London /
Governing is choosing. The United Kingdom’s Chancellor of the Exchequer, the Labor Party Rachel Reevesmade its decisions on a budget that sets out a strategy for parliament and beyond. It marks the burial of Thatcherism and announces a larger State.
Much of what Reeves said about inheritance was correct, no matter how much conservatives complain. In view of this, the increase in taxes was inevitable. The result will be a state larger than it has ever been in peacetime. In fact, this looks like an “old Labor” government. That can be defended as what the public chose in the election, but voters also expected faster economic growth and better public services. In the end, it is by these results that the government will be judged. Today, skepticism is the sensible attitude. This great project may work, but it also may not.
The terrible legacy must not be forgotten. According to the IMFin 2024 the GDP per capita of United Kingdom will be 29 percent lower than it would have been if growth had continued at the 1990-2007 pace. This is the worst performance of any G7 member, relative to those past trends. The fiscal legacy was also very difficult. A row broke out over whether Labor found a £22bn “black hole” in the public finances, but analysts knew the public spending promises made in March were fairy tales.
So now we have the adjustment: higher taxes, higher spending, and higher debt. According to the Office of Budget Responsibility (OBR), these policies “increase spending by almost £70 billion (just over 2 percent of GDP) annually over the next five years, of which two-thirds goes to current spending.” and a third to capital expenditure.” The size of the State is expected to reach 44 percent of GDP by the end of the decade, which represents almost 5 percentage points more than before the pandemic. Half of the spending increase is financed by increased taxes, primarily on employers’ payrolls, but also on assets.
Not only are taxes and spending higher than forecast, but so is debt. The net effect of the budget is to increase the budget by £19.6bn this year and by an average of £32.3bn over the next five years. Net debt is projected to fall slightly, from 98 percent of GDP this year to 97 percent by the end of the decade. The underlying debt, excluding the Bank of Englandincrease in all years of the forecast.
Once again, a British government tightened its fiscal rules. He now proposes a balance in the current budget and that net financial liabilities decrease in five years. The change to this last measure allows you to include financial assets recognized in the national accounts. The change itself is defensible. It also allows for greater debt. The question is whether United Kingdom will get its way, especially considering its heavy dependence on foreign credit.
Meanwhile, government investment and consumption will be higher and private consumption and business investment will be lower. Employment is also likely to decline as more onerous employment taxes, higher minimum wages, and tighter regulation of labor markets combine.
The government can claim that it is not taxing “working class people,” but that is absurd. The incidence of taxes does not fall on those who seem to pay them. Employment taxes are a cost of doing business. In a competitive economy they will fall on employees and consumers. They will also cause a greater shift towards self-employment. It would have been much better for Labor not to rule out higher income taxes, as well as initiating serious tax reform including taxing land.
Much will depend on the overall economic impact. The OBR considers that the supply-side effects on potential production will cancel each other out in the period up to 2029-2030. From then on, the package will have a net positive effect on potential production. But, according to the OBR, even if the growth in public sector investment were maintained as a percentage of GDP, the latter would only be 1.5 per cent higher after 50 years. That shows how difficult it is to increase growth.
Can the result be better than that? It depends on the net result of increased corporate taxation, on the one hand, and increased investment and other policy and administrative changes, especially in planning, on the other. Central to this effort will be attempts to reform the effectiveness of an ailing state. It can make a difference—at least we hope—to have a government that doesn’t look down on those who run it.
There must also be doubts. Reeves It promises an “economy that grows, that creates wealth and opportunities for everyone, because it is the only way to improve living standards,” and adds that the only way to achieve this is to invest, invest, invest.” Yes, it is a necessary condition for faster growth in a country that invests as little as the United Kingdom, but it is not enough. Furthermore, the investment that drives growth is not made by the government alone, but by a motivated and dynamic private sector. The results of the last 14 years show that this is not what the UK has now. In that, the government is right. But will it emerge in a country that is shifting toward higher taxes and greater regulation?
Britons expect more spending to give them the better services they want, but they also expect better jobs and faster growth. To achieve this, the government must offer a more dynamic, innovative and entrepreneurial economy. Also based on their success your measures must now be judged.
