It’s fair to say that since her appointment as Chancellor, things have not gone well for Rachel Reeves. Her October 2024 Budget had a disastrous effect on short term growth, leaving her scrambling to find a way to meet her medium-term “golden rule”. This means Labour has prepared to cut benefits.
The Office for Budget Responsibility (OBR) released its medium-term economic and fiscal outlook immediately after the Chancellor’s speech. It makes for gloomy reading!
UK GDP growth is now forecast at just 1% this year; half the rate of the October forecast. Inflation is also expected to rise and peak at 3.7% this summer. It is said that bad things come in threes and, to add to the growth and inflation woes, the underlying fiscal outlook is also expected to deteriorate, taking the current balance from a surplus of £9.9 billion to a deficit of £4.1 billion in 2029/2030. In just five months, the Chancellor has lost her wiggle room.
Rather ironically the “increased global uncertainty”, to which Reeves referred at the start of her speech, may come to her rescue. It gives the government an excuse to increase fiscal spending on defence, which is forecast to rise to 2.5% of GDP in this parliament. In his 1936 classic, “The General Theory”, Keynes suggests that:
“If the treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again, there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.”
In other words, if the government creates activity for the private sector, GDP will rise. I doubt the Chancellor’s reputation could survive a policy that involved the state creating nationwide landfills for the private sector to clean up, but rather than using rubbish dump economics to boost growth she has been gifted the opportunity, courtesy of Vladimir Putin and Donald Trump, to increase defence spending instead.
Keynes also said that, in relation to filling disused coal mines, it would “…be more sensible to build houses and the like…”, so if Angela Rayner can deliver her promised 1.5 million new houses and Rachel Reeves can quickly ratchet up Britain’s defence spending to 2.5% of GDP, we may just get the growth that this Labour government, and the rest of us, are craving. The Chancellor should certainly hope so as, in their latest release, the OBR warned that if the projected recovery in UK productivity growth fails to materialise and productivity instead continues its recent trend, GDP would be 3.2% lower and the current government budget would be 1.4% of GDP in deficit by the end of the decade.
That will be Labour’s worst nightmare for entering the next election because, by then, they won’t be able to blame the Tories for their economic mismanagement; it will all be their own!
