Budget 2024: Take stock, catch a breath

OK so what the hell just happened here.

Photo by Clever Visuals on Unsplash

Going to be a short one today, because I'll be back here tomorrow writing about the Tory leadership election result. I'm not entirely sure why I'm bothering to do that. Whoever they choose, they've picked a lunatic. For the record, I'm hoping it's Kemi Badenoch, because she genuinely believes in her horrible views. Robert Jenrick does not genuinely believe in his horrible views and therefore has no moral floor to his behaviour. But really, it's touch-and-go. They are both unconscionably dreadful people.  The polling, such as it is, points to Badenoch. I suspect Jenrick will win, on the basis that the worst possible thing always happens. 

Anyway, back to the matter at hand. I want to briefly compare what we've learned from the Budget with my piece laying out how to assess it last September. The original piece is here if you want to follow along. This isn't so I can assess how powerful my predictive powers are. I have no predictive powers. I've been wrong about almost every forecast I ever made. It's to try and spot the flaws in progressive reasoning and assess the likelihood of future success. It's to subject liberal politics to the kind of scrutiny which populism always rejects. To see where we are and where we're going.

I'll grab some key quotes from the original piece and then outline how I think they fared…

"The government is establishing a set of fiscal rules which discourage borrowing for day-to-day spending, but encourage borrowing for investment."

This was my core assessment of how the government approach would pan out and it's basically accurate. Current spending is in the spotlight as a demonstration of rectitude. Borrowing for long-term investment has been loosened. I think it's worth briefly saying how honourable this is. Long-term investment doesn't pay off immediately. Its benefits take years to become known - certainly past the next election, possibly after Labour has left power, when the benefits will be claimed by the next government. She did it anyway. 

"If we're really lucky Reeves will do something more meaningful, for instance by getting rid of the five-year debt test and replacing it with a… public sector net financial liabilities."

So it turned out she did this. I barely touched on this because I thought it would be too radical for such a cautious chancellor and focused instead on the PSND-ex BoE issue. Reeves went much further. She proved more ambitious than I anticipated.

"You might want to borrow and invest, but eventually the lovely stable bond market will turn into a terrifying fucking monster which tears your goddamn throat out."

I wrote in the original piece that Rachel Reeves' doom-and-gloom narrative and projection of fiscal rectitude was needed to communicate with markets and ease any jitters about that level of borrowing. It turned out that was necessary but also insufficient. The reaction has not been good. We can caveat that and we must. We're not talking Liz Truss era bad. This is not an emergency. But it's not great. The pound fell pretty sharply. Yields - the interest paid by government on bonds - rose pretty sharply. This means the debt costs more. It means we're creeping up to the point where we eliminate the headroom she has against her fiscal rules. Perhaps most importantly, what we're seeing will discourage future governments from doing anything radical in the future with borrowing and investment. 

"We are not remotely in the same place as we were under Truss."

The case for greater investment was based on Britain being on a fundamentally sounder footing. Covid and Ukraine had worked their way through the system, interest rates were coming down, Reeves was behaving in a less insane way than Truss and investment slowly percolates through the economy, meaning it is less inflationary than tax cuts. So go ahead - open up the throttle a bit. That was the basic progressive case. It may still be true. But we should be clear that it is looking on much shakier terrain this morning, after two days of bond market movements which can, at best, be described as eyebrow-raising. Reeves was certainly not being too cautious. She may well not have been cautious enough. 

"She wants departmental spending to at least match inflation"

Reeves pretty much stuck to her pledge of preventing a return to austerity, broadly keeping funding above inflation. But this actually does her a disservice. The really impressive thing is how unfashionable her choices were. Typically speaking, the things the public and newspapers care about get funding and the things they don't do not. So the NHS and education are ring fenced from cuts, while the Ministry of Justice gets savaged, leading to the prison crisis we see today. Reeves did indeed throw huge sums at education and particularly health. But in percentage terms, justice and local government got the most support. She targeted those areas that were in the most need, rather than those which simply got the most coverage. She was making decisions on urgency, not appearance. There's been pretty much zero recognition of this.

"Sometimes it is a sun-kissed vision of a brave technological future."

My assessment of Labour's approach suffered from a major vulnerability: the absolute state the Conservatives left the country in. Unfortunately - and this is a problem of Labour's own making, really - this has been reduced to the £22 billion black hole argument. But it is so much worse than that. The Tories did not allocate the money for paying compensation to the victims of the infected blood or Post Office scandal. They did not put money aside to pay decent salaries to NHS workers, which was needed to unfreeze public services. They put forward spending projections which were obviously false and everyone knew were false. They introduced repeated tax cuts they knew full well we could not afford. Now, when Labour comes in, it is told that it gets very little 'bang for its buck', but which people mean that it's raising taxes and borrowing and yet seeing disappointing growth forecasts. And it's like: Yeah. For a reason. The government's working at full pelt just to keep the country afloat. The Conservatives handed Labour a boat riddled with holes and now complain that they aren't spending any money on the drinks cabinet.  The media coverage in general is doing a terrible job of informing viewers of just how bad the inheritance was.

What about the medium term?

OK final point here. In the original piece I laid out Labour's hoped-for medium term dynamic that would allow them to dedicate more cash to day-to-day spending. Economic growth returns by its standard cyclical dynamic, interest rates go down, planning and labour market reform start to increase demand. This perhaps underestimated the extent to which other changes might slow down the rate at which interest rates are cut. But regardless: everything now relies on that working out. If it does not, Labour is going to be back here in a few years time requiring more tax rises and more borrowing and things might start to look really quite ugly indeed. 

Reeves deserves much more credit for this Budget than she's getting, particularly on investment and departmental spending. But we should be clear. This is a high-stakes gamble. I think it was the right one, but it's a gamble nonetheless. Everything is on the line.

Odds and sods

Every so often - once or twice a year perhaps - an album comes along that you can't stop listening to. You know as it's happening that it's a problem. You're overdoing it. You'll ruin it. But you just can't help yourself. That's where I am with No Name by Jack White, the strange little undercover release he originally gave away for free in unmarked sleeves, now available as a normal nuts-and-bolts record. 

It's a bonafide fucking rock classic is what it is. No extra fat on it at all. No unnecessary production, no additional instrumentation, no filler. Just the absolute bare minimum of what is required for the absolute maximum effect: pure undistilled blues, rock and pop. Properly crunchy, stinky, smoke filled, alcohol fuelled, smudged lipstick late night filth. It's dark, it's foreboding, it's austere, it's cacophonous, it is laugh-out-loud funny, it's an absolute pelting bastard of a thing. And I swear to god someone needs to stop me playing it.