During the debates surrounding pandemic relief spending, arguments about deficit and debt were muted. The government could spend whatever it took without anyone claiming Britain might go bankrupt. Now that the country can see an end to the pandemic, the main political parties are returning to the politics of the deficit. Both the Conservatives and Labour have adopted fiscal rules that aim to limit government borrowing with arbitrary targets. Fetishising deficits is bad policy that can damage society.
In her first address as shadow chancellor to a Labour party conference, Rachel Reeves put on a fiscal straitjacket. She then spent her speech getting out of it. This was a good sign. Her plans to spend an additional £28bn of green capital investment each year until 2030 shows Labour will take the climate emergency seriously. By contrast the government is investing just £5bn annually, a quarter of what experts say is needed to hit net zero targets. In making a big spending commitment, Ms Reeves has put pressure on the government to set out a costed plan to meet its green pledges.
Ms Reeves can do all this because capital investment – such as battery factories for electric vehicles, offshore windfarms and more cycle paths – is excluded from her self-imposed spending limits. A better approach to policy would be to focus on how much is needed to accomplish a stated public purpose and work out whether the economy can absorb that amount of spending without price pressures.
But the shadow chancellor’s speech was more about politics than economics. Her dig at Amazon’s founder, Jeff Bezos, revealed a populist touch. Ms Reeves’s line that it’s wrong that web giants pay less tax than high street businesses will strike a chord with voters who worry about the death of their town centres. By freezing business rates and increasing the level of digital services tax, Ms Reeves is signalling an intention to bring the politics of place into the Treasury.
It was disappointing that her speech lacked a mention of wealth taxes to reduce inequality. Labour’s fiscal rules make it much harder to raise taxes with that aim in mind, since they require spending commitments to be spelled out. This was a trap that Ed Miliband fell into with his mansion tax pledge before the 2015 general election. Voters need time to get used to new ideas. Britain’s wealth gap ballooned during the pandemic, with the richest 10% gaining £50,000 on average, dwarfing increases for the poorest third of the population. With an early election on the cards, Labour ducked an opportunity to outline ways to make Britain fairer.
A paper this month for the European Central Bank concluded that government Covid spending can be highly effective in preventing an economic contraction and more so when the central bank “funds” it. With an uncertain and uneven recovery under way in the major economies, central banks seem too ready to dial back their support. Ms Reeves seeks reassurance by adopting caps on day-to-day spending. The worry is that what looks like a safe bet may turn out to be a costly gamble.