Labour needs a true alternative to Rishi Sunak’s austerity

The moral case against spending cuts is overwhelming – and so is the economic one.

Libraries will close. Bus routes will be cancelled. Potholes will go unfilled. But in the coming round of council cuts, that’s just the easy stuff. According to the County Councils Network, which analysed the budgets of 40 local authorities, the scale of austerity means they will have “no choice but to reduce care packages and eligibility” for adult social care next year.

“For some councils,” warns the report, “even extreme levels of service reductions will not be enough. Funding reductions, on top of inflationary pressures will intensify the risk of councils issuing a Section 114 notice, where a council is unable to balance their budget.” From local government to defence, the public sector is being hit with a triple whammy: double-digit inflation, rising demand for services and the sudden constraints placed on spending by the government’s self-induced fiscal crisis. As a result, we are heading for something akin to state failure, with millions of vulnerable people cast adrift.

This alone should stand as the moral case against spending cuts in this month’s Autumn Statement by Jeremy Hunt, the Chancellor. But there is also a strong economic case against austerity, once you cut through the nonsense being spouted by right-wing think tanks and echoed uncritically by the broadcasters.

Let’s deal, first of all, with the alleged “£40bn black hole” in the public finances. It does not exist. If there is a gap between how much the government plans to spend and how much it raises through taxes, it can be filled by borrowing and taxation. The “black hole” appears because since 1997 governments have adopted fiscal rules that limit their own ability to borrow. Rishi Sunak’s old fiscal rule, ratified by parliament in January 2022, decreed that debt must fall as a share of GDP by the third year of the rolling forecast period. But if you extend the deadline to five or six years the need for tax rises or spending cuts is reduced. Doing this should be an easy choice for Hunt and an easy demand for Labour.

Of course, this leaves the government with more debt as interest rates surge due to Brexit and government incompetence, but the UK is nowhere near the limits of debt sustainability. For the IMF, a developed country’s debt is sustainable when it is “economically and politically feasible” to achieve a balanced budget even while facing foreseeable shocks. This is clearly the case for the UK. At 102 per cent of GDP, according to the Office for National Statistics, the UK has – as Liz Truss has consistently reminded us – a lower debt-to-GDP ratio than France, Belgium, Portugal, Spain, Canada, the US, Italy, the G7 average and Japan.

The bond market panicked after the mini-Budget in September because, using this fact as her excuse, Truss set off on a pathway to disaster. She ignored inflation, ignored the damage Brexit has done to the UK’s international reputation, ignored the evidence that tax cuts do not stimulate growth and saddled the Bank of England with contradictory imperatives.

So the real risks facing Hunt – and which would face any incoming Labour government – are threefold: inflation, credibility and the unpredictability of government debt interest rates. The Autumn Statement needs to establish new, clear fiscal rules, appropriate for a country that needs to grow its way out of stagnation. The principles behind Labour’s fiscale rules are borrowing only to invest and funding higher public spending through taxation, but we need far greater detail.

According to the Resolution Foundation, the government could still reverse another £17bn of the tax cuts introduced by Truss and Kwasi Kwarteng, her chancellor (including changes to Stamp Duty, National Insurance and investment thresholds). For the sake of short-term fiscal credibility I would unwind all three – though you could weight the National Insurance increase towards the higher end of the income scale.

The scale of tax rises then required is highly sensitive to the expected growth rate. If the UK economy is growing at 3 per cent a year by 2026-27, says the Resolution Foundation, you would need just £30bn of tax rises or spending cuts now. If growth is half of that then £60bn will be needed this year, either from the pockets of the wealthy and corporations, or from the budgets of councils, hospitals and police forces. There is only one economic strategy that makes sense in these circumstances and that is one based on investment-led growth. Anything else leaves the economy in a doom loop as public spending cuts cause growth to flatline, requiring further cuts and ultimately leading to yet another loss of confidence from the bond markets.

If Labour comes to power during this mess – as is possible given the instability of the Sunak administration – it needs to level with voters: even if spending cuts are ruled out, there are limits to what higher taxes can achieve. Meanwhile, high inflation will continue to erode public service provision until we get it under control. Restoring fiscal credibility is an essential prerequisite to funding the green transition and decent social care. As well as retaining Sunak’s £17bn NHS levy, Labour could raise a further £15bn through measures such as abolishing non-domiciled status and tax breaks for private schools. This is more than enough to balance the books over five years as long as economic growth rises.

But this would still leave councils closing care homes, the NHS short of 50,000 nurses and 90 per cent of schools facing bankruptcy within a year. A second round of austerity, on top of the long-term effects of the first one in the 2010s, will cut to the bone. As the Institute for Government has warned: “There is no meaningful ‘fat to trim’ from existing budgets – many of which are still feeling the effects of a decade of spending restraint and more recent pandemic pressures.”

So the way forward is regime change. The UK needs a government that can look the disaster of the past 12 years squarely in the face and say: enough. We need a rapid, symbolic and irreversible reorientation towards trade and economic co-operation with the EU, signalled by rejoining as many of the bilateral mechanisms we abandoned as possible, and in the shortest time. We need a commitment to proportional representation for Westminster elections, so that those lending money to the British government by buying bonds can be certain we will never again allow libertarian fantasists to rule alone. And we need to remove from the airwaves the economists who still insist, amid double-digit inflation and an energy war, that balancing the books should be the sum of our ambition.

That’s how you square the bond markets. You remove the risk premium on lending to a country that doesn’t know what its place in the world is and that keeps electing fools and charlatans to its highest office.