Economic downturn: Shoppers walk on Regent Street in London. The United Kingdom is facing higher interest rates and abysmal levels of productivity leading to persistently weak growth. — Reuters
BRITAIN’s Labour government will make an historic investment into the country’s battered public services this week – a £300bil (US$406bil) uplift for areas such as health care, education and transport, amounting to the largest sustained funding increase since at least 2010.
The danger is the public won’t notice.
For all the political pain Labour has endured by raising taxes to pay for the commitment, the money will seem to disappear.
That’s largely because the previous Conservative administration cut spending to pay for giveaways before last year’s general election, putting public services on track for a period of austerity described by critics as politically implausible.
“It turns out £300bil is the cost of ending implausible,” Andy King, former chief of staff at the Office for Budget Responsibility fiscal watchdog, told Bloomberg.
Britons’ experience of government over the last decade-and-a-half can be boiled down to two inconvenient facts: frontline services have deteriorated and taxes have risen.
Today’s broken social contract is that people pay more for less.
The latest causes of the rot are ballooning costs from demographic pressures (the size of the state is at a postwar high), a debt pile swollen by Covid, higher interest rates and abysmal levels of productivity leading to persistently weak growth.
Chancellor of the Exchequer Rachel Reeves has the unenviable task of confronting this reality when she unveils her Spending Review and the stakes could not be higher.
James Smith, chief economist at the Resolution Foundation think tank, said Reeves’ choices could determine whether Britain’s long record of centrist politics survives and keeps Nigel Farage’s populist Reform UK party at bay.
Reform is soaring in the polls with the same promise of “change” that Labour campaigned on in 2024.
“People are understandably frustrated with Britain’s ‘less for more’ approach to public services in recent decades,” said Smith.
“The combination of austerity, economic stagnation and fiscal pressures mean that their experience of public services is that they don’t work properly and yet they are paying more in tax to fund them.
This economic failure has created a political opening for political parties like Reform who haven’t been in government during this period.”
Police seem unable to tackle shoplifters, a record number of patients are choosing private health care above the cherished National Health Service (NHS), and potholes blight the roads.
Yet the tax burden is at a post-Second World War high, 3% of gross domestic product (GDP) or £90bil more in today’s money than before both the 2008 financial crisis and the pandemic.
The Spending Review is Labour’s chance to reset the contract, and will be the first opportunity to see clearly where the priorities lie for Prime Minister Keir Starmer’s government.
Trade-offs will have to be made, with cuts to policing expected to prop up the NHS. Even a record spending boost is not enough to prevent fights over how to split the pot.
“Not every department will get everything they want,” Reeves admitted.
“I had to say ‘no’ to things I want to do.”
Aggravating the problem has been the collapse in productivity since Covid.
Public sector workers today are 4.6% less productive than in 2019, according to the Office for National Statistics. That means for the same taxpayer contribution, the public gets a service that is almost 5% worse.
That would be bad enough if taxes had stood still but they have risen by £90bil since 2008 in today’s money – equivalent to increasing the basic rate of income tax from 20% to 33%.
To show taxpayers their money is not being wasted and “every penny counts,” Labour will cull thousands of civil service jobs.
Meanwhile, since 2008, the United Kingdom debt pile has more than doubled to 100% of GDP and now costs about £50bil a year more to service than before both the 2008 crash and the pandemic in 2020, almost as much as Britain spends on defence.
Weak economic growth has compounded the problem, costing tens of billions of pounds in foregone tax revenue.
On an output per person basis, GDP per head – a proxy for living standards – has grown just 5.5% since the pre-financial crisis peak in 2008, an average of 0.4% a year.
In the preceding 17 years, GDP per head grew eight times faster - by more than 45%, or 2.2% a year. — Bloomberg
Philip Aldrick writes for Bloomberg. The views expressed here are the writer’s own.
