Tony Blair is right about two crucial things – but Labour is in denial

Tony Blair
As prime minister, Tony Blair avoided confrontation with the public sector like the plague - Stefan Rousseau/PA

You don’t need to be a fan of Tony Blair to know that he is surely right about at least two of the things he has been highlighting this week.

One is that, unless something is done to cure Britain’s miserable productivity record, taxes will have to rise further to pay for the country’s ageing population, rendering everyone relatively worse off over time.

The other is that AI offers possible salvation, with the potential to cut the public sector headcount by anything up to 40pc. Technology, it is hoped, is about to come to our rescue.

Getting more for less from our public services has long been the holy grail of government ministers. There is nothing particularly original or insightful about Blair’s observations.

The potentially transformative powers of AI were a particular hobby horse of the last chancellor, Jeremy Hunt, but the electoral cycle intervened before he could properly road test his ideas.

The need for radical action has also been self-evident for a long time now. Both in absolute terms and relative to private enterprise, the public sector headcount has been on a relentless upward trajectory ever since the vote for Brexit eight years ago.

Under George Osborne as chancellor, the Government had made some progress in reducing the numbers from the record levels that presided at the tail end of the Blair/Brown government.

But all that hard work has since been squandered, and we are now back to where we were when Labour was last in office. The pandemic is plainly the main immediate explanation for this explosion in public sector employment, yet it had been rising strongly from well before then.

Nor has there been any improvement since. To the contrary, the latest statistics to March this year show a continued rise, with total public sector employment reaching its highest level since early 2012.

At the same time, standards have plunged – our public services have become an object of national shame. Sadly, we have had to get used to paying more for less.

All economies have their breaking points – the threshold at which any additional rise in the tax burden starts to impact growth and therefore becomes counterproductive in terms of its revenue raising purpose.

For some, the threshold is higher than others. The Nordics seem to sustain a particularly high tax burden without undue damage to the wider economy. France, too, appears to tolerate a very high level of tax, but somehow still manages to show some growth.

But for Britain, it seems to be much lower at around a third of GDP. Anything below is likely to be stimulative – much above it and growth begins to falter. At a projected 37pc, the UK is already right up there on the very edge of its pain threshold. It cannot afford to go much higher.

Back to Blair’s analysis. As it happens, the last government was already on the case. Hunt’s last Budget was all about productivity, though nobody took much notice amid the wider spectacle of the Tory party’s slow motion train crash.

Yet the thinking was spot on. To pay for extra spending on defence, the then government committed to shrinking the size of the civil service back down to at least pre-Covid levels.

It also earmarked £3.4bn for health service IT, with the aim of improving NHS productivity growth from its present level of 1.5pc per annum to just under 2pc.

This might not seem an overly ambitious target, but set against overall trend productivity growth in the public sector of a negligible 0.5pc, it would have been a major step forward.

Underpinning it all was the idea that AI, if effectively applied, could free up resources for front line services, thereby delivering the prize of more for less.

Hope is not a strategy, it is often said, but a good deal of it has been vested in the idea that AI is capable of providing a catch-all solution to the problem of public sector reform.

The history of this stuff, it has to be said, is not encouraging. It is hard to recall a public sector IT project that has delivered as hoped.

In the NHS, the record has been poor to abysmal. An IT system to digitise patient records, said to be the largest in the world at the time, was finally abandoned in 2013 at a cost of more than £10bn.

As for the Post Office’s Horizon IT system, the least said the better. There are exceptions. The Passport Office, which only a few years back was thought of as a complete basket case, seems now to function remarkably effectively on a substantially automated basis. All the same, the case for AI is far from proven.

Widely assumed to be the eminence grise behind the new prime minister and the rest of the Labour leadership, Blair may not in any case be as influential as he seems.

His resurrected idea of ID cards as a gateway to more efficient public services as well as a mechanism for controlling migration has already been slapped down by both the new Business Secretary, Jonathan Reynolds, and the Home Secretary, Yvette Cooper. It looks too much like Big Brother for their taste.

You also have to wonder just how robust Labour is going to prove in holding the line even on public sector pay, let alone allowing AI to cut a deep swathe across public sector employment, as Blair suggests it should.

As prime minister, Blair avoided confrontation with public sector unions like the plague, mindful perhaps of the damage inflicted on previous Labour governments by repeated bouts of industrial strife.

But economic conditions were far more benign when he ruled the roost and, largely defanged by previous Conservative governments, the unions were easier to manage. Today is completely different, and much more challenging.

If Labour caves in, and gives junior doctors the 35pc pay rise they demand, it will set off a domino effect of increased pay demands across the public sector, and all those campaign pledges from Chancellor Rachel Reeves not to raise taxes will fly out the window.

The Tony Blair Institute calculates that such are the pressures on public spending from an ageing population that, without a change in approach, taxes would need to rise by 2pc of GDP by the end of this Parliament, 3pc by the end of the next Parliament, and 4.5pc by 2040.

These would be German levels of taxation in GDP, but without the Vorsprung durch Technik of German public services. Structurally, it would be very hard for the UK economy to cope with. Growth would struggle, and British living standards would fall further behind other advanced economies.

Widely applied, AI offers the prospect of less alarming alternatives, but does Labour have either the stomach or the vision for it?