Budget 21: Productivity politics

Rachel Reeves responding to the Autumn 21 budget

Yesterday was a far bigger budget than many in the know had expected. Analysis about what it all means for the economy is still trickling though from the Resolution Foundation, IFS and others as I write.

On the day, there’s very little economics to be talked about as nobody really knows what’s happening until they’ve had a serious look at the numbers. So lets take the budget in two sections. The politics of the day, and the economics of the future (and what they mean for the politics of the future).

On the politics of the day, it was difficult for Rishi Sunak, went well for Labour and very well for Rachel Reeves, who all seem to agree gave a strong response in the Commons and performed far better than the chancellor on the media rounds this morning.

Pre-budget worries about ‘the tanks on the lawn’ did not materialise this time. The government is spending, yes, but Rachel clearly and cogently set out what Labour would do differently – using the  cost of living as a route into a fairness and values based pitch that is intuitively appealing.

We have also seen that the currency Johnson gained for being ‘the Conservative who spends’ is rapidly devaluing. Levelling up money, very little of it new, was not enough to distract from the tax rises on the radio bulletins yesterday and today. Tory-friendly papers remain friendly, but the serious ones offer more qualified support. Even the Guardian managed not to fall for the pre-set, preferred, attack lines on flight taxation and preferred to hit the chancellor where it actually hurts – on tax.

Tweet from Britain Elects which shows Tax rises: Con: 39% Lab: 30% which shows

The tax rises, and the causes for them, are the bridge into thinking about the economics and future politics that this budget is pointing towards.

The message from the IFS, Resolution Foundation and others is that public spending is going up, and that despite what the chancellor says, this is not wholly – or even mostly – due to the pandemic.

Some of this is capital spending (levelling up) but a lot a lot of it is current spending (keeping the lights on). The chancellor can’t (and shouldn’t) borrow to fund this second tranche and therefore if he wants to fund it, taxes have to go up.

So after ten years of austerity what has changed that has meant the government wants to spend now? Sadly the answer is not very exciting. It’s the policy challenge facing most western economies – the aging population.

It puts pressures on in two directions – higher costs to government through health and welfare and lower tax receipts as the non-working share of the population increases.

Tax needs to go up to pay for the health and social care requirements of an aging population, with health now representing 40% of the government’s day to day spending. But we are now facing a situation where even with increases tax will not be enough to cover this health spending and along with the kind of other services people will expect from a high tax state.

The solution to this, say economists, is the high productivity and therefore high wage economy. Higher wages will lead to more tax which will pay for our demographic timebomb.

This timebomb is a reality for all parties. There’s a chance that tax will not be the dividing line between Labour and the Conservatives it has historically been. There will still be posturing of course, expect small tax cuts in time for the next election, and arguments about who bears the burden, but the message from the experts is tax is simply going to have to go up.

The question will be ‘how do we get the high productivity and therefore high wage economy?’ What we invest in, and how we do it, will be the political dividers of the future.  And this budget already starts to sketch out what the differences might be.

The Conservative answer is levelling up. Forgive me for being partisan, but it is basically not very good. Some of the big transport spending is welcome but the grand sounding pots of funding cash out as roundabouts or ‘businesses hubs’ here and there. They will not translate into meaningful productivity upgrades

Both Labour and the Conservatives seem to agree that R&D is a vital part of this high skill, high productivity economy. Cashing out what this actually means and looks like in a way that voters can grasp is vitally important. 3% of GDP on R&D is an ambitious and vital policy but it is also two acronyms and a number. It is vital to make this tangible.

Figures from the Resolution Foundation (below) suggest that the government’s answer to productivity is to invest in business and transport at the expense of education. Indeed, the government has struck a culture war posture against higher education in particular.

Complex chart from Resolution Foundation showing more capital investment in department for Transport and Business than education

One does not need to be an expert of skills, productivity etc to see that education is a vital component of a higher productivity higher wage economy. This observation was at the heart of Labour’s electoral success in the late 1990s and early 2000s – and though the context will be very different in 2024, it will likely remain a key differentiator for the contemporary Labour Party in a forthcoming era when the consensus is tax and invest.

This is not the only serious political indicator from the economics around this budget. Inflation has the potential to derail the government’s plans and really put household income under the cosh. According to the OBR inflation should peak around mid-2022 – in time to be a major issue in ahead of next year’s local elections.

But aside from the important tactical points, the budget solidifies the new, post austerity paradigm around tax and productivity. Labour under Rachel Reeves has a distinctive message for these times, the challenge for all of us is to support her and the rest of the front bench to develop the narrative and policy offer that meets the needs of the public and takes us into power.

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