A government borrowing rise has made nonsense of Rachel Reeves’s economy claims and cast doubt on Labour’s ability to fund reforms to public services.
The BBC is reporting that income tax receipts grew “strongly” and debt interest payments fell last month – but this was more than offset by rises in the cost of public services and inflation-linked benefits increases, leading to higher borrowing.
As a result, borrowing hit £3.1 billion last month – £1.1 billion higher than most economists expected, £1.8 billion higher than in July last year, and the highest July level since 2021.
It contradicts the Chancellor’s claim that economic growth will make it possible for the Labour government to “sustainably resource strong public services, raise living standards, and compete internationally”, as made in her 2024 Mais lecture.
Buy Cruel Britannia in print here. Buy the Cruel Britannia ebook here. Or just click on the image!
Simon Wren-Lewis has touched on this, apparently by chance, in his latest Mainly Macro column, but his reasoning in it is difficult for This Writer to understand.
He seems to be saying that increased tax receipts pay for higher wages in the public sector, and there is little or nothing left over to increase public sector employment.
If that increase comes from more people being in work, then it can pay for more doctors, nurses, teachers and so on, but the number of doctors, nurses or teachers per working person will be much the same.
If economic growth comes from higher productivity in the private sector, this normally leads to higher private real wages, and therefore higher taxes. But if real wages in the public sector keep pace with that, then these higher taxes mainly pay for higher real wages for public sector workers rather than for more doctors, nurses or teachers.
So it seems there will not be enough money freed by economic growth for Labour to fund improvements in the public sector.
What will Reeves do instead? What will she announce in the October Budget?
According to The Guardian,
Among the changes Reeves is believed to be considering are:
-
Raising more money from inheritance tax and capital gains tax.
-
Sticking to plans for a 1% increase in public spending even though it would involve cuts for some Whitehall departments.
-
Rejecting pressure to scrap the two-child benefit cap.
-
Changing the way debt is measured to exclude the Bank of England.
She is still (currently) saying she won’t raise VAT, National Insurance or Income Tax. But she will “raise taxes, cut spending and get tough on benefits” if she takes the actions suggested by the newspaper.
But the rhetoric has triggered alarm among social media commentators – especially the possibility that she will attack other benefits besides those related to children. Read for yourself:
The next one is high on sarcasm:
The bottom line is that the economic plan on which Labour won the general election – still less than two months ago! – is baloney. It doesn’t work.
My personal opinion is that Reeves knew it couldn’t work all along.
But she sold us that pup because it was pretty – and she knew she could slap us with the ugly truth in her first budget because that is what incoming governments do; they blame their unpleasant decisions on the failings of their predecessors.
And what are we, the people of the UK, left with after a general election in which the Party of Austerity was replaced by an organisation claiming it was the Party of Change?
We’re left with No Change at all – just another Party of Austerity and more pain.
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The first collection, Strong Words and Hard Times,
is still available in either print or eBook format here:
Borrowing rise has made nonsense of Rachel Reeves’s economy claims
A government borrowing rise has made nonsense of Rachel Reeves’s economy claims and cast doubt on Labour’s ability to fund reforms to public services.
The BBC is reporting that income tax receipts grew “strongly” and debt interest payments fell last month – but this was more than offset by rises in the cost of public services and inflation-linked benefits increases, leading to higher borrowing.
As a result, borrowing hit £3.1 billion last month – £1.1 billion higher than most economists expected, £1.8 billion higher than in July last year, and the highest July level since 2021.
It contradicts the Chancellor’s claim that economic growth will make it possible for the Labour government to “sustainably resource strong public services, raise living standards, and compete internationally”, as made in her 2024 Mais lecture.
Buy Cruel Britannia in print here. Buy the Cruel Britannia ebook here. Or just click on the image!
Simon Wren-Lewis has touched on this, apparently by chance, in his latest Mainly Macro column, but his reasoning in it is difficult for This Writer to understand.
He seems to be saying that increased tax receipts pay for higher wages in the public sector, and there is little or nothing left over to increase public sector employment.
If that increase comes from more people being in work, then it can pay for more doctors, nurses, teachers and so on, but the number of doctors, nurses or teachers per working person will be much the same.
If economic growth comes from higher productivity in the private sector, this normally leads to higher private real wages, and therefore higher taxes. But if real wages in the public sector keep pace with that, then these higher taxes mainly pay for higher real wages for public sector workers rather than for more doctors, nurses or teachers.
So it seems there will not be enough money freed by economic growth for Labour to fund improvements in the public sector.
What will Reeves do instead? What will she announce in the October Budget?
According to The Guardian,
She is still (currently) saying she won’t raise VAT, National Insurance or Income Tax. But she will “raise taxes, cut spending and get tough on benefits” if she takes the actions suggested by the newspaper.
But the rhetoric has triggered alarm among social media commentators – especially the possibility that she will attack other benefits besides those related to children. Read for yourself:
The next one is high on sarcasm:
The bottom line is that the economic plan on which Labour won the general election – still less than two months ago! – is baloney. It doesn’t work.
My personal opinion is that Reeves knew it couldn’t work all along.
But she sold us that pup because it was pretty – and she knew she could slap us with the ugly truth in her first budget because that is what incoming governments do; they blame their unpleasant decisions on the failings of their predecessors.
And what are we, the people of the UK, left with after a general election in which the Party of Austerity was replaced by an organisation claiming it was the Party of Change?
We’re left with No Change at all – just another Party of Austerity and more pain.
Vox Political needs your help!
If you want to support this site
(but don’t want to give your money to advertisers)
you can make a one-off donation here:
Be among the first to know what’s going on! Here are the ways to manage it:
1) Register with us by clicking on ‘Subscribe’ (bottom right of the home page). You can then receive notifications of every new article that is posted here.
2) Follow VP on Twitter @VoxPolitical
3) Like the Facebook page at https://www.facebook.com/VoxPolitical/
Join the Vox Political Facebook page.
4) You could even make Vox Political your homepage at http://voxpoliticalonline.com
5) Join the uPopulus group at https://upopulus.com/groups/vox-political/
6) Join the MeWe page at https://mewe.com/p-front/voxpolitical
7) Feel free to comment!
And do share with your family and friends – so they don’t miss out!
If you have appreciated this article, don’t forget to share it using the buttons at the bottom of this page. Politics is about everybody – so let’s try to get everybody involved!
Buy Vox Political books so we can continue
fighting for the facts.
Cruel Britannia is available
in either print or eBook format here:
The Livingstone Presumption is available
in either print or eBook format here:
Health Warning: Government! is now available
in either print or eBook format here:
The first collection, Strong Words and Hard Times,
is still available in either print or eBook format here:
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