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The Guardian - UK
The Guardian - UK
Politics
Richard Partington and Phillip Inman

Eight charts that lay bare Labour’s spending inheritance from Tories

She looks at him but he looks down at the ground
Rachel Reeves and her predecessor Jeremy Hunt at the state opening of parliament. On Monday she will unveil the audit to MPs. Photograph: Ian Vogler/Reuters

Rachel Reeves is preparing to announce Treasury analysis of Labour’s spending inheritance from the Conservatives in parliament on Monday to highlight why she will need to make “tough decisions” in her autumn budget.

The chancellor’s audit is expected to show £20bn in commitments left unaccounted for by the previous government, building on a narrative that the Tories have left Labour with the “worst set of circumstances since the second world war”.

After more than a decade of stalling economic growth, and with public services stretched thin, there is plenty of evidence to back up Reeves’s argument. However, there are also signs that some progress was being made before Keir Starmer’s landslide victory this month. Here are eight charts that lay out the economic legacy the new administration faces.

Soaring national debt

Reeves will be painfully aware of the damage George Osborne inflicted on Labour the last time her party left office, epitomised by the way David Cameron’s chancellor seized on the infamous Treasury note left by Liam Byrne, joking that “there is no money left”.

Without such a powerful device this time, Labour will be keen to highlight official figures showing a tougher picture than in 2010.

The national debt has risen from 64.7% of GDP in 2010 to 99.5%, the highest level since the 1960s, after successive annual budget deficits and the damage of the Covid pandemic. Debt interest costs reached a postwar high of 4.4% of GDP in 2022-23, although are now falling back as inflation cools.

UK government bond yields – a proxy for borrowing costs – have also been on a rollercoaster, soaring after Liz Truss’s mini-budget in September 2022, falling back after Rishi Sunak took over but rising again in 2023. They have eased in recent weeks but remain higher than in 2010, amid predictions that rock-bottom rates seen after the 2008 financial crisis are unlikely to return.

Falling living standards

If one chart illustrates how the UK’s situation over the last five years can be likened to the period after the second world war, it is a look back at the ups and downs of disposable incomes in each parliament.

There was a fall of 0.1% in the period from 2019 to 2024 in household incomes when taking inflation into account. To find another five-year period when real household incomes fell means going back to the Labour government of 1945-50 headed by Clement Attlee.

Then, like now, the government was also increasing defence, health, education and infrastructure spending while trying to bring down borrowing from historically high, although not unprecedented, levels.

Recovering economic growth

Since the 2008 financial crisis, growth in UK GDP has slowed. Treasury analysis requested by Reeves shows that, had the British economy grown at the Organisation for Economic Co-operation and Development average over the past 13 years, it would have been more than £140bn larger.

However, in recent months there have been more encouraging signs. The UK exited last year’s brief recession in the first quarter at a faster pace than many forecasters predicted. Gross domestic product (GDP) rose by 0.7%, more than double the rate in the eurozone and above the G7 average.

Business surveys show robust growth has been maintained, in contrast to France and Germany, where political uncertainty and global trade headwinds are weighing on activity. The pound has gained on the international money markets and the FTSE 100 is close to a record high.

Cooling inflation

After reaching the highest level since the early 1980s, 11.1% in October 2022 after the Russian invasion of Ukraine, inflation has fallen in recent months to the 2% government target.

However, prices are significantly higher than three years ago and still rising. Labour also argues that insufficient action to decarbonise Britain’s energy supply and insulate homes left households more exposed to the cost of living crisis.

Still, cooling inflation is expected to lead the Bank of England to cut interest rates, possibly as soon as Thursday next week, easing the pressure on households and businesses after 14 consecutive increases, from 0.1% in December 2021 to the current level of 5.25%.

Tax constraints

Reeves has criticised the Tories for leaving office with “working people facing the highest tax burden in 70 years”. Tax as a share of GDP is forecast to rise from 36% of GDP to 37.1% by 2028-29. That would be four points higher than pre-pandemic and the highest level since 1948.

Despite these high tax levels, public services are struggling, and could face cuts should the chancellor stick with self-imposed fiscal rules requiring the national debt to be falling as a share of GDP in the fifth year of forecasts.

Labour’s manifesto pledged not to raise income tax, national insurance or VAT, which account for the bulk of overall taxation, hemming in the new government. Reeves could, though, tweak the fiscal rules, or raise more from taxation – most likely by targeting capital gains and inheritance taxes.

Employment challenge

The proportion of people in employment across the UK has declined over the past five years, mainly in response to an acceleration in the number of people opting for early retirement and a rise in the number too sick to work.

It is a trend that other G7 countries have managed to buck. In France there has been a significant rise since the coronavirus pandemic in the number of people in employment as a proportion of all working-age people, albeit from a lower level than the UK.

Investment challenge

Investment in the UK has trailed other G7 countries for decades, hindering productivity growth and leaving key infrastructure increasingly inadequate for a modern advanced economy.

Public investment has jumped in recent times from an average of 1.8% of national income to 2.4% since 2021, but the last Tory chancellor, Jeremy Hunt, paid for his pre-election cuts to national insurance with a dramatic reduction over the next five years that Labour is struggling to reinstate.

The level of investment by businesses has also been low for decades. Huge injections of foreign direct investment mostly went into buying UK companies rather than building new factories. Brexit added a layer of uncertainty, deterring foreign companies from basing themselves in the UK and discouraging businesses from investing to spur exports.

Councils in crisis

More English councils have declared effective bankruptcy in the past three years than the preceding 30, with casualties including Birmingham, Nottingham, Thurrock and Woking.

Sky-high inflation and rising demand on services have played a role, as have missteps at some authorities. However, local government bore the brunt of the Tories’ 2010s austerity drive, with central government grants cut by 40% in real terms in the decade up to 2020. The Institute for Government estimates that local authority budgets would need to increase by £7.1bn to bring funding back to the level in 2010.

Among the biggest challenges include a £5bn debt crisis in funding for special educational needs, which has been kept off municipal balance sheets by a special “override” arrangement with central government.

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