Labour’s shameless economic narrative would be laughable were its implications not so potentially serious. The party repeatedly claims to have received the worst economic inheritance since the Second World War, warning that a supposed £22 billion fiscal black hole necessitates “tough decisions” to get the country back on a strong footing.
This is almost the opposite of the truth, as a raft of positive data this week have made clear. With 0.6 per cent GDP growth in the second quarter, the UK now has the fastest-expanding economy in the G7. Unemployment is down, even if the economic inactivity rate remains stubbornly high. Inflation is within the Bank of England’s target range. Mortgage rates are beginning to fall, while consumer and business confidence are rising.
A significant part of the “black hole”, to the extent that it exists, has been dug by Labour’s decision to boost pay in the public and quasi-public sectors, at a cost of billions. Teachers, junior doctors and train drivers have been awarded above-inflation wage increases with no strings attached. The Government’s attempts to reassure voters that these offers would put an end to industrial action have also been exposed as fantasy: the train drivers’ union, Aslef, has announced a further three months of walkouts and GPs, who have been awarded a 7.4 per cent funding increase, are now demanding 11 per cent.
It is often forgotten how bloated Britain’s public sector has become. More people are employed by the state than at any time since the early-2010s and, as headcounts have mushroomed, so too have costs, with government spending relative to the size of our economy reaching levels not seen in decades. Given the Government’s recent electoral success, and the disillusionment with the Tories’ procrastination over public sector reform, it is possible that the decision to pay off these workers will be politically popular.
But it could be extremely damaging to economic growth in the medium term. Ministers refuse to say how some of these increases will be funded, but the Chancellor has already admitted taxes will rise in the October Budget. In particular, there is fierce speculation that she will increase capital gains tax, hitting productive investment.
There are certainly challenges facing the UK economy. But they are largely structural: a high government debt and tax burden, sluggish productivity, poor public services. All will be exacerbated by excessively generous pay deals awarded with no requirement to improve service or output. Not only does this Government, which is clearly committed to expanding the role of the state, appear to lack serious answers, it is also likely to make the problems much worse.
