Outmaneuvered or an opportunity? Sunak's spending review and Labour
By CALLUM DOHERTY
Back in November, Rishi Sunak spelled out in stark terms the economic cost of the coronavirus pandemic. Forecasts from the Office of Budget Responsibility (OBR) state that the economy will contract by 11.3%, the worst contraction in 300 years, with a predicted reduction in GDP of 12.4%. The deficit this year will be £394 billion pounds, 30% of GDP. The national debt has exceeded £2 trillion. There will be “long-term scarring”, the chancellor acknowledged, and it’s clear that this entails some notable changes in the government’s economic direction. To fill the hole in spending, the OBR reports, the government will have to find 27 billion pounds. There are two basic ways to do this- spending cuts and tax increases.
With spending cuts, the Conservatives are at a dead end. A decade of austerity has already devastated public services, and now there’s little left to cut. The clear unpopularity of the austerity programme can be seen in the great pains the chancellor took to emphasise that public spending would rise. Departmental spending will see its fastest increase in 15 years, and Sunak promised the government would match previous EU funding for regional development. At the same time, public sector pay rises will freeze (with the exception of over 1 million NHS workers) and the overseas aid budget will be cut to 0.5%.
With this mixed bag of spending cuts and increases, the Conservatives may be left with no other option than the one they’ve tried to avoid throughout their time in government- taxing the wealthy.
Taxation rises will put strain on the party’s wealthy donors and, if taxes extend far enough, to their middle-class base of voters. If the talk is true and corporation tax is increased back to 24%, it would signal a shift from a ‘laissez-faire’ approach to a more ‘hands-on’ government attitude to the economy that the Conservative party has shied away from for forty years.
If this is the direction the Conservatives take, it could mean trouble for an opposition party still working out what it now stands for. With a government threatening to outflank them on redistributive taxation, even if only in the face of an insurmountable crisis, Labour under Keir Starmer could find itself wrong-footed by yet another Conservative shift in policy- in what way would the opposition’s spending plan be different or better? If Starmer intends to continue his PMQs demonstration of governing capability and lawerly cross-examination, he might find it easier to criticise Sunak’s spending plans as irresponsible. If the Conservatives continue to raid Labour’s 2019 manifesto for spending ideas, how will Labour justify a new budget for its transformative policies?
At the same time, Sunak’s plans present an opportunity for Labour, who’ve struggled with accusations of “how will you pay for it?” for years. Now the sheer amount of debt, deficit and budget requirements is threatening to expand beyond all comprehension. Clearly the “magic money tree” does exist, at least when it suits the chancellor- so what’s stopping Labour climbing its branches as well? If Sunak raises taxation and increases spending, questions will arise about why we can’t do more of that sort of thing- the chancellor may well be opening the floodgates, Labour could find justifications for taxing and spending easier than before. If “difficult decisions” have to be made, what will the cost for ordinary people be? If taxation can rise then why can’t spending as well?
For over forty years both parties have operated under an understanding of what the government can and can’t do in relation to the economy. With the crisis surrounding the pandemic, that consensus is fraying, and the chancellor’s spending review threatens to uncork ideas that were previously dismissed as unviable. Now is the time for Labour to seize the moment and make the case for a transformative change in direction. An election may be far off, but it’s never too early to ground the crisis in a narrative people understand- that the government is incapable of doing enough, that conventional solutions to budget problems aren’t working, that things cannot go on as they are. It requires a more combative approach from the leadership and a quick resolution to the party’s internal crises. Starmer and Labour must decide if they’re up to the task.
IMAGE - Flickr (HM Treasury)