Luke Baker

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In for a penny, in for £175 billion

April 22, 2009

It may not be tax and spend exactly, but it’s definitely tax and borrow.

For the best part of 12 years, Labour has pursued essentially conservative (with a small ‘c’) economic policies, steadily underburdening itself of the ‘fiscally unreliable’ tag that some earlier Labour administrations were (wrongly or rightly) saddled with.

And for most of the past 12 years, as the global economy steadily expanded and Britain’s along with it, with aggregate wealth rising smoothly, Labour looked strong at the helm each time the budget came around.

But since the global economic crisis hit in late 2007,  it has become much harder for the government to keep a tight rein on the fiscal strings as growth has taken a hit, unemployment has risen sharply, and tax receipts have declined. 

Last April’s budget was a tough one for Labour, but Wednesday’s budget may well go down as the one that really showed the government reeling as it tries to keep a grip on the purse strings in some of the most challenging economic circumstances imaginable.

The numbers tell the story and are in some cases eye-bogglingly huge.

Finance minister Alistair Darling says the government will have to borrow 175 billion pounds this year and almost as much next year (173 billion) as it tries to plug a widening gap in its finances. WIth the Debt Management Office already struggling to raise funds (if one recent debt auction is anything to go by), the borrowing requirement could be a very big ask.

At the same time, tax receipts as a proportion of gross domestic product are going to be down, Darling said, and growth is set to contract this year at the fastest rate since World War Two with unemployment edging relentlessly higher.

To try to boost government revenue, Darling has unveiled a new income tax band, although it’s unclear just how much can really be raised from taxing the richest 1-1/2 to 2 percent of the population an ever larger portion of their income.

From next April, those earning more than 150,000 pounds a year will have to pay 50 percent tax, while their benefits allowances will steadily be cut, as they will be for those earning more than 100,000 pounds.

Those new tax policies represent something of a bust for Labour. For 12 years they’ve kept on the right side of business and the wealthy, encouraging entrepreneurship and positioning themselves as a partner with business. But the new top rate of tax suddenly begins to look like a Labour policy of old —  a “tax-the-rich” gambit.

It remains to be seen how the Conservative opposition – now widely expected to win the next election, which has to be called by June 2010 – respond, but on the face of it the high borrowing and higher taxation would seem to play ever more into their hands politically, while threatening them with a dire economic legacy should they win the next election.

For Darling, it may be the best that can be done with an awful hand. Maybe the borrowing can be met, the spending measures announced will have the desired effect, kickstarting economic activity and getting the wheels of commerce turning. Maybe. But it’s a slim chance will little more than a year to go before an election.

Borrowing and taxing may be what’s needed (or the only means available) to try to right the economy in this uncertain time, but it’s unlikely to help Labour’s prospects of holding onto power.

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  • About Luke

    "Luke is bureau chief for Reuters in Brussels. The 25-strong, multimedia bureau covers all European Union issues, from trade, energy and agriculture to foreign policy, competition, regulation and economic affairs. The bureau is also responsible for coverage of NATO and Belgian politics, economics and company news. In his beat, Luke covers foreign affairs, with a focus on the Middle East and Iran, and writes about EU economic policy. He was previously based in London, where he was defence correspondent, and before that had postings in Jerusalem, Baghdad, Rome and Johannesburg."
    Joined Reuters:
    1997
    Languages:
    English, Italian, French, Spanish
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