Four years of economic turmoil. High inflation, then high interest rates, then an (albeit mild) recession. A pre-election budget with some distinctly dodgy looking tax cuts. All leaving an election-winning, but nevertheless very unpopular, government with a big fiscal hole to fill. What does the chancellor do? Put up taxes, of course.
And indeed that is precisely what Norman Lamont did in March 1993. By a lot – by most measures, it was the largest tax-raising budget in at least the previous half century. It was followed by a decade and a half of macroeconomic stability and mostly steady growth, averaging almost 3% per year, a level recent chancellors could only dream of.
The context today is entirely different, but it illustrates both the scale of Rachel Reeves’s task and the fact that taking tough decisions can pay off. Lamont’s task was not just to fix the public finances, but to restore economic credibility after the fiasco of the UK’s exit from the exchange rate mechanism on Black Wednesday.
Reeves’s challenge is similarly both economic and political. We risk a cycle where low growth leads to less money for public services and higher taxes. That in turn leads to distrust in politicians and the democratic process itself, manifesting itself in general apathy, political fragmentation and, worse still, the growth of far-right ideologies that blame immigration for all of these problems, despite all the evidence to the contrary.
If the response from mainstream politicians is short-termism – for example, unrealistic promises not to put up taxes or to slash immigration, while ignoring fundamental long-term challenges such as the steady degradation of the public realm, ranging from roads to hospitals, the crisis in social care, lack of special needs provision in schools and the funding problems in higher education – then the downward spiral will continue.
So how to break out of the doom loop? Reeves needs to address the short and the long term – to make a visible difference to people’s lives now, at the same time as putting in place longer-term policies that will generate growth.
What would that look like in practice? Here are a few tests by which to measure the budget.
First, taxes. We already know that they’re going to go up, and by quite a lot. And we already know that while the letter of Labour’s promise not to put up the main rates of VAT, income tax, national insurance and corporation tax may be honoured, the spirit will be pushed to – and perhaps beyond – the limits of plausibility. Moreover, there will be lots of tweaks to other taxes designed to raise revenue.
In the circumstances, and given how Labour has boxed itself in, this is perhaps the best that can be hoped for in the short term. However, further complicating an already byzantine system will reduce growth. Reeves should at the very least commit to radical simplification of a whole host of badly designed taxes, from the VAT threshold to council tax and stamp duty to the bizarre structure of the income tax system that leads to marginal rates of 70% or more. A simpler, fairer system will make raising more money less economically damaging and more politically palatable.
Second, the fiscal rules. Again, we already know that the discredited debt rule will go, and that should be welcomed wholeheartedly. But simply substituting the current rule with another one written behind the closed doors of the Treasury – as has happened numerous times in the past decade – may get the chancellor through this budget, but could well come back to haunt her later in the parliament. It may be less comfortable for the Treasury, but long-term credibility would be much better served by a proper independent process with a role for parliament and external experts.
Third, investment, not just in infrastructure – essential though that is – but in people, especially children. We know now that Sure Start didn’t just help poor families when their kids were young, but improved GCSE results and reduced crime a decade later. More recently, we saw long-lasting benefits from the Kickstart programme for young unemployed people. That doesn’t mean we can budget on the basis that these or similar programmes “pay for themselves”: that’s almost impossible to say in advance. But it does mean that we should be prioritising spending on programmes – for example, mental health support for children and young people – that we think will plausibly benefit individuals and society over the long term.
Meanwhile, the two-child benefit cap, and the resulting hardship, remains a stain on our collective consciences. The forthcoming child poverty strategy offers an opportunity to begin the task of reversing some of this; Reeves will not pre-empt this, but she can use the budget to make clear that there will be real resources behind the strategy when it comes. Reducing child poverty is just as much an investment in our future as HS2.
Fourth, improving public services. The NHS is understandably the public’s top priority and it’s therefore understandable that it will take the lion’s share of the available funds. But simply trumpeting the amount of money spent on it will not convince the public, unless productivity recovers. It has suffered not just from underinvestment in buildings and equipment, but in management. It may not be popular to hire experts in workflow management or procurement rather than nurses or doctors, but if it enables the latter to be used properly that will improve both morale and productivity. The same applies to the courts and the criminal justice system. Simply claiming that “efficiency savings” will enable public services to do “more with less” won’t be enough. Setting a target for a sustained improvement in public sector productivity – and requiring departments to have credible strategies, backed by investment plans, for delivering those improvements – would be a start.
Fifth, fairness. This isn’t just about putting up taxes for the “rich”. When it comes to income, we already have a strongly progressive tax system. But much less so on wealth, especially property. Council tax, never progressive, has morphed into something that in many parts of the country is not much better than the poll tax it replaced; while at the same time, George Osborne deliberately targeted cuts to local authority funding on more deprived areas. Shifting that back in the other direction, while at the same time devolving much more control over tax and spending to mayors and local authorities, will take time, but can start now, and could help deliver meaningful improvements to people’s lives immediately.
Even delivering all this – and it would be a tall order – may not be enough. Lamont’s budget may have been an economic success, but politically, not so much: he lost his job a few months later. Strong growth did not restore the Conservatives’ reputation for economic competence, or save them at the 1997 election. Reeves is likely to have more time, and one budget, important as it is, will not make or break the government. But, after the vagueness of Labour’s manifesto, there will never be a better opportunity to articulate not just a budget but an agenda for meaningful change.
Jonathan Portes is professor of economics and public policy at King’s College London and a former senior civil servant
