On the third floor of an unassuming office block in Bloomsbury lies one of the institutions most feared by chancellors. For decades, Westminster has looked to the Institute for Fiscal Studies (IFS) to cast the definitive judgement on tax and spending policies.
Shortly before Rachel Reeves’s first Budget I met Paul Johnson, the think tank’s amiably nerdish director. Behind him rows of economists worked in near-silence as they prepared for the occasion (fuelled by pizza and coffee, they remain in the office until at least midnight).
“One of the frustrations is that we knew during the election campaign that tax rises – and quite substantial ones – were inevitable, but nobody would admit it,” Johnson, 57, who has led the IFS since 2011, told me. “We called it a conspiracy of silence between the two big parties.”
Even before the Budget, taxes were forecast to reach their highest level since 1948 (37.1 per cent of GDP), while public spending was due to settle at 42.5 per cent. Brexiteers’ hopes that the UK would become a low-tax, low-spend country proved delusional. Is Britain essentially becoming a more European-style economy? “[The tax take] is still relatively low by western European standards but it’s catching up. We’re also becoming more normal in terms of debt. Twenty five years ago we were about average for OECD economies, now we’re well above.” (The national debt is currently about £2.8trn, or 98.5 per cent of GDP.)
Johnson cited higher debt interest payments and the NHS as the main forces driving taxes upward. “We’re spending more and more on health, and that’s inevitable and not a bad thing. There’s no point getting richer if we’re sick or dead, is there? We’ve essentially funded the growth of the welfare state for decades, in part through cuts to defence spending – that’s now more likely to rise. And on top of all that, poor economic growth clearly doesn’t help.”
Was Reeves, an admirer of Johnson’s recent book Follow The Money, justified in complaining that the Conservatives left a “£22bn black hole” in the public finances? “There is a smidgen of truth in that,” he said, noting that, “The last government’s treatment of asylum costs was very poor, it wasn’t in the Home Office budget. But broadly speaking, the claim that this is driven by something that was unknown about this year is not right.
“One can have a discussion about whether, for example, the public sector pay increases [costing £9.4bn] should have been smaller. I think that would have been difficult to be honest. But if the government entered office intending to do that then they should have known beforehand that those levels weren’t there.”
Reeves has used the government’s inheritance to defend measures such as the winter fuel payment cuts – a policy Johnson applauded back in July (“a sensible choice,” he tweeted). Today, he stands by that view. “Every think tanker and economist in and around Westminster has been arguing for this for years and years. So it would be inappropriate to resile from it when it happens and it looks like it’s terribly unpopular. It was announced at the same time as a much bigger and, in my view, much more worrisome change: ‘We’re not going to reform social care after all.’” Labour abandoned the planned £86,000 cap on care costs and is expected to establish a royal commission on the subject.
Johnson pointed out that the winter fuel allowance has halved in real terms over the past 25 years: “I haven’t heard anyone particularly complaining about that.” (Today it is worth £200-£300, the same level as under Tony Blair’s government in 2003-04). “Of course, there will be some pensioners who are somewhat dependent on it – those not on benefits but not on high incomes. But these are the sort of hard choices politicians have to make. It’s very hard to think of a reason we’ve still got the £10 Christmas Bonus, which was introduced in 1972. No one has ever had the guts to get rid of this absurdity.”
Though the IFS is well-respected, its critics have become more vocal in recent years. The left complains that its “fiscal orthodoxy” thwarts investment; the right that it obstructs tax cuts. “They’re basically the same criticism, aren’t they?” Johnson replied. “They are that you can have something for nothing. A lot of what we’re saying is you have choices here. If you really want to spend more, then in the end you’re going to have to tax more. If you really want to cut taxes, then you’re going to have to spend less.” He cites the free-market economist Milton Friedman’s adage of choice: “There’s no free lunch and one of the things that really riles me is the idea that there is.”
For Johnson, the market meltdown that accompanied Liz Truss’s tax cuts in 2022 was “a perfect illustration of the fact there are limits. Now, it doesn’t tell you where the limit is, and it doesn’t tell you exactly what took us to the brink, but it clearly tells you that there are limits.”
Does he believe that Reeves can borrow more for investment without unsettling the markets? “I don’t think we’re in a world at the moment where that’s a big risk, assuming that we’re not talking about massive unfunded splurges.”
Reeves’s first Budget may also be Johnson’s last. In October he announced that he would leave the IFS next summer to become provost of Queen’s College, Oxford University. “It’s probably good for me and for the institution that we don’t become institutionalised with one another,” he quipped; Johnson’s first IFS stint ran from 1988, when he joined as a graduate, until 1998. “It’s a wonderful job, being head of the IFS, but it’s also completely all-consuming. People see me burbling on the telly, but I’m running a charity, a small business with a £10m turnover, I’m responsible for all the staff [of which there are 75] and the fundraising.
“I wanted to move to another really top institution. One of the top colleges at the top university is a good one. I love working with the academics and the young people [at the IFS]; that will be replicated. This is a very collegiate organisation, Queen’s is obviously collegiate.”
Johnson declined my invitation to name the most impressive chancellor of his IFS tenure, so I asked him instead to name the most momentous. “George Osborne’s decisions on spending cuts were obviously very substantial. Though it’s really important to remember that back in 2010 there was quite a lot of agreement between the two parties on the need to cut spending. Osborne went probably further and faster than Labour would have done.”
Johnson has often been accused of excessive pessimism, but his view of Labour’s prospects is strikingly hopeful. “They might get lucky – and I mean that quite seriously. I think we are finally escaping the long shadow of the financial crisis; we forget just how big a shadow that’s cast across all economies, ours more than most.” By this, Johnson means a more moderate version of what the former Bank of England governor Mervyn King called the “Nice” decade, standing for “non-inflationary consistently expansionary” growth: rising wages, low inflation and low unemployment.
“Of course, Labour might not get lucky. Who knows what happens if there’s a trade war post-Trump and the Middle East gets worse and worse. But I think there’s a serious chance they might get lucky.”
[See also: The Thatcher delusion]
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This article appears in the 30 Oct 2024 issue of the New Statesman, American Horror Story