Labour’s light at the end of the tunnel looks more like a speeding train

Rachel Reeves, the Chancellor
Rachel Reeves, the Chancellor, deceives herself by thinking that Britain is ‘open for business’ - Nicola Tree/Getty Images Europe

No pain, no gain. And then, eventually, light at the end of the tunnel and the reward of sunlit uplands.

Sorry, but no. That’s not the way a modern economy works.

Yet it continues to be the Government’s central message – that the “prize” of economic growth relies on first getting the public finances back on an even keel. This in turn is going to require “painful” decisions on tax and entitlements in the forthcoming Budget.

OK, so few would dispute the need for major surgery in the public finances. Britain is up to its neck in debt after the reckless profligacy of the pandemic, a period of madness which, by the way, is the root cause of so many of today’s social and economic pathologies.

No one is going to invest in the UK economy if they think public borrowing is on an unsustainable footing. Investors need to know the nation remains capable of paying its debts and, when it comes, absorbing the next big economic shock without breaking the bank.

Yet simply plugging the holes with a higher tax burden is not enough, and with the economy now slowing markedly, the timing of such action could hardly be worse. The time to fix the roof is when the sun is shining, not when storms are brewing.

Stability in the public finances is an important building block for future growth, but no more than that.

It’s also a question of balance: the Government needs a credible plan for restoring the public finances, but it also needs one that is not so austere that it wrecks the economy.

In any case, confused messaging has become the order of the day. On the one hand, Rachel Reeves, the Chancellor, promises no return to “austerity”; but on the other, she seems to imply a quite severe fiscal squeeze in the coming Budget.

Her mistake is to think of austerity as simply about cuts to public services, as if hitting disposable income with tax increases instead is not just another version of the same thing.

Besides, the way things are going we may soon need a heavy dose of counter-cyclical investment spending just to keep the economy from slumping back into recession.

“Growth is the challenge, investment is the solution,” the Chancellor said in a speech to the Labour Party conference so chock-a-block with platitudes and clichés that its only truly memorable moment was the interruption of a heckler protesting against arms sales to Israel.

If investment is the solution, she’s chosen a pretty odd way of going about it. For the time being, current spending is manifestly being prioritised over investment spending. How else to read the decision to cave into public sector pay demands?

There are some positives. The Government’s promised assault on the planning system is much needed and long overdue, upsetting and disruptive as it is bound to be for some.

Most development has victims alongside its supposed wider public good. But that’s not Labour’s concern, in that the likely victims of the intended explosive growth in onshore wind, electricity pylons, house building and new data centres are, on the whole, not among the party’s voters.

But virtually everything else the Chancellor is presiding over – from enhanced workers’ rights to capital gains and inheritance tax reform, and from inflation-busting pay deals to cancellation of key artificial intelligence initiatives and a once-planned programme of new hospitals – seems designed to do the reverse.

Reeves deceives herself in thinking that Britain is “open for business”.

I can’t tell you how many “industrial strategy” white papers and initiatives I’ve had to wade through over the years, none of which has succeeded in significantly shifting the dial on investment – yet here’s the Chancellor promising yet another of them.

She had better be careful of who she invites to her planned “international investment summit” in mid-October, for my sampling of international business opinion suggests she’s unlikely to get a friendly reception.

Many already regard the UK as “un-investable”; a recent survey of infrastructure investors ranked Britain bottom of the class for attractiveness.

It’s going to be an uphill struggle, convincing international capital otherwise against a backdrop of rising taxes and enhanced workers’ rights.

It wasn’t Labour’s fault, obviously, but the debacle of Thames Water has done lasting damage to private sector investment in our public utilities and infrastructure from which it is going to be hard enough to recover.

As it is, Labour seems supremely unsuited to the task. To invest, the private sector requires not just regulatory certainty, but a reasonable rate of return. Even under the Tories it received neither, and seems even less likely to get it under Labour.

You can have higher investment or low prices, but no amount of regulatory or government intervention can deliver both at the same time, which is the impossible demand of most politicians.

The promise of “more activist government” alone, I fear, is enough to make business investment run a mile. If the private sector won’t invest, Reeves could theoretically change the fiscal rules to allow her to borrow to invest with public money instead.

Indeed, she dropped heavy hints in her conference speech that she would, saying: “It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too.”

But it only works if there are worthwhile things to invest in, and if the underlying economy is there to support it.

Recent experience of the choices made – HS2 being only the most obvious example – give little cause for confidence.

What’s more, Reeves seems confused over what her fiscal rules actually imply. Unlike the previous government, she says, investment and current spending will be treated differently, implying that she is free to borrow to spend provided it is for investment purposes.

But she also retains the overarching rule of debt falling as a proportion of national income in five years’ time. This will be as limiting for investment spending as it is for day-to-day current spending.

Light at the end of the tunnel? An oncoming train, more like.