will compound the problem by slowing growth even more.
The Bank of England's growth forecasts during this parliament are lower than those of the OBR, starting with 0.75pc this year, compared to a 1pc 2025 forecast from the official fiscal watchdog. If the Bank is right, Reeves's £9.9bn of headroom in four years' time turns into a £30bn shortfall, according to calculations by Elgin Advisory, a risk consultancy.
Such concerns about Labour's big-borrowing, growth-sapping tendencies are increasingly evident on government debt markets. Over the last nine months, the Bank of England has dropped base rates a full percentage point from 5.25pc to 4.25pc. But long-term government borrowing costs have moved a similar amount in the opposite direction, with the 30-year gilt yield surging from 4.35pc in the run-up to Reeves's October budget to 5.55pc now.
Markets and policymakers are at loggerheads, which spells looming systemic danger as the markets always win. For months, long-term borrowing costs have been above their peak during the October 2022 'mini-Budget' crisis – so where is the media outcry?
Within investor circles, there is now open talk of a potential 'gilts strike' – with the Government only able to borrow at very sharply elevated interest rates – or even a 1976-style insolvency crisis. We're not there yet, but the dangers are very real.
While the 'bond vigilantes' are starting to inflict pain around the world, with US and Japanese long-term yields rising, the UK is heavily exposed, lacking the 'reserve currency' might of America and with a lot of our debt held by overseas investors. Plus, a third of our government debt is index-linked – so as inflation rises, the balance sheet squeeze is punishing.
'If nothing else works, a total pig-headed unwillingness to look facts in the face will see us through'. So said General Melchett in that television comedy classic Blackadder, played by Stephen Fry.
That's Labour's approach to managing our public finances – but it's anything but funny.
The UK is crying out for economic leadership – in the form of fiscal discipline, lower taxes and other supply-side measures to deliver the growth needed to rescue our public finances.
But, like General Melchett, this Government – and much of our political and media class in fact – is determined not to 'look facts in the face'.