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Expect Labour to become the party of austerity

Out with the old fiscal authoritarian, in with the new. Credit: Getty

May 27, 2024 - 5:00pm

As the prospect of a Labour government draws nearer, Britain’s future does not look any brighter. Last week, the Institute for Fiscal Studies (IFS) quietly published a shock statement to the financial press that was overlooked by many. The IFS stated that whichever party won the next election would be handed the worst fiscal situation Britain has faced since it emerged from post-WWII indebtedness and rationing.

According to IFS Director Paul Johnson, any government that hoped that it would be saved from Britain’s awful fiscal situation — specifically a yawning deficit of around 4.4% of GDP — by a bounceback in economic growth would be “miraculously lucky”. Johnson added that whoever won the election would have three choices. One option would be accepting “painful” public spending cuts. The other would be to raise the tax burden to an 80-year high, the highest since WWII. The final option would be to let things stand as they are and ramp up borrowing, but this would likely trigger a fiscal crisis of the sort that the Truss government experienced.

The reality is that the Labour Party will almost certainly win the next election, but it will be handed a bowl of fiscal gruel. Far from being a breath of fresh air that will bring in a new era of economic and political dynamism, Labour will be forced to become the party of austerity. The British public will be forced to stomach lower-quality public services, higher taxes and, likely, even more strikes and dysfunction in public transport.

These austerity measures will be turbocharged by geopolitical events. At the start of the year, Defence Secretary Grant Shapps warned that Britain would be at war with China, Iran, North Korea, and Russia within five years. These warnings triggered an extensive public debate on the status of British military preparedness. Starmer has seemingly accepted this hawkish stance, stating that security would be a Labour government’s “first priority”.

Although it’s unlikely that the Labour leader will press ahead with Rishi Sunak’s national service plan, it is possible that he will ramp up the UK’s defence spending, which could prove costly: Starmer is committing to 2.5% of Britain’s national income to defence by 2030.

The reality is that Britain is broke. The events of the last few years, starting with the lockdowns and then moving into the energy price subsidies in the wake of the Ukraine war, have bankrupted the country. Various Tory governments jumped headfirst into these policies without even considering their costs, and the Treasury seems to have gone along for the ride, having consistently backed economic support schemes during the lockdowns and extended the Government’s energy price guarantee scheme for months. Now the British public will have to bear the costs, we should expect to see rising taxes and a sharp decline in quality of public services.

What should Starmer do as PM? Unlike Liz Truss, the Labour leader is unlikely to be a risk-taker — so taking a gambit that the bond markets will accept a lax fiscal stance is a non-starter. Rather, he will have to rule over a series of painful tax increases and impose austerity on public services that are already subpar. Britain is facing a bleak future — no matter who is at the helm.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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AC Harper
AC Harper
27 days ago

The final option would be to let things stand as they are and ramp up borrowing, but this would likely trigger a fiscal crisis of the sort that the Truss government experienced.

I think you will find that the ‘Truss Government’ never got a chance to trigger a financial crisis… she was bounced out of the Premiership by financial institutions having a fit of the vapours.

Milton Gibbon
Milton Gibbon
27 days ago
Reply to  AC Harper

The same fit of vapours which they had over Javier Milei in Argentina, look at how that is turning out.

Peter B
Peter B
27 days ago
Reply to  Milton Gibbon

I’d guess too early to say at this point. But hopeful he can see it through. Carlos Menem showed it was possible in the 1990s. Before Argentina lost the plot yet again and succumbed to inflation once more.

Prashant Kotak
Prashant Kotak
27 days ago

The phrase ‘hospital pass’ was invented for this incoming transition of power from Conservative to Labour.

Dennis Roberts
Dennis Roberts
26 days ago
Reply to  Prashant Kotak

To be fair you could have said the same of the 2010 election.

Right-Wing Hippie
Right-Wing Hippie
27 days ago

The events of the last few years, starting with the lockdowns and then moving into the energy price subsidies in the wake of the Ukraine war, have bankrupted the country.
Yes, COVID and Russia bankrupted the country.

Rob N
Rob N
27 days ago

Presume you are being sarcastic. It was our Govt’s mad reactions to COVID and Ukraine that have exacerbated the, already considerable, problems

Walter Marvell
Walter Marvell
27 days ago
Reply to  Rob N

And do not forget the Fake Tory’s adoption of the anti capitalist Greta inspired Degrowth Ideology of Net Zero which has ready threatened our Oil and Gas industry with auto destruction.

David Morley
David Morley
26 days ago
Reply to  Walter Marvell

Didn’t work out so well so they must be “Fake Tories”. This almost as bad as the “not real socialism” argument.

Mark V
Mark V
27 days ago

‘Austerity’ is a deliberate misnomer. A propagandistic term defended by midwits to facilitate government profligacy and cronyism at the expense of working people.
It is not in a free people’s favour to have a state unshackled of limits to its own expansion.

David Morley
David Morley
26 days ago
Reply to  Mark V

As is “cronyism”. Though probably mid to low wits.

Peter B
Peter B
27 days ago

This is need not be true:
“The British public will be forced to stomach lower-quality public services, higher taxes and, likely, even more strikes and dysfunction in public transport.”
The reason public services are poor is not because they don’t have enough money. It’s appalling management and leadership and simply not focusing on the real priorities. These things are really not difficult to fix given the will to do so.
Public services are also blighted by DEI initiatives. When you are forced not to hire solely on the basis of competence, it’s hardly surprising if you find increasing incompetence.
Public transport strikes will continue until the time when these services are reformed and made more efficient. The government should not be buying trains for private train operating companies. Investment banks should not be running train leasing companies. And railways and TfL should not be run principally for the benefit of their employees. All reasons why we have both the worst and most expensive public transport in Western Europe. Again, all fixable given the will.
But still zero prospect of any of that actually happening within the next decade. Seems like we’ll need to relive the 1970s first.

David Morley
David Morley
26 days ago
Reply to  Peter B

It’s appalling management and leadership

Not really. It’s impotent management. The medical profession is simply too powerful and too vested in its own interests for management to be effective. It’s a classic case of provider capture. What is needed is both systemic and massive cultural change, against huge entrenched resistance. It won’t be easy, and it will certainly cost.

I think you are confusing two things. That health could be delivered both more cheaply and more effectively is doubtless true. Getting there will take both money, and the kind of will we have not seen from politicians for a long time.

Peter B
Peter B
26 days ago
Reply to  David Morley

I hadn’t really commented on the health side of this. But I agree with your view that the medical profession is too powerful. They’re even campaigning for special tax opt-outs for their gold-plated doctor’s pensions which the rest of us on vastly inferior pensions will be denied !
I’m not convinced that reform takes that much money. If there are costs to be saved and efficiencies to be gained (and I agree), I’m not convinced that the investment spike needed to get there is that high. There’s probably an enormous one-off severance bill for a lot of staff that aren’t really needed though – this is the public sector and that won’t be cheap.
The will to change isn’t going to come until people generally see what and who are really responsible for the problems. We’re way off that still.

David Morley
David Morley
26 days ago
Reply to  Peter B

I think we largely agree. Yes. Recently reading some Gramscii – didn’t realise that the (usually right wing) idea that politics is downstream of culture comes from him. Ideas need to change.

Chipoko
Chipoko
25 days ago
Reply to  David Morley

Well said!

Chipoko
Chipoko
25 days ago
Reply to  Peter B

I couldn’t agree more!

Ian_S
Ian_S
27 days ago

Expect Labour to promote antisemitism and Muslim appeasement; to promote Kafkaesque show trails of women questioning “transwomen”; promote plummy wombles like Phoebe Plummer and the rest of the net zero / just stop oil womble crowd along with their essentially impossible and bankrupting “net zero” agenda; welcome record numbers of welfare-seeking migrant freeloaders; and have no answer or even care how to raise exports — the best way to lower national debt. But the conservatives did the same — it’s what the Americans call the “uniparty”. The only antidote now is rising populism that harshly destroys all the elitist preoccupations outlined above.

Phil Day
Phil Day
27 days ago

For the whole of my life successive governments have been overspending using financial smoke and mirrors and ponzi schemes to create the false impression of prosperity without effort. Sooner or later the whole thing had to collapse so no real surprise.
Pity the future generations who will have to pay for this stupidity and arrogance.

J Bryant
J Bryant
27 days ago

Holy heck, Philip Pilkington, here in the US it’s Memorial Day, the unofficial start of summer. We all at least pretend to be cheerful, and often, like today, the weather cooperates to help us.
Having read this article, I feel it’s time to break out the cyanide pills in Dear Old Blighty, and I might swallow one myself! Surely it’s worth remembering that the UK is still one of the wealthiest and most technologically advanced nations on earth. There must be a glimmer of hope and sunshine on what I think is called Bank Holiday Monday in the UK.

Russell Hamilton
Russell Hamilton
26 days ago
Reply to  J Bryant

“it’s worth remembering that the UK is still one of the wealthiest and most technologically advanced nations on earth”

That’s the impression I get from leafing through Country Life magazine each week – looks pretty prosperous to me. People photographed for Tatler seem to be keeping their end up.

Are things like ‘the triple lock’ becoming unrealistic?

Paul T
Paul T
26 days ago

No, it’s public sector benefits that are strangling us; nobody is allowed to mention it. In the FT today there is an article about how the idea of getting Europeans to work longer hours is missing the point. I cant imagine how when Europeans seem to think that the answer to developing nations, China, India etc are ever shorter hours, longer holidays and higher pensions all paid for by someone else with state employees at the vanguard of this explosion of profligacy. All whilst life expectancy keeps increasing. The French want 30+ years of life on fat pensions! “Where do our taxes go?” people ask; they go to the gigantic and growing Ponzi scheme of public sector benefits which need to be paid for now, there is no savings account. “What about the greedy rich” they ask; the sums involved are so gigantic it will eat through the rich in a matter of months but where does the money come from after that?

Someone else, else, (you know, like “going out out”) will pay.

Pedro the Exile
Pedro the Exile
26 days ago
Reply to  J Bryant

the UK is still one of the wealthiest and most technologically advanced nations on earth.
Not on a per capita GDP basis unfortunately

j watson
j watson
26 days ago

The inheritance will be dire. Public mostly know that. But they want some competency now and they want there to be a consequence for those who’ve got us into this mess.

AC Harper
AC Harper
26 days ago

Not just any austerity – Labour Austerity.
But in reality probably little different than that of the current Government. I always thought that George Osborne played a blinder by talking up austerity, but actually doing little about it. I expect the same from Rachel Reeves if she becomes Chancellor.

David Morley
David Morley
26 days ago
Reply to  AC Harper

Partly true. If you are to use the well off to stimulate growth you have to convince them that no tax man is going to come and grab their money any time soon. They then become confident enough to spend and invest and that creates a stimulus to growth.

The only problem is that it hasn’t worked, doesn’t work, and was probably based on miscalculation. Presumably because too much investment has been in non-productive assets (property) and has just pushed prices through the roof.

David Morley
David Morley
26 days ago

The IFS stated that whichever party won the next election would be handed the worst fiscal situation Britain has faced since it emerged from post-WWII indebtedness and rationing.

If people could be convinced that the situation is this dire, then perhaps something could be done. But many are doing nicely thank you for themselves while the country and their countrymen struggle. And frankly they don’t care.

Austerity they can stomach, because they are largely unaffected. Diverting some of their wealth into mending a country they don’t even identify with in any real way? Not so keen.

Tyler Durden
Tyler Durden
26 days ago

The bonus for Labour is that high taxes, high interest rates and ‘sustainable borrowing’ (low spending on anything but the NHS) will align the UK with the Eurozone’s economic regime. And the single European currency is the real goal of the party managers and their core vote.

Pedro the Exile
Pedro the Exile
26 days ago

The reality is that Britain is broke. 
and that is the defining issue of our times and all the rest is a sideshow .The macro economics are shot with debt/gdp approaching 100% (currently 97.5% excluding non funded liabilities ),a current account deficit that shows no sign of going away and debt servicing costs likely to exceed any lukewarm real growth rate.A welfare bill that is on an upward trajectory ,a defence budget that needs ramping up ,uncontrolled immigration and a net zero obsession that will immiserate both people and businesses.
Against this backdrop Sunak is banging on about a “triple lock plus”-this is what the end of democracy looks like with the elite desperately trying to bribe their constituents without the luxury of an identifiable source of funds.
The author correctly identifies the economic zugzwang facing the current and any future Government-cut spending/raise taxes/borrow more-all 3 are economic and political suicide.So we will get endless tinkering at the margins with constitutional and cultural issues (“workers rights anyone?) whilst the economy tanks.Having kicked the can down the road for the last 20 years,with the last hurrah being the lockdown blowout, now is the time of reckoning.
The solution,such that a mature economy like the UK has available to it will require political and popular will to face facts and make some hard decisions- cut the welfare bill,identify real growth opportunities (fracking would transform the UK finances ,its energy security and level up the North in one fell swoop-but a few noisy nimby’s will put paid to that) and deliver.
Chances of this happening under either of the main parties is nil-nota great prospect.

Bryan Dale
Bryan Dale
26 days ago

There is an alternative to austerity. Cuts to taxes and regulations, including cancelling net-zero, could turbocharge the economy. Unfortunately, Starmer is even less likely to do that than his fellow leftist ideologue, Rishi Sunak.

Peter Shaw
Peter Shaw
26 days ago

There must be some silver lining? A global thermonuclear war perhaps ?

Simon Martin
Simon Martin
26 days ago

“Britain is facing a bleak future — no matter who is at the helm”.
This is obvious. If there were a magic bullet it would have been used by now – no one party has any magic solutions to the fundamental problem, which is that for decades politicians have overpromised in order to get elected.
Britain has, overall, reached a standard of living and of social security that is as high as a smallish economically developed country can reasonably expect, largely fuelled by economic growth from the post WWII baby boom demographics and the post war peace dividend. These are both now reversing and the outcome is inevitable, we have to cut our cloth to fit our coat as things are, not as they were or we would like them to be. “the times they are a changing…..” as some Nobel Laureate observed.

Warren Trees
Warren Trees
26 days ago
Reply to  Simon Martin

Bob Dylan?