Reeves is not following in Osborne’s footsteps

 

I often see the claim that Reeves is just doing a version of George Osborne’s austerity, or that Reeves is following Osborne in being obsessed with fiscal rules. As Osborne’s period as Chancellor is increasingly seen as a disaster for the UK (as a few of us shouted at the time, but were ignored by a media that thought austerity was common sense), such comparisons serve a political purpose, but they are very misleading. The big mistake Reeves is making has little to do with Osborne and rather more to do with the folklore that emerged from Labour’s eighteen years in opposition between 1979 and 1997.

If anyone was following in Osborne’s footsteps it was Jeremy Hunt, who promised if a Conservative government was re-elected an additional period of significant spending cuts. In reality, as Will Dunn reminds us, he was repeating the trick played by Osborne before the 2015 election: set impossibly tough targets for spending after the election to limit what Labour could promise. Osborne was re-elected, and promptly moderated the decline in spending (as a percent of GDP). Hunt wasn’t re-elected, but Reeves raised government spending to be roughly flat (as a percent of GDP). From 2010 Osborne cut public investment (as a share of GDP) substantially, while Reeves raised Hunt’s plans to keep public investment roughly flat (as a share of GDP). As regular readers will know, Reeves has done much less than I would have liked, but it is not because she is following in Osborne’s footsteps.

Reeves appears obsessed by her fiscal rules, but in this she is following Gordon Brown rather than George Osborne. It was Gorden Brown that first created the ‘golden rule’, that current public spending should be matched by taxes. (It’s form was different because Brown’s rules looked backwards over a complete economic cycle, while today’s rule looks forward a number of years, but that is a detail compared to the rule’s basic principle.) The context in which Reeves is operating is also more similar to Brown’s than Osborne’s. Osborne’s principle macroeconomic error was to cut spending hard at the bottom of the deepest recession the UK had experienced since WWII, when interest rates were at their floor, going against standard macroeconomic theory and evidence. Reeves inherited a far weaker economy than Brown, but its weakness represents supply side stagnation rather than deficient demand. Overall, if Reeves is following anyone it is Labour’s most accomplished Chancellor, while any obsession about following rules on her part can unfortunately be laid at the door of Liz Truss.

As I have argued many times (most recently here) Reeves’s main error has been a failure to raise tax sufficiently. This is partly the result of commitments that Labour made before the 2024 general election. But Brown and Blair also committed not to raise the standard and higher rates of income tax before the 1997 election, as well as pledging to exempt some items from VAT. That the 2024 commitments covered more areas on tax than in 1997 may just reflect that the Conservative government had changed these additional taxes. Gordon Brown did eventually raise personal national insurance contributions (NIC) to partially fund higher health spending, but only after winning a second term of office. Even in this case I remember him telling me that they were really worried about the media and public reaction to this tax increase, and spent months carefully preparing the ground for that announcement. (Preparations that were, apparently, blown out of the water by Tony Blair in a media interview.)

Labour’s fear of tax increases is therefore longstanding, and owes a great deal to a belief that the public's distaste for tax increases was key in keeping Labour in opposition for eighteen years before 1997. In particular, their defeat in 1992 is often put down to a shadow budget which involved increasing taxes on high earners, which John Major described as Labour’s ‘tax bombshell’. 1992 was an election Labour thought they were going to win, but where they were soundly defeated yet again.

Are Labour’s fears about the electoral impact of tax rises justified? I’m not really qualified to answer (and I’m not sure anyone really knows), but some things are clear. First, many more voters favour higher taxes and spending compared to lower taxes and spending, although in recent years that large gap has been closing. However, the link between the two in many voter’s minds may not be clear: voters know that they pay taxes, but may be unsure that additional tax revenue will go to the kind of government spending they favour. In addition, those with high incomes and wealth tend to have an outsize influence in the media.

What does seem clear is that Brown’s concern about the reaction to his NIC increase to fund additional health spending proved unwarranted. Even a majority of Conservative voters supported it at the time. One difference between then and now, of course, is that back then real incomes were growing, whereas today they are not, such that those on low or modest incomes are already stretched. However, even if that concern is valid, the case for not increasing the top rates of income tax today looks rather thin.