How Reeves’s Budget has sown the seeds for Labour’s destruction

Margaret Thatcher
Margaret Thatcher

It’s not hard to understand why Leslie Cole chose to leave Britain with his wife and three children. Having received three “attractive” job offers in the US, and faced with a high and rising tax burden at home, the aerospace engineer packed his bags and moved to Long Island in search of a better life.

He had lost faith in the Labour prime minister’s promise of a burst of economic growth. And he was far from alone in packing his bags. As the PM privately admitted, many of our best and brightest were being poached by our international competitors; too many taxpayers were leaving.

That was the 1960s, when Harold Wilson’s promise of boom times through the “white heat” of technology was falling flat.

The real economic revolution would have to wait another two decades, until Margaret Thatcher unlocked the statist chains in which Labour had bound the country.

Today though, the brain drain is once again creeping back into the national discussion. Doctors are leaving for Australia, engineers for Dubai, and the UK is expected to see the largest exodus of millionaires outside of China.

After a decade and more of lost growth, real wages are still lower than they were in 2008, the tax burden is at record highs, and satisfaction with public services has plummeted. From roads filled with potholes to interminable NHS waiting times, the sense of a state in decay has permeated the public consciousness even as the cost of funding it has risen.

People, in short, are fed up, and justifiably so.

The Thatcherite consensus that underpinned British growth for three decades has long been fraying, with the country sliding back into the postwar malaise of higher taxes, higher welfare and lower growth. But by unashamedly plundering the private sector to pay for an expansion of the public realm, this week’s Budget has sought to bury it for good, seeking to obliterate forever the modern economic identity of the nation and return once again to the era of Wilson and Callaghan.

The risks for the country are huge. Yet by choosing to march the country forward to the past, Sir Keir Starmer is also making one of the greatest gambles of his career.

Crunch time for Sir Keir

A little over 120 days ago, Starmer was the master of all he surveyed. Having dealt the Conservatives their harshest defeat in two centuries, quelled internal dissent within his party, and swept to office feted by the international Left, the heights of British government seemed his to command.

If a week is a lifetime in politics, four months is an epoch. Even before Wednesday’s budget, Starmer’s approval rating had plummeted 49 points to -38 – the worst slide for an elected leader in more than 40 years.

Some of this slide may have been due to avoidable missteps, with internal Labour conflicts and controversy over donations landing poorly with a public already worn out by years of Tory psychodrama.

Perhaps more relevant is the fact that people are simply fed up after years of bad news. They put up with austerity to fix the public finances and put the country on a sustainable footing. They endured the Covid lockdowns to shield the vulnerable and keep the NHS functioning. And then the war in Ukraine and slow-motion restart of the global economy saw the cost of living spiral.

Now they want things to get better, fast. Which is why last Wednesday was so important.

The decade of doom

Sir Keir’s public image is not that of a massive risk taker. Nevertheless, at the heart of his first Budget was a vast statist gamble. The bet is a simple one. If Labour is to win the next election, it needs either public services or economic growth to improve in time for the poll.

So Starmer will pump money into the NHS – £22 billion on day to day spending – in an attempt to bring waiting lists down, hoping that this reduces spending pressures in future years.

The payoff is potentially huge: satisfaction with the health service might be at a record low, but there is still huge public affection for the funding model. If Starmer’s adrenaline rush restarts the organisation, then that will be a huge boost for the 2029 election.

Meanwhile when it comes to economic underperformance, Labour’s diagnosis is that this has come from underinvestment by the public sector. The solution is to pour £100 billion into capital projects over the next five years, boosting demand in the short-run and hopefully supply over the longer horizon.

Overall, the Budget is set to put £70 billion into the public sector for each year of this Parliament. And while the upsides of this spending are uncertain, the costs are already clear. No matter who you listen to, Britain looks to be in for a “decade of doom”.

Cash infusions into the public sector have to be paid for, and the Budget came with £40 billion in tax increases and a £140bn in borrowing. This is enough to take the tax burden to its highest level on record, with the UK leapfrogging Spain, Portugal and Slovenia in today’s international league tables.

Even if Labour’s gamble pays off, we will for years be condemned to pay European levels of taxes for markedly inferior public services, while inflation and interest rates are driven up.

And despite all the cash being splashed, by the time of the next election even the official forecast is that higher taxes, and the lagged effect on GDP growth of investment, will mean the economy is slightly smaller than it would have been without the steps taken in the Budget.

If everything goes perfectly, things look very slightly better at the end of the decade. But how often do vast public spending projects go perfectly? Delays, cock-ups and corruption could lead to substantial underperformance.

Even in the best scenario, the overall picture is grim: the nation’s forecasters are united in predicting that living standards and wages will remain stagnant.

In other words, far from going into the next election vindicated by resurgent public services and the engine of growth firing powerfully, it is more likely that he will be begging for more tax rises as the economy stalls and sinks.

There is one overriding reason why.

Fixing the unfixable

Starmer is hardly the first politician to pitch himself as the NHS’s saviour. Yet despite successive governments dutifully trotting out pledges to transform healthcare, there are still over 6 million patients waiting for 7.6 million hospital treatments in England alone, with almost 300,000 people stuck in the queue for over a year.

With outcomes deteriorating, it’s small wonder that public dissatisfaction is at an all-time high, or that Health Secretary Wes Streeting believes the health service is “broken” with patients “failed on a daily basis”. While the Labour government has identified the disease, however, it’s far from clear that they’ve found, or are willing to administer, the cure.

It is practically an item of faith on the Left that the failure of the NHS is solely down to being starved of funding over 14 years of Tory government. Labour has done little to disabuse the public of this notion, despite per capita healthcare spending rising in real terms by roughly 2 per cent each year between 2013 and 2024.

Today, Britain spends about the same amount as the average rich nation on healthcare as a proportion of GDP. It simply spends it badly; we have fewer doctors and nurses per thousand people, and fewer CT scanners and MRI units than in comparable countries. In the Netherlands, comparable levels of healthcare spending result in an average waiting time for general surgery of 2.6 weeks compared to the UK’s 19.5. British survival rates for common types of cancer are among the lowest in Western Europe, and the rate of mortality from heart disease is increasing for the first time in 50 years.

Small wonder that many are taking matters into their own hands: the market for private medical insurance in Britain grew 6 per cent in 2022, more than triple the average annual growth rate between 2008 and 2019.

Spending more may not be enough to fix this mess. Between 2019 and 2022, the NHS received a 16 per cent increase in the number of full-time equivalent junior doctors, a 11 per cent rise in nurses and health visitors, and a 26 per cent funding increase. The March Budget took this rise to 33 per cent, and last week to 47 per cent. So far, these injections of cash and manpower have failed to produce any real rise in outputs. The most recent productivity figures for 2021/22 showed an organisation that was treating fewer patients than it was prior to the pandemic, despite the significant rise in resources.

With the NHS set to receive over £181 billion this year, it’s hard to maintain the idea that it’s the victim of chronic underfunding, and public attitudes are shifting as a result. Previously, people have been willing to pay more in tax to fund the NHS. Recent polling, however, suggests that there is no longer a majority in favour of this approach.

In this context, Starmer’s bet looks to be extremely bold. A cure that has repeatedly failed will have to work, and work quickly if it is to come off.

Grow-slow

The rush for economic growth will face a similar race against time. But Labour’s approach to growth faces a trio of challenges. There’s whether they can get enough projects underway to deliver a meaningful economic boost by the end of the decade. There’s the challenge of getting Britain’s idle population off benefits and back into work, against the instincts of the Labour Left. And then there’s the contractionary effects of the taxes, regulations and borrowing announced in the Budget.

Lord Moynihan, former chairman of PA consulting group, is not optimistic. Rachel Reeves, he believes, has “adopted policies that are precisely the opposite of what is needed”. The correct prescription would be to reduce the size of the state, lower taxes, and not run a deficit. Instead, as the response in the bond market shows, she’s increased the latter to “dangerous levels”.

It’s certainly true that the Budget has triggered a boom for the public sector: thanks to Reeves and Starmer, state consumption and investment are set to make up a larger share of the economy. Above inflation pay awards are due to be handed out and Government departments shielded from the effects of tax rises, with the private sector bearing the cost.

These taxes, Lord Moynihan believes, will “give economic growth a walloping” far in excess of that predicted by the OBR (Office for Budget Responsibility).

Luke Johnson – former chairman of Pizza Express and current chairman of Gail’s – isn’t much more optimistic. In his words, this was a “socialist” budget with the unproductive public sector “crowding out” private enterprise.

Hikes in employers national insurance and the minimum wage come in for particular opprobrium; one acquaintance in a “labour-intensive” field has already suggested to Mr Johnson that their firm will offer “no pay rises next year” beyond those imposed by statute, and be forced to make “strategic job cuts” to go with them.

The strong signal coming from the government, in his view, is that it “only cares about public spending in the public sector”, with the idea that it’s “making wealth and job creation a priority” farcical.

Shovels in the ground

Investing in infrastructure can absolutely generate growth, with roads and grid connections powering factories and data centres. But not many projects in this category are “shovel-ready”; by the time they’ve been through the “years of delay” added by the planning system, we could easily be into the next parliament before work actually begins.

These delays, notes Sam Dumitriu, Head of Policy at pro-growth think tank Britain Remade, are not inevitable: when the planning system, rather than the physical task of construction, is what’s holding a project back, the Government has the ability to “approve projects that have been delayed, such as the Lower Thames Crossing” – a tunnel under the Thames estuary that anyone who has tried to drive the Dartford Crossing will know is desperately needed.

Many of these projects have a strong case in their favour; while we can quibble with the OBR’s view of how much growth they will generate, it’s hard to deny that Britain has underinvested in infrastructure in recent years. But those payoffs might not materialise for close to a decade from now. By 2030, investments in the budget are forecast to boost GDP by a little over 0.4 per cent, enough to offset the crowding out from higher interest rates, and even the rise in employer NICs. But Labour appears in little rush to make the project approvals needed to get them underway.

Beating back the benefits binge

The final challenge is getting people off NHS waiting lists and benefits and into jobs. A record 2.8 million people are on long-term sick leave, up 800,000 since the pandemic. Britain is now one of only two G7 nations where economic inactivity is higher than it was before the pandemic, and the crisis appears to be deepening. The Treasury is now spending more on welfare payments to the long-term ill than it does on schools or policing, with costs for working age people expected to top £75 billion by the end of this parliament.

This is clearly not sustainable, and there are significant gains to be had from correcting it. If labour market participation were to return to its pre-pandemic trend, government borrowing could be reduced by £18.7 billion in three years’ time. If, on the other hand, it continues to fall, borrowing could rise by over £21 billion.

Whether Labour is up to the task is very much in doubt. When the Tories announced plans to tighten the Work Capability Assessment last year, Labour immediately pledged to reverse them. It forms part of a broader pattern; former Work and Pensions Secretary Iain Duncan Smith notes that when he introduced Universal Credit “long-term unemployment fell by half”, but that these changes were deeply unpopular with the Left.

Changes, nonetheless, are needed. In 1992, just 2 per cent of working age adults claimed disability benefits. The equivalent figure in 2022 was over 6 per cent and driven mostly by the increase in claims for psychological ill-health. Some of this increase will be genuine. But it would be foolish to ignore the impact of financial incentives.

Few politicians have been prepared to ask searching questions about the root cause of this problem for fear of breaking social taboos around discussing mental health. Work and Pensions Secretary Liz Kendall herself has sought to reassure the public that Labour has a “plan for mental health”, with the party pledging to put it on the same level as physical health. But how will this ease what her predecessor Mel Stride as Work and Pensions Secretary cautioned was a “real risk now that we are labelling the normal ups and downs of human life as medical conditions”?

Labour’s solutions to wider economic inactivity focus on making work more attractive, beefing up workers’ rights and increasing the national minimum wage, in order to incentivise people into taking on jobs. But this could have the reverse effect of discouraging businesses from hiring workers. More economic inactivity, Stride warns, “means a higher welfare bill and a weaker economy. Labour are ducking the harder welfare challenges and taxpayers are paying the price”.

Where are the Thatcherites?

Who then, will come to the defence of a Thatcherism which the party in power appears to be burying? It will take time for the Conservative party to refind its footing, and retake power.

Whether Robert Jenrick or Kemi Badenoch emerges victorious from the Tory leadership contest today, the party is expected to change substantially. Both candidates are critical of its record in Government, summarised by Badenoch as “talking Right but governing Left”, and both have witnessed the dysfunction of the machinery of Government up close.

Both candidates have praised Margaret Thatcher, and appear willing and able to defend her legacy. The question is whether they will be thwarted by their own parliamentary party. Whoever emerges victorious will have done so securing just a third of MP votes available in the final round. There leaves a large and discontented constituency of MPs whose belief in the economic policies pursued by previous Conservative administrations is likely to see them resist the idea of large scale benefits reform, or a significant reduction in the size of the state.

If Thatcherism is to be revived in time for the next election, it may well revolve less around who wins, than how large a mandate they received from the membership. And the more divided the Conservative party is, the less effective the opposition it offers to Labour’s agenda will be.

A two-tier economy

Between the unreformed planning system, the NHS moneypit, the unwillingness to tackle disability claims, and the anti-growth effect of Labour’s regulation, the outlook for Britain’s economy does not look bright.

This is only compounded by the incentives facing Keir Starmer. Going into the election, it seemed clear that he believed his path to victory was straightforward: buy over friendly voting blocs with promises of public money, and pass the costs on to those groups that vote Conservative.

The approach taken to the Budget is not encouraging; it has more than a whiff of class war about it, with taxes on non-doms, farmers and private schools, huge pay rises for public sector workers, effective tax carve outs for Government employees paid for with raids on the private sector, money poured into public services beloved of Labour voters. Given their voting base, it’s hard to see them cracking down on public sector waste or the benefits bill in the near future.

Then again, this approach is not without risks. The top 1 per cent of British earners already pay 29 per cent of all income tax. It wouldn’t take very many to leave for Labour’s already shaky fiscal projections to become works of complete unreality. And if the Leslie Coles’s of today start a new ‘brain drain’ in earnest, Britain’s decade of doom could turn into a far longer period of stagnation.