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December 24, 2024 - 8:00am
It wasn’t exactly the Christmas cheer Rachel Reeves had been hoping for.
On Monday, the Office for National Statistics reported that the UK economy failed to grow in the third quarter, a reduction from the original estimate of modest expansion. And with the October figure on GDP growth now coming in at slightly less than zero, the risk of a second quarter without growth — or worse — is rising. In short, far from the renewed economy Reeves promised us all, the UK may be heading into a recession.
In fairness to the Chancellor, her government has four more years in which to deliver, so an early stumble isn’t itself a problem. What’s more, if this lump of coal is on the government, it’s on both Labour and its predecessors, considering that the outgoing Tories left her a dreadful inheritance. Their obsession with tax cuts — which over 14 years led successive chancellors to degrade public services so badly that the economy went backwards — and hastily negotiated Brexit deal with Europe would have hamstrung any government.
However, Reeves made her task even harder by failing to ask for a mandate for the kind of bold reform the economy requires. On the election campaign trail earlier this year, she promised to restart the economy and repair public services while matching fanciful Tory promises not to raise most taxes.
That left her to focus any tax rises on business, in particular the National Insurance contributions which employers must pay for their employees. This added cost of creating jobs has, unsurprisingly, led firms to curtail job-creation, while business investment may also suffer in response. That, at least, is the pre-Christmas message from the Confederation of British Industry, which warns that “businesses continue to cite the impact of measures announced in the Budget — particularly the rise in employer National Insurance contributions — exacerbating an already tepid demand environment”.
Making matters worse, neither Reeves nor Prime Minister Keir Starmer did themselves any favours with their negative messaging in the months leading up to her Budget. The state of the economy and the public finances is undoubtedly bad. However, hammering home that message may have killed any animal spirits they wanted to stir. Investors awaiting a turnaround before investing could now create a self-sustaining doom loop: few jobs are created, demand thus drops, and so new investment is further postponed.
It needn’t be this way, though, because bad news can be delivered with a happy ending. In 1982, during the depths of a recession his government’s policies had helped to worsen, Ronald Reagan delivered his first State of the Union address. In a masterclass of hope-filled oratory, he laid out a vision of how the painful process through which America was passing would ultimately lead to a renewed economy — as it duly did, when in the late summer of 1982 the stock market bottomed and a decades-long bull market began.
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SubscribeAn entire article on economics. Less than a handful of numbers. A huge amount of empty rhetoric. How about we use numbers to talk about economics? Economics pretty much is only numbers after all…
1. An “obsession with tax cuts”? In 2009/2010, UK state managed expenditure was £1021bn*. In 2023/2024 is was £1223bn*. In teal terms the state ballooned by a fifth in just 14 years. At the same time, the public sector deficit shrank. Tax as a proportion of GDP is roughly flat. There were no tax cuts.
2. “successive chancellors [degraded] public services”? All department budgets in real terms are broadly unchanged or increased since 2010** so why the degradation? It wasn’t the budget… Meanwhile, the NHS and “general public services” spending has soared. The NHS has record numbers of staff, record funding… and falling output, it literally performed fewer treatments and made more clinical errors. Are Chancellors responsible when 700,000 managers are employed in public sector organisations, Whitehall, and LAs to deliver public services? The UK state is utterly ineffective and the NHS proves more money can actually make things worse.
3. “if things don’t improve soon, the pressure may rise either for her to abandon her earlier promises on taxes or for the Prime Minister to abandon her.” So it is a binary choice between Reeves raising taxes or another Chancellor raising taxes? Europe, including the UK, has the highest taxes in the developed world. Ranked by highest tax / GDP ratios, the first non-European OECD country is New Zealand at no. 23. Europe is the slowest growing region on planet earth, in absolute and relative terms. More tax is clearly not the answer.
*ONS, in real terms, 2024 Q3 prices.
** HM Treasury Public spending statistics: May 2023.
Thank you Neil.
Nell.
I was wondering why I hadn’t noticed these tax cuts. And the last few “Conservative” chancellors either froze or cut allowances! Also, like anyone who comments on the negative impacts of Brexit, he doesn’t actually specify them,let alone quantify them
‘Are Chancellors responsible when 700,000 managers are employed in public sector organisations, Whitehall, and LAs to deliver public services? The UK state is utterly ineffective and the NHS proves more money can actually make things worse.’
This is the key point – too much management, which has largely happened under the Tories.
However, in the short-term they are trying to bring the deficit down and chosen to tax business (should have been a tax on unearned housing wealth, but that’s even less popular than Starmer). Of course, it remains to be seen if that will work.
If they then go on to address public sector inefficiency then fine – there are signs that’s what they intend to do with comments on “rewiring” and “too many people in Whitehall are comfortable in the tepid bath of managed decline.”
“[Labour] are trying to bring the deficit down”
By giving huge pay rises to the public sector? Hmm…
No, by increasing employer NI contributions.
By 2030 one in 5 of us will be aged over 65. And you want tax to fall? Here’s a prediction – it’s only going one way in medium term and same as the demographic. Hopefully though v slowly.
Like the DOGE are going to find soon enough in US, you can get rid of a few public servants as you identify some waste and poor performance but you aren’t finding Billions unless you make major Policy changes on entitlements and service provision. Which ones you think an aging population going to support?
Now had we not crippled UK growth last 14yrs, before the struggles of the new Govt, we just might have lower debt repayment, which of course is a huge drag. But as was seen lunacy like that of Mad Liz just increased that pressure because it was dishonest in what it was then going to have to cut.
In fact our overall tax burden still lower than key Western European countries but then they mostly have better healthcare and roads and housing etc. The Right might like the notion of a more US style approach but that’s not what British folks want, and they won’t as they age.
The issue is where the taxes fall and whether the broadest, luckiest shoulders take more of the strain.
Thank you for those gems of reality.
Say what? Reeves’ program appears to be raise taxes, increase debt, increase spending, punish private-sector business and increase energy costs. The outcome is inevitable – misery.
Reeves is compounding the Tories errors.
Rapley: “Their [Conservatives] obsession with tax cuts”
IFS: “tax revenue as a share of national income was remarkably stable until 2019 but has increased sharply since and is now higher than at any point since 1948.”
https://ifs.org.uk/publications/governments-record-tax-2010-24
Very poor journalism
Yes p**s poor! The Tories weren’t tax cutters…or even small State. In fact, not even competent at anything.
AE Halcyon, agreed very poor journalism, but obviously a Tribal Lefty with magical thinking presented as facts.
Internal pachyderm – why does no-one mention the ridiculous hundreds of billions spaffed on the useless lockdown policies, supported by both Labour and Tories? Where did that money come from? Doesn’t it have to be repaid? Has it not caused the “cost of living crisis”? I would say that would make a 400 billion (?) pound black hole that dwarfs everything else.
The black hole is £2.7 trillion. The interest on that wouldn’t drop much even if Musk subbed us £400 billion – (he’d still have $50b left). There are no piggy banks, we borrow off our great grandchildren. This lockdown obsession is tedious, inaccurate and irrelevant. Most of the 1st World did similar or worse.
The previous government obsession with tax cuts??? I must have been distracted because I thought that the tax burden went up and up and up during 14 years of “conservative” governments.
I confess I stopped reading after that. Did I miss much?
No. The comments are more cogent. The book mentioned in the author’s blurb looked interesting but after this article a sale lost I’m afraid.
Plenty to criticise the Conservative Governments 2010-24 for, but an obsession with tax cuts isn’t one if them. The problem with the public services is not so much lack of money, but how it gets spent.
Without a doubt, Reeves will go, as Starmer tries to save his own skin … he will fail … he is not equipped to be PM … nor has he the intellect.
Cheerio to Rachel from accounts……
Not Brexit again!!! And no mention of COVID and lockdowns and the significant impact on borrowing and growth. This article would be better suited for the Spectator which has gone down hill significantly over the last few months
Gove down hill?
Sorry
Tory obsession with tax cuts? Excuse me. When and where? The tax cuts that led to the state taking the highest yield since the 1970’s? Those tax cuts?
“In fairness to the Chancellor, her government has four more years in which to deliver, so an early stumble isn’t itself a problem”
Will somebody tell me why it was so quick and easy to get rid of Liz Truss and yet “in fairness” to Rachel Reaver, we -and whoever else decides these things -should be willing to put up with her and the Starmerdroid for four whole years?
Ah yes, an economy “going backwards” where by 2019 the budget deficit changed to a surplus i.e. we were starting to pay off the debt. Where wages were rising much faster than inflation for the first time in decades (3.2% above inflation according to a quick google). Where growth was pretty good by developed, Western standards excluding the USA.
There was a deficit in 2019 of about 2%, which was the lowest it had been for a long time, but it wasn’t a surplus. The last time the UK had a surplus was 2001 when Labour were still following Conservative spending plans.
The buzz word is ‘optics’. Truss, by acting too quickly instead of eking out her plans caused nervous nellie turmoil. If Starmer ditches Reeves now, yes he should under normal circumstances but the stable door’s open and sacking her would have the nervous horses bolt, here and overseas. Better Labour ditch him and, politically, she goes with him.
Cowardice and vote catching. Fiddling with areas unlikely to bring any return; WFA, IHT, CGT, interest rates. I’ve long thought Thatcher dropped basic income tax too much too soon. Wilson was on 33p £ and we had fleets of V bombers and a hefty force in Germany. Scandinavia manages.
If Reeves had said ‘time to take your medicine, income tax is going up’ they would still most likely have won. It was their time, time the Tories were laid off.
Now, a bold Chancellor would put two or three pence on income tax, put the threshold up to £20k or more. The BoE and OBR could make it variable, adapting to circumstances. Banks think nothing of credit card APR and we suffer that.
Too late now, there’s no oxygen in the circulation and it’s winding down like an older person in an ICU.
There is some remarkably imaginative re-writing of fiscal history appearing now as Labour ideology. I heard one recently say that, if only we would raise taxes further, there would be no problems of “mental health” or “NHS waiting lists”. It is as though you picked a rather naïve youngster in about 1880 and told them about the wonders of Communism; then elected them to government!.
The pain of course is now. Businesses adjust to things like the NI raise but it takes time. The potential benefits of the choices made now only occur in the future too. So was going to be inevitably be a v rocky period. The growth data hardly moved, but they could have done without it moving back by the fraction it did. They did box themselves in with the promises to avoid the 3 main taxes, but we’d probably be in an even bigger mess if we ended up with a different political outcome from the GE. All parties were going to have raise taxes. And as a place for stable Govt one might just see UK as a beacon right now compared to many.
One further upside is wages rising faster than inflation so that may seep through if sustained, which it may not be but it’s quite poss too.
There is though something in how Starmer/Reeves communicate all this. It’s not elevating is it. But that said you wonder whether this characteristic might grow on folks a bit more over time. We’ve had plenty of bluster in the recent past. Somebody uncharismatic but dogged may just be what we grow to appreciate a touch more. We’ll see.
From the perspective of an outsider here… the UK is not seen as a beacon of stable government. Au contraire, everyone I know is asking “what the heck is going on in Britain?” We see articles about: police visiting journalists for hurty tweets; two-tier policing (ergo your PM’s nice nickname); proposed blasphemy laws; prisons being emptied of criminals to make way for the hurty tweet folks; nice farmers protesting because their family farms are being ruined by a new tax; and so on. My country, Canada, is not doing any better, no argument there. But also, no one is claiming that Canada is a beacon of anything except dysfunctional government.
You read too much on here UR. Those first few subjects you quote are not mainstream stuff for folks here in UK.
Cost of living is, as is access to healhcare, housing, potholes on the roads etc. You will of course hear more on Unherd about the latest Culture war than those because it needs to focus on those to attract your subscription. Undoubtedly though we have got ourselves into a proper pickle here and the new Govt struggling to get out of it quickly. But that was inevitable.
What we have though now is 4 and half years without election turmoil, and there is a chance, not a certainty I grant you, that stability makes a difference.
The pain of course is now.
Whose pain? Not yours, that’s for sure. If you think that governments can go on taxing productive activity indefinitely and handing the proceeds to you in the form of unearned property wealth and unfunded pensions, then you are in for a rude awakening. Reeves and Starmer had a choice. They got it wrong. There will be a recession. They won’t recover.