6 days ago
Labour is borrowing against our children's futures
Much of the debate about our public finances is intensely short term. The in-vogue concern at the moment is the fiscal 'headroom' that each Chancellor has to work with – that is, the buffer between their spending plans and the fiscal rules they set for themselves. Rachel Reeves appears to have cut hers so fine that someone sneezing in the Treasury could blow her off course.
As it happens, increased borrowing costs and the Government's inability to bring limited reforms to the welfare system means it is highly likely that tax rises are on the way in the autumn, as the Conservatives have been predicting since the general election.
But even this will do little to change the fundamental economic picture. The truth is that we live in an age of fiscal irresponsibility, where governments increasingly look to pass the burdens of the present onto the future. That even this short-termist strategy now seems to necessitate desperate tax rises should concern us greatly.
In July, the Office for Budget Responsibility published its fiscal risk and sustainability report. For a technical document, it did not mince its words. Britain's deficit is the third highest amongst advanced European economies. Its debt level is the fourth highest after only Greece, Italy and France. Efforts to make our public finances more sustainable have met with only 'limited and temporary success'. There has been a 'substantial erosion of the UK's capacity to respond to future shocks and growing pressures on the public finances', and the scale and array of risks to the UK fiscal outlook is 'daunting'.
The most serious liabilities Britain faces are not so much to do with day-to-day spending decisions as they are about the chronic, structural issues with our economy and the state's role within it. They include an unfunded state pension which is designed to increase exponentially over time, even as the number of working people paying for it shrinks, the levels of public spending on healthcare, which is set to rise to more than a fifth of GDP by 2070 (we now already spend more on health than the entire Portuguese economy), and a welfare system that will see us spending £100bn per annum on health and disability benefits as early as 2029-30.
What makes these vast financial commitments 'irresponsible', however, is the way we are currently funding them: that is, increasingly by borrowing from the prosperity of future generations. The national debt already stands at about 100 per cent of GDP and is forecasted to grow to over 270 per cent by the 2070s. Even this does not fully factor in the vast state and public sector pension liabilities for the British state – which some commentators argue increases the total outstanding liabilities to some £11tn, or four times the size of the economy. Instead of making tough decisions on spending and taxation today, we are passing on the financial obligations to the taxpayers of the future, who will face higher debt servicing costs.
Labour is in a bind. It won't – or can't – take on the responsibility of reducing the welfare bill. It is changing the way the government measures debt, not to give a better picture of the public finances, but simply so it can borrow more. Yet the costs of borrowing have risen to the third highest of any developed economy since it entered office. And so it is being buffeted towards raising taxes to pay for a totally unaffordable level of public expenditure. Some on the Left suggest that this is its own form of fiscal responsibility. But this fails to recognise that higher rates will harm the ultimate source of tax revenue, which is a productive economy.
Reform isn't much better. They spy an opportunity to attract voters in the so-called 'upper Left' quadrant on the political spectrum – those with socially conservative but economically statist views and values. They advocate for tighter borders, but greater state involvement in the economy and more generous welfare spending. Cobbling together economic policies based simply on what is most likely to attract a particular section of the British public in the next election, however, is the very same political problem that has gotten us into this mess.
So there's a gap in the political market. But if the Conservatives wish to be the party that the public trusts to restore the public finances, they will have to offer a drastic change to the status quo. And that will mean making some far harder decisions than those to which they have committed so far.
Firstly, a truly fiscally responsible government would need to reverse a long-standing policy of seeking to take people out of paying tax. Before the post-2020 phenomenon of 'fiscal drag' – in which people were dragged into paying more tax by the combination of frozen thresholds and inflation – Conservatives bragged about taking people out of paying income tax altogether by increasing the personal allowance. We need a complete about-turn in this approach. It is the definition of fiscal irresponsibility to have more and more people benefiting from a system which they do not have a stake in financing. And it's bad politics. To generate a coalition in favour of lower tax rates, we need more people with a stake in sustainable public finances.
Secondly, indexing benefits so that they cease to bear any relationship with our ability to pay for them is indefensible. When it comes to the state pension, there is no fund into which savings are built up for an individual worker. Current pensions are being paid for by those in work, and the triple lock introduced in 2010 means its funding requirement is always ratcheting upwards. This needs to be scrapped, a more proportionate index for the triple lock introduced, and efforts to increase private retirement savings radically boosted.
Finally, the Conservative articulation of fiscal responsibility cannot come down on the side of raising taxes to accommodate high expenditure, as Labour have proposed. It must do the reverse. In particular, we must level with voters on the NHS. It is not the envy of the world. In fact, on metrics like healthy life expectancy, the only worse system is the US's model of fully private insurance. And it is cripplingly expensive. Again, the only less affordable system in the world is the American. The Dutch and Singaporean models suggest ways to improve both affordability and health outcomes.
Fiscal responsibility is a signal. Balanced books, a lower debt burden and a smaller state demonstrate a commitment to the view that the centre of economic life ought not to be at the level of government but in the private, wealth creating sector.
But it is not simply about balancing the books year to year. A Conservative Party wishing to present itself as the only force in British politics willing to make the necessary decisions in the cause of long-term prosperity must also address a short-termism which is driving us towards an economic iceberg, and sapping tomorrow's workers of their purchasing power. That means disavowing some policies with which it has been associated for far too long.
