Reeves's public sector obsession will crush the economy

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21 hours ago

Rachel Reeves has cemented 'historic changes' to enlarge the British state, according to one of the nation's leading economists, with the battered private sector now looking at permanently higher taxes to support it.
Paul Johnson, the head of the Institute for Fiscal Studies, says it is hard to overstate the scale of the shift taking place in the economy this decade, as government spending mounts on public services, welfare and debt interest – and taxes rise to match.
'These are historic changes in the size of the state and the size of taxation in this country,' says Johnson.
'Over all of my lifetime up until 2020, taxes hovered around 33pc of national income. By the end of this decade they will be 38pc of national income. I cannot see them coming down.
'In economic history terms I think this decade will be seen as the decade in which the British state grew.'
An older and sicker population suggests the state will only get bigger.
Analysis by the Resolution Foundation, a think tank, shows that Reeves has put health spending on course to gobble up half of all the money spent on day-to-day services by the end of the decade.
This is up from a third in 2010 and roughly a quarter in 1999.
'That is a huge increase. Everything else pales a bit in significance,' says James Smith, an economist at the Resolution Foundation. 'We are becoming ever more a health state.'
The proportion may rise even more after Labour publishes its 10-year plan for the NHS later this year.
Previous proposals outlined by the Tories suggested that making the health service fit for the future would require a 50pc rise in the number of staff to 2.4m by 2037. Such an increase would mean one in 11 workers in England would be employed by the NHS, compared with one in 17 in 2021, according to the IFS.
Ruth Curtice, the Resolution Foundation chief executive, said the clear shift towards higher health spending constituted a 'major reshaping of the state'.
Labour is using its gigantic parliamentary majority to push through such seismic change. Yet at the same time the economy is weakening, undermining Reeves's ability to pay for her grand spending plans.
GDP dropped by 0.3pc between April and March, suggesting the strong growth seen during the first three months of the year was not the start of a sustained recovery.
The Chancellor has blamed Donald Trump's trade war for knocking Britain off course, and it undoubtedly had an effect. However, there is no sense that Reeves has adapted her plans to cope with Trump's crusade, which has been known about for months.
Furthermore, April's GDP numbers also show clear signs that it was Reeves, not Trump, who was to blame for the slowdown.
The services sector performed particularly poorly, with retail struggling amid the sharp rise in employers' National Insurance contributions, the tax bosses pay on workers' wages, and the minimum wage.
Unemployment is up and the number of people in work is down, another sign that this 'jobs tax' is weighing on hiring.
Worryingly, Britain is relying more and more on public spending to keep the economy afloat.
Recent analysis by the Bank of England shows that activity has essentially been driven by the public sector over the past two years. That's not a sustainable model for growth, particularly given the dire productivity in the public sector.
Businesses are increasingly frustrated. Simony Emeny, the chief executive of pub group Fuller's, argues the private sector is being forced to work far harder than the public sector.
'Because of what the Chancellor announced last year, we have had to work really hard to make our businesses as efficient as possible and use technology well and to make sure that we are in a position where we can absorb some of these cost increases,' he says.
'If I look at the Government, I don't see that same drive to improve efficiency coming through.'
He cited the rise in the number of civil servants, which has soared from below 420,000 in 2016 to 550,000 today.
'The [hospitality] sector is having to be forensic about costs just to navigate the challenges we face and I'm not seeing that same scrutiny from the Government. [They] need to be consistent about this,' says Emeny. 'They're putting a lot of pressure on business with extra costs. We're having to absorb that this year, and so is everybody else.'
Fuller's and other businesses may have to absorb even more costs later this year. With pressure to spend yet more on healthcare and benefits, and amid scepticism that many of the plans set out in the spending review are realistic, economists believe more tax rises await in the autumn.
Johnson, at the IFS, suspects the long freeze on income tax thresholds will be extended – a classic stealth tax, as workers end up paying more tax even if their pay only rises in line with inflation – meaning they become worse off over time.
But that alone may not be enough. Andy King, a former senior official at the Office for Budget Responsibility (OBR), the Government's spending watchdog, says it is almost certain to slash its growth forecasts at the Budget in the autumn, in part because of Reeves's own policies.
'The immigration policy looks net negative for growth, employment rights need to be scored, the employer NICs and national living wage rises look to have done much more damage to employment than was allowed for,' he says.
'The writing seems to be on the wall for another fiscal hole in the autumn.'
That points to yet another tax raid, despite the record-breaking £40bn of tax increases in the Budget last October, which was supposed to put the finances back on an even keel for the rest of this parliament.
King suspects the Chancellor will have to ramp up the big taxes she has promised not to touch: VAT, National Insurance or income tax.
'Now that the spending plans have been inked in, it leaves fewer levers for restoring fiscal headroom. So it looks like a rock and a hard place for the autumn. Something important may have to give if there is a material fiscal hole to fill,' he says.
'That means either loosening the fiscal targets, which look very risky given the way the bond market is viewing the UK relative to its peers. Or it means breaking manifesto tax commitments which looks, as Sir Humphrey might say, brave, bordering on courageous.'
Whatever form tax rises end up taking, it will extend what has become a well-established pattern under Labour: raid the private sector to pay for ever higher state spending.
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