The woman who would be Chancellor made what I think was a good speech at the Labour Party Conference on Monday. It was serious and well delivered. I even liked much of the substance. Unfortunately, the few specific policy proposals she made all had significant flaws.
Let’s begin with the ‘good’ bits. There was a welcome emphasis on the need to reform the planning system, and remove other obstacles, in order to accelerate the building of new homes and infrastructure. This is absolutely essential. Indeed, I can imagine Liz Truss nodding along in the audience (I have a very vivid imagination).
There was also a strong commitment to fiscal discipline. It was encouraging to hear a prospective Labour chancellor tell conference that ‘you can’t tax and spend your way to economic growth’ (cue clapping from the Trussites). Reeves has already annoyed many in her own party by rowing back on some of the extreme promises to splash out on ‘green’ schemes.
The speech – like all such speeches – was vague on what more this might mean in practice. But Labour has been briefing about ‘new’ fiscal rules based on balancing current spending and tax revenues, and borrowing only to invest.
Of course, we have had such rules before, and they have always been either fudged or broken. Nonetheless, borrowing, say, 4% of GDP for capital spending would still be consistent with debt falling as a share of national income, as long as nominal GDP growth is more than 4% (which it should be).
I also liked the emphasis on targeting savings on Whitehall consultants and recouping Covid cash lost to fraud. Again, you would not expect any Chancellor to say anything different, but this was good knockabout stuff.
However, the more she got into specifics, the weaker the speech became.
The promise of more powers for the Office for Budget Responsibility (OBR) has been laboured by many, not least by Rachel Reeves herself. A new ‘Charter for Budget Responsibility’ would guarantee that any government making ‘significant and permanent tax and spending changes’ will be subject to an independent forecast from the OBR. But the specific proposals here are not the game-changer that some think.
The OBR already produces two forecasts every year, which usually accompany two fiscal events (the Autumn Statement and March Budget). There will also still be exceptions during crises. Indeed, despite what some now claim, the Truss government always expected the OBR to produce another full set of forecasts before the end of last year, which could then have taken account of the revised spending plans too. The upshot is that the new ‘Charter’ would not, in fact, be a game-changer.
Turning to the ‘bad’, there was a lot of guff about ‘securonomics’ – a messy mix of protectionism and bungs for pet projects (including a gimmicky ‘National Wealth Fund’). A sensible ‘industrial strategy’ would simply be about creating the right environment for private businesses to thrive, including good infrastructure, low and simple taxes, and light regulation. Labour’s plans go well beyond this, back to the bad old days of trying to pick ‘winners’ (preferably British ones).
There were plenty of misleading narratives too, notably on mortgage costs (which have risen even further in the US than in the UK), dodgy assumptions about the revenue that might be raised by abolishing non-dom tax status, and the usual tedious misrepresentation of the statistics on the gender pay gap.
But what struck me most was that all the specific policy proposals were more or less economically illiterate. These were the ‘ugly’ bits.
Take VAT on private school fees. In general, it is right that all consumer spending should be taxed equally. But spending on education is investment, not consumption. Increasing taxes on private schools is also particularly likely to have negative spillovers for the public sector (increased demand for taxpayer-funded places) and penalise lower-income households (the rich will just swallow the extra VAT).
Indeed, this poor economic case is why so few countries, anywhere, impose VAT on this sector. New Zealand is a notable exception, but copying them here would be just as bad as Rishi Sunak’s decision to adopt their rolling increase in the smoking age (which Reeves also endorsed).
Another example is the proposed ban on so-called ‘zero-hour contracts’. These are best seen as another form of flexible working that particularly suit students, older people, and those that need to fit work around caring responsibilities. Outlawing ‘zero-hours contracts’ would reduce job opportunities and actually be an attack on workers’ rights.
Reeves also promised even bigger increases in the national minimum wage (which the current government has already pledged to raise to two thirds of median earnings). So far, the national minimum wage has not led to the large job losses that some feared. But this is precisely because it has been set at a sensible level, based on independent advice. Labour would turn it into a political football.
In short, Rachel Reeves will have had the luxury of much more time to prepare than most of her immediate predecessors (assuming the polls are right). She already understands the brief well and talks like a chancellor in waiting. It would also be unrealistic to expect her to make a large number of detailed policy commitments now. But it is therefore all the more worrying that the few specifics she did offer were so weak.
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