All are agreed. Britain needs large increases in government investment if the standard of living of the British people is to be improved.
All are also agreed that the government does not have the money to make the required investments. We are told that government current spending on teachers, doctors, armed forces etc is greater than taxes levied by some £22 billion. Not only does the government have no money to make investments but, since a level of current spending greater than taxes levied breaks Reeves’ 1st self-imposed fiscal rule, current spending must be cut. Indeed, one such cut has already been announced by Reeves when she ended the winter fuel payment for the vast majority of pensioners.
Government investment could therefore only happen if the government borrows money from the private sector. But that leads to an increase in the national debt. Reeves’ self-imposed 2nd fiscal rule, which requires that the debt/GDP ratio falls within 5 years, would not have permitted such an increase. But Reeves has a problem. If the investments do not happen, Labour will lose the next general election. Reeves needed to abandon her 2nd fiscal rule. It would however appear odd, to just end a rule if it is proving inconvenient. Abandoning her ridiculous rule will, therefore, be disguised as creating a superior fiscal rule which will take into account the government’s assets as well as its liabilities. She will now be able to significantly increase public sector investments without breaking this revised 2nd fiscal rule.
It would appear that, with one bound, Reeves is free. All this is a complete illusion based on the false assumption that ‘finding the money’ was the government’s main problem. Since the UK state is a currency creating state, ‘finding the money’ is never an issue. The real problem is finding the resources to buy in order to implement government policies. Reeves went through hoops creating the ‘no money’ problem, then through further hoops finding the money, and now we are finally back at the real problem: where are the resources (workers and raw materials) to build houses, schools and hospitals, to reduce NHS waiting lists, to address social care, etc? In analysing the budget we should concentrate on discovering her plan for acquiring these resources.
Unemployed resources can exist and therefore be available for the government to buy. There is of course the question of the suitability of these unemployed resources. If the task in hand is to increase house building from 200k to 300k units per year, then workers with building expertise are the kind of unemployed resource that the government needs to be available. There is little evidence that workers with these skills are currently lying idle.
If the workforce that a government needs to implement its policies does not exist, the government must bring such a workforce into existence through training and education. Creating such a workforce takes time. Doctors will most likely take longer to train up than builders. But in both cases we are talking about years, not weeks or months. Reeves has shown little evidence in her budget of serious plans to train up the required work force She promised an additional £300 million for further education and made one vague reference to Skills England.
If the workforce that a government needs to implement its policies does exist but is currently being used by the private sector, the government must devise strategies to take them from the private sector. The standard methods for doing that are taxation and regulation.
The problem with the taxes that Reeves has proposed in her budget is that her attention was focussed on the amount of money that these taxes will remove from the private sector. Reeves tells us that the increase in taxes that she is proposing will remove some £40 billion from the private sector, and that therefore she now has £40 billion that she can spend. Rather than tell us what money she is taking from the private sector, Reeves should explain what resources her taxes will free up so that the government can buy them to implement its policies.
Consider, for example, the VAT imposed on private schools. We are told that it will raise money to employ more teachers in state schools. If this tax caused all private schools to close then then there would be a lot of unemployed teachers but Reeves, by her own logic, would have no money to hire them. If the tax caused no schools to close then Reeves would have increased tax revenue but there would be no unemployed teachers to hire into state schools. VAT on private schools will only work if a sufficient number of them remain open to finance hiring the teachers made unemployed by those private schools that close.
A similar analysis must be made of all Reeves’ proposed taxes. How will the increase in employers’ national insurance, inheritance tax, capital gains tax, investment tax etc free resources that can then be used to implement government policies? For a currency creating state, the revenue that these taxes raise is of little relevance. (Though it should be noted that many of these tax increases will mainly hit individuals who are well off. That is something to be said in their favour since they will reduce the level of post-tax inequality.)
Despite these criticisms of Reeves’ first budget, it is to be welcomed that she effectively relegated the problem of the size of the national debt to the dustbin. Osborne and Sunak raised taxes so that they could reduce the national debt. Reeves raised taxes to limit the cuts in current government spending that her 1st fiscal rule implied. It would have been better had she ditched that rule. She redefined national debt and thus got rid of it as a limiting factor so that she could greatly increase government investment spending. Perhaps it was always her intention to do that when she signed up to her original 2nd fiscal rule. If so, it was a clever move. Certainly the Tories are fuming at how she got out of the trap into which they thought they had put her.
Her budget has ‘found the money’ that did not need to be found. Now Reeves must move on to the real problem of finding the resources required to implement government policies. It remains to be seen whether she has the ability to do that.
Labour Affairs 
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