“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism,” wrote Adam Smith, “but peace, easy taxes and a tolerable administration of justice.” Britain is hardly heading in the right direction; peace is precarious, taxes are the highest for 70 years and the administration of justice, whether in the legal process or as administered by unaccountable regulators, is barely tolerable.
Subsequent to Adam Smith, a fourth requirement should be added: a high level of domestically financed investment. Here, Britain is failing badly with inadequate, falling and often misdirected investment, such as carbon capture. More than half the companies in the FTSE 100 are buying back shares, yet very few are raising capital. Businesses are being acquired, but none are raising capital through flotation. Foreign direct investment is in retreat and government investment is driven by politics.
The government recognises that to achieve growth, and therefore rising tax revenues, it needs to encourage investment. Its actions, though, fall a long way short of the rhetoric. It needs to cut taxes, but money must first be found to finance the rising cost of the national debt and the need to spend more on defence. Hence the commitment to cut (or rather reduce the growth in) public spending, but that is easier said than done. Welfare dependents are a core constituency for the Labour Party, so cutting their benefits is hard. Saving £5 billion a year by 2030 is a step in the right direction, but it’s not nearly enough. Abolishing NHS England should enable significant cost savings, but will a government that worships the NHS really go ahead with these?
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Structural reforms, notably in the planning process, are promised, yet there is no indication of any change in energy strategy, which has embedded some of the highest energy costs in the world. The government wants to avoid blatant tax increases, yet it’s focused on “closing loopholes”, which still means higher taxes.
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Rachel Reeves faces huge political obstacles to implementing the necessary change of course, not least since these measures imply the stern austerity associated with Tory governments. The left will regard the “Spring Statement” as a betrayal of Labour’s principles, the right will say it doesn’t go nearly far enough. To be fair, it was never realistic to think the government would perform a handbrake turn.
An imperceptible U-turn?
Inevitably, there is plenty of small print to keep the media distracted. Nevertheless, in economic terms, the Spring Statement changes very little in the short or medium term. Hopefully, the government has embarked on a change of course that will help raise economic growth and thereby prosperity in the long term, but if this is a U-turn, it is of the super-tanker variety; so gradual as to be almost imperceptible.
The UK should avoid a recession this year and probably next. However, growth will be slow and possibly non-existent on a per-capita basis, as reflected in the reduction in the Office for Budget Responsibility’s (OBR) 2024 growth forecast from 2% to 1%. Tax revenues will disappoint as people work out how to avoid them, while the government will struggle to control spending. In the 11 months to February, government borrowing was already £20 billion above the OBR’s forecast in October.
Meanwhile, growth in Europe is expected to pick up as a result of higher spending by Germany, notably on defence. This may, nonetheless, be a false dawn, as government spending is rarely the engine of sustainable growth. The Eurocentric press, though, is exultant about the slowdown in the US economy. Many are predicting that the US will tip into recession, for which they blame Donald Trump’s tariffs.
More significant factors are the dramatic fall in immigration and the slashing of the public sector, which should be a positive for growth in the medium term. Chris Watling of Longview Economics acknowledges that the economic data has deteriorated but gives five reasons why “it’s not a recession”.
Firstly, the corporate sector is healthy, while all prior recessions since the 1960s (except for the Covid-induced one) started when the corporate sector was in deficit. Secondly, there is no spike in the oil price. Thirdly, liquidity and credit conditions are easing. Fourthly, the Conference Board survey of chief executives shows improving confidence. Finally, housing and household net wealth indicators are not signalling trouble.
Corporations and households, Watling says, have deleveraged markedly in the last 15 years and can pick up the slack, so “a mid-cycle slowdown is the most likely path, particularly as interest rates are cut”. Thereafter, the US is likely to re-accelerate, helped by rising labour productivity, which has increased at an annual rate of 1.4% for the last 30 years, while in the EU and UK growth has slowed to a snail’s pace.
A slowing US economy is very unlikely to provide the excuse the UK government desperately needs for the failure of its growth strategy, while Europe is equally unlikely to provide a helping hand.
Reeves understands the structural problems of the UK economy, but it could be a long time before she summons the nerve and political support to turn good intentions into effective measures. The road to hell is paved with good intentions.
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