IPPR: Why Labour’s first budget in 14 years gives us cause for hope

‘We must celebrate the wins when they come, but the case for bold ambition on areas such as fair taxation and the green transition must be made and remade throughout the course of this parliament.’

 Pranesh Narayanan, research fellow at IPPR

The first Labour budget in 14 years is shaping up to be a significant event. In the run-up we’ve heard a lot about ‘fiscal black holes’ and bleak inheritances. Many have been complaining about a narrative defined by gloom rather than hope. However, it is important to acknowledge the scale of the challenge facing Keir Starmer and Rachel Reeves at this point in time.  

Ordinary people have seen a decade and a half of stagnant wages and rising living costs. Many regions outside of London and the South have seen a decline in meaningful and prosperous work. There is a palpable sense that things are just not working – whether that’s the courts, the NHS or community services. Britain is no longer at the technological frontier and lags many advanced economies on productivity and investment.  

There are two pieces of good news – firstly, after being battered by the pandemic and an energy crisis, economic conditions are returning to some sense of normality. Inflation is back at normal levels, interest rates are expected to fall, and the risk of recession has faded away. In fact, the International Monetary Fund has revised the UK’s growth forecast up.  

The second piece of good news is that a way forward is emerging. We’ve seen that the low-tax, small-state policies of successive conservative governments have failed to deliver prosperity. There is consensus that we need to improve, not cut, public services and investment to build a better economy.  

This change in mindset was at the heart of Rachel Reeves’ recent announcement that the government will tweak its fiscal rules to allow more borrowing for public investment. For many people, this might sound like a simple edit of numbers on a spreadsheet, but it removes a key barrier to public investment that has effectively been in place since the Coalition government of 2010. This is the Treasury finally admitting that being responsible with the public finances is about spending wisely not just cutting costs.  

This can release up to an additional £50bn a year for public investment in infrastructure, buildings, equipment and industrial development. It’s unlikely that Reeves will use up the entirety of this ‘new money’ – investment projects take time to set up and deliver. A careful approach is needed so that we don’t see the mistakes of previous governments in creating instability in the funding pipeline. 

Whilst there is undoubtedly good news for public investment, this government’s rules on day-to-day spending state that they will have to be funded by tax revenues. However, we know that spending cuts would be a mistake.  

This time last year, Chancellor Jeremy Hunt delivered a budget that cut taxes whilst complaining about poor public sector productivity. The idea was that public services would get less money and would magically improve their productivity through better discipline or some vague turn to ‘responsibility’. This was a ludicrous proposition – when services are already on their knees and dealing with huge and immediate pressures, it’s simply not possible to do root and branch reform or introduce new systems and technologies. They need funding for the present and investment for the future.  

Both Starmer and Reeves have committed to not repeating austerity. It’s easy to be sceptical when the rhetoric of ‘tough choices’ has been deployed ad-nauseum. Still, it’s possible to make a different set of touch choices – most people link this idea to spending cuts thanks to George Osbourne’s brutal austerity measures but today, it’s more likely to mean tax rises. Most of the speculation in the run up to the budget has been about which taxes to hike, not about whether taxes should increase.  

Capital gains tax reform could bring an extra £14bn, with almost all that revenue coming from the wealthiest in society. Closing inheritance tax reliefs could also raise some of this revenue. However, if it is not possible to fully close the funding gap through these measures, adding national insurance to employer pension contributions could also be a reasonable option – this would raise up to £14bn, of which £6bn would come out of contributions into the pension pots of the top 10% of earners.  

It’s unclear how far Starmer’s Labour will go on many issues that are important to progressives – rumours around capital gains tax, for example, suggest that reforms will fall short of what is technically possible. That being said, there does seem to be a more constructive approach to economic policy. We must celebrate the wins when they come, but the case for bold ambition on areas such as fair taxation and the green transition must be made and remade throughout the course of this parliament.