Labour's balanced budget pledge is banking on growth
Hostility to Ed Balls’ Fabian Society speech on a future Labour government’s economic policy has been directed towards the promised return of a 50 pence top rate of tax on annual incomes over £150,000.
Symbolism matters (think 10p tax) and this promise is certainly symbolic. But it does not challenge the belief that the economy would not be safe in Labour’s hands. The need to assuage this fear was why Balls also promised to ‘balance the books and deliver a surplus on the current budget and falling national debt in the next Parliament’. To old Labour ears this might sound like capitulation to Osborne’s ‘austerity first’ mantra. But if we look at it more closely, it is not quite what it seems at first sight.
There are two key ideas in play here. The first is ‘surplus on current budget’. ‘Current’ public spending is total public spending less investment. Since capital depreciation is treated as part of current spending, the investment we are talking about here is net investment. Over the last 35 years this net public investment has averaged 1.4% of GDP, just one pound for every 20 of current public spending.
Assuming a full five year life, the next parliament would continue to the end of the financial year 2019/20. Balls could meet his promise by balancing the current budget in that year. At the moment, the published forecasts from the Office for Budget Responsibility finish one year earlier, in 2018/19. For that year they show a surplus £28bn. Since Balls is only promising zero, he could fulfil his promise, one year earlier than he needs to, yet still spend £28bn more than Osborne. That’s probably quite a nice place for Balls to be – running a surplus but cutting much less.
The second key idea is ‘falling national debt’ which in practice must mean falling as a proportion of GDP. Arithmetic here is a Chancellor’s friend. The basic point is that debt will fall as a share of GDP so long as the addition to debt in any one year – the annual public sector deficit – is proportionately smaller than the addition to GDP due both to real growth and inflation. With debt now standing at some 80% of GDP and GDP (real growth plus inflation) foreseen by the OBR as growing at 5% a year, the debt share will fall so long as the public sector deficit is less than 4% of GDP. In ordinary times, that is not a tough target at all.
Of course Balls has not spelled out how much investment Labour would go for. But with a balanced current budget, even net public sector investment equal to 3% of GDP would be entirely consistent with a falling debt share. Net investment at this rate is twice what’s in Osborne’s plan and twice the average over the last 35 years. As the bars in the graph show, since the 1970s, net public investment has only been higher in the two crash years.
So it is easy to see why Balls has chosen this ground on which to make a stand. First off it is tough – a balanced current budget. But it also less tough than the government – so there is, for those old Labour ears, still a political difference between the parties after all. And it also radical, signalling, or at least allowing, for a decisive shift in spending towards investment.
The obvious retort to this upbeat assessment is that the reference point – Osborne’s plan – is eye-wateringly tough. As the BBC Robert Peston picked up at the time, the OBR made this point by noting how the plan would take ‘government consumption of goods and services – a rough proxy for day-to-day spending on public services and administration – to its smallest share of national income at least since 1948’.
Yet as the line in the graph shows, Osborne is still only taking current spending as a share of GDP back to the levels seen during the Blair years. Of course this top down view takes no account of how spending pressures within the total have changed over the intervening years. It also takes no account of the fact that the economy ‘projected’ by the OBR for five years hence is wildly unbalanced, wholly unsustainable and utterly implausible.
But what made those low levels possible was the strong and sustained economic growth which began in 1993. Tuesday’s numbers from the ONS showed strong growth in the second half of 2013. If that continues for several years, 37% is not unthinkable. An inference from this: Balls is banking on strong, sustained growth.
The other point is about the implication of higher net public investment. As the early years of the graph show, net public investment used to be much higher, not 3% of GDP but more like 5%. That’s a lot of money. So who was spending it? The answer is local authorities on house building and nationalised industries. This is not to suggest that Labour should embark on its own version of Jurassic Park, rebuilding those beasts from DNA fragments lodged in the late middle-aged men and women who worked there in their youth. But if the money is to be spent wisely – and to do otherwise would be a disaster – Labour needs to consider what institutions are needed to do that. Pushing up the capital budget is the easy part.