Politicians tend to delude themselves and their voters. John McLaren advises Andy Burnham to face the difficult facts of fiscal reality.  Taking the easy way out is the rapid route to oblivion.  

Almost as soon as he has started in the new job, Andy Burnham is facing the same dilemma that his recent, short-lived, predecessors have encountered: how to deal with a fiscal crisis when the economic uptick you promised turns out to be a chimera.

The link between disappointing economic growth, fiscal tightness and the (lack of) longevity of Prime Ministers appears to be getting stronger, alongside the preparedness of the public to flirt with what would normally be considered more ‘extreme’ political parties, like Reform and the Greens.

This breakdown in economic and political norms can be traced back almost two decades to the global financial crisis of 2008. Since that time, productivity and economic growth have been constantly, and notably, lower than the post second world war average. The original problem has since been compounded through the negative economic impacts stemming from Brexit, COVID, de-globalisation and the Ukraine and Iran wars, warding off any chance of a recovery.

Interesting aside: The Office for National statistics (ONS) has recently substantially revised the UK’s productivity per hour performance post 2008. It is now thought to have grown by 1.3% per annum between 2009 and 2019, whereas the previous estimate was of only 0.8% p.a. Although less than the pre 2008 average growth rate of 2% p.a. this is still good news. The bad news is that the revision is largely down to an overestimation of hours worked rather than output being higher. So economic growth will not be revised up and the low growth scenario, post 2008, still stands, although not for the reasons we thought.

The original banking crisis and economic slowdown led to a period of fiscal austerity, a supposed resetting after which normal service might be resumed. However, the investment halting uncertainties around Brexit and, especially, the fiscal ballooning impacts of COVID put an end to such hopes. So, while growth remained anaemic, public spending grew. 

No ‘get out of jail’ card

The tax burden also grew, to a record level, but not by enough to fully compensate. Hence borrowing also grew, substantially, and with it the size of the National Debt. In 2008 this stood at around 35% of GDP, now it is – near as dammit – 100%. Initially, the cost of such rising debt levels was limited, as interest rates were under 1% for over a decade – 2009 to 2022. Unfortunately, the latest twist in this sorry tale has been the return of inflation – via de-globalisation and war mongering – and with it rising interest rates, now back up to almost 4%. This makes debt interest payments a serious burden, such that they now account for around 8% of all government spending, or over £100 billion a year. 

Having already found themselves in a pretty big fiscal hole, recent governments have had – and still are having – to contend with new spending pressures associated with the Defence budget; the pension Triple Lock; COVID backlogs; and stubborn labour market related problems. Faced with such a bleak fiscal background, successive UK governments have turned to the same ‘get out of jail free’ card – a promise to restore faster economic growth and to use the higher associated taxes generated to help ease spending pressures. Thus far, no-one has managed to pull off this trick and so the crisis rumbles on and politicians credibility continues to evaporate.

Initially, UK politicians got away with the implications of reduced growth as an ‘adjustment’ period. Cameron and Osbourne were allowed six years grace, but, as wages, living standards and public services continued to stagnate, patience grew shorter. Voters also looked for alternative reasons for this malaise, including the impact of immigration on their wellbeing. Raised levels of net inward migration had been experienced earlier in the twenty first century, but this was perceived as less of a problem, as the economy, and living standards, kept growing. However, when growth stalled, and with it prosperity, then heightened immigration levels became a convenient target for some to explain the downturn in their fortunes.

No easy way out

But there is no easy route to an economic renaissance – migration is largely an irrelevance and reducing it is possibly counterproductive – and so no easy way to resolve the fiscal crisis. If Reform were to come into government they would, almost inevitably, fail to resolve any of these issues.

At the heart of the problem remains the economic downturn. Somewhat problematically, the more obvious routes to economic salvation that exist have been around for ages and for equally as long have been ignored.

These include: higher levels of private investment; more housebuilding; easier planning and less regulation; and a stable and encouraging policy environment. Some of these are outwith the UK Governments direct influence and those that come within it are not easy to implement or they would already have been acted upon. As a result, governments tend to weaken in their resolve to act, or back down completely, and hope that ‘animal spirits’ will somehow come to the rescue.

Burnhams solution rests on an expanded form of ‘Manchesterism’, via greater devolution of powers. This is unconvincing, certainly in the short term, and the examples of Scotland and Wales, post 1999, do not exactly engender confidence in its eventual success.

Spreading the tax burden – the European way

If the economic and fiscal stasis continues, and there is little to signify that it will not, then we are faced with a choice between cutting public spending and raising taxes. I have ruled out increasing debt (US style) through more borrowing due to i) its clashing with successive UK government fiscal rules and ii) the drain that debt interest payments are already having on the Exchequer.

The worsening – from a financial aspect – demographics and rising military spending needs, suggest that cutting spending is unlikely to be the option pursued, even by right of centre parties. That leaves higher taxes. If this is to be the case, then the tax burden will need to rise across all households. There simply aren’t enough rich people to fund the change, and, given their mobility, there will be even fewer if high-end tax rates are hiked substantially. This should not be a surprising outcome as it is how most mainland European, social democrat, governments fund their higher levels of public spending – along with the equivalent of higher employer NICs.

As bodies like the IFS and the Resolution Foundation have repeatedly pointed out, higher tax countries differ most from the UK in relation to the tax burden that applies to middle earners, not high earners. There is less inequality because of the way that money is spent, not because the rich are hammered. So, the big money will be in income tax (and its sister tax – National Insurance), VAT and property tax. You can cut this different ways, and alter the impacts on different households, but the higher tax outcome for average families still holds.

Facing facts – a problem for politicians

All of this, I would contend, is fairly self-evident to those who want to face the facts. The bond markets – who are in reality are anonymous and neutral in their behaviour – are already there. The UK pays a premium on its debt issuance because repeated governments have been in denial over the fiscal position whereas the bond markets are fully cognisant of it. The problem for politicians is that it remains far more popular to delude themselves and the public that such facts do not need to be faced and that some other cunning plan can yet prevail.

The turning point will come when political parties and manifestos catch up and admit that faster future growth cannot be guaranteed and so we will have to live with what that implies in fiscal terms. Only then can the hard choices be made and the public give their verdict. This requires a revolution in British politics with a strong leader – and very good storyteller – levelling with, rather than pandering to, voters. Were such a person to emerge, then faster economic growth might also return, if they also manage to push through measures like greater rationalisation of the tax system (the excellent Mirrlees Report from 2011 remains highly relevant here) and help loosen up planning conditions, in order to encourage longer term investments.  

Maybe Burnham is that person. His conference speech exhibited elements of the bravery and storytelling needed, such as the higher tax for better social care trade off – but not until 2029. The bigger question is whether, by then, he will have also accepted the economic truth and if so how to present this changed reality to the electorate. That is, if he gets that far, three years of treading water is a long time to stay popular while advocating difficult and, on the face of it, unpopular, changes.

Interesting times await, but the latest PM at least has the examples of his predecessors, and their rapid demise, to remind him that, in the end, the easy way out is also a rapid route to political oblivion.

Scottish Appendix

For the umpteenth year the SNP have not even tried to explain what would happen differently in an independent Scotland. It’s just not worth the hassle.

Looking at Scotland post the financial crisis, the SNP have been unlucky. Their stewardship of the country has largely coincided with this extended period of fiscal struggle. However, they have not helped themselves in terms of poor decision making, using up one-off fiscal windfalls and going even further into debt than the UK position implies. Only very recently, and not exactly strategically, has this started to be addressed. John Swinney’s announcement on the drastic reduction of NHS boards in Scotland is an interesting opening gambit in attempting to close the funding gap. But it looks a bit panicked, with no prior consultation or rolling of the political pitch. The rearrangement of local government looks even less thought out. As the notion of a single National Care Service body fades into the distance, what chance such radical reconstructions going the same way?

Meanwhile, the implications of the impact of independence on Scotland’s fiscal position were, again, laid bare by last month’s GERS publication. The latest edition tells the now familiar story of a Scotland whose public finances would be hard pressed at the point of separation. Based on the same tax and spend policies as pertain now, then net financing costs are around £2,700 higher per person than for the UK average in 2025-26 – equivalent to being over £15 billion further in debt than the UK. 

Fit to take on more powers?

For the umpteenth year the SNP have not even tried to explain what would happen differently in an independent Scotland. It’s just not worth the hassle. Which means the independence strategy can now be reduced to, ‘wait until the UK Government becomes so unpopular that such tricky issues can be simply avoided as nit-picking, lob in a couple of higher growth promises and pick up the pieces once the bomb’s exploded’. Pretty similar in fact to the Brexit strategy but with even bigger fiscal ramifications.

Of course, the big difference with the UK position is that, in political terms, the SNP serenely sails through all the economic and public service disappointments. The electorate either see them as blameless – which seems unlikely – or without the powers to influence – a moot point – or the best of a bad bunch – which is dispiritingly likely. Such political longevity does no-one any favours, including the SNP. Without the wake-up call of being forced into opposition, a tired and self-delusional party simply staggers on, looking less and less like a government that could handle even more powers.

Featured image: Street artist Clet Abraham’s reworking of a No Entry sign in central Edinburgh. Photo Fay Young