A Labour government will have little economic wiggle room – but what’s new?

There’s a long list of people and global events you can blame for the mess we’re in – but, says Sean O’Grady, whichever party gets in next time, they won’t have a magic bullet to get us out of it

National debt now stands at £2,700bn, around a year’s worth of national income – almost three times the proportion of only 20 years ago (Peter Byrne/PA)

Why are taxes so high? One answer given far too little attention is because our national debt is so high, and the cost of servicing it has gone up so much as interest rates have risen from their ultra-low phase.

And why did our national debt become so outsized? Because of a series of major crises during the past 15 years or so that governments of all three major parties have had to deal with.

In case you’ve forgotten, which people do seem to do all too easily, they were:

• the global financial crisis (2008-09), which required the British state to save the banks and which triggered a nasty recession;

• the Covid pandemic (2020-21), during which the state was obliged to support the economy via the furlough scheme and other support measures during the biggest recession in three centuries;

• and the energy and food supply crisis triggered by the war in Ukraine (2022-still ongoing), which threatened to bankrupt households and which also helped push the economy into a recession, with a bout of inflation on top.

We should also mention the baleful effects of the low-key permacrisis of Brexit on economic growth, compared with the hypothetical where the UK was still in the EU, which has depressed output, tax revenues and pushed government into borrowing more.

It is as if the nation has, with varying degrees of willingness, decided to take on a succession of large mortgages and now resents having to pay them back. In the case of Covid, and this is not to trivialise a traumatic national tragedy, we took a year off work during the lockdown, but borrowed the money to keep up our usual levels of spending.

Recent arguments about Jeremy Hunt’s budget have fussed about the £3.6bn that abolishing non-dom status will raise, and the £9bn in national insurance cuts. Small beer. We seem to have forgotten the £137bn that we spent on nationalising and lending money to the banks during the credit crunch, the extra £313bn we borrowed during the Covid crisis, or the £58bn spent on assorted household support packages during the cost of living crisis (which isn’t over, of course).

Brexit, too, has cost us significant amounts – around 4 per cent of annual GDP, with a concomitant cost of tens of billions of pounds a year to the Exchequer.

Our economy and productivity haven’t grown much since the global financial crash either, a central phenomenon that puzzles economists, so we’re less able to shoulder the debt and get it down; like having a huge mortgage but our wages never go up. The national debt is now about a year’s worth of national income, and almost three times the proportion of only 20 years ago – about £2,700bn.

Given all that, it’s surprising the country hasn’t gone bust. I suppose the point I’m making is that we needn’t be too partisan about debt when it’s forced on the nation. Yes, we’ve had plenty of official incompetence and bad policy (perhaps the Cameron/Osborne austerity drive), and waste and all the rest of it, but the bulk of the debt has been either foisted upon the country by global factors or, in the case of Brexit, a conscious (if ill-starred) choice.

Governments have undoubtedly contributed to the costs of these crises, but even then, there have been some successes that offset failures. The effects of the global financial crisis in 2008 may have been worse in the UK because the City was so big, powerful and under-regulated by Labour – but Gordon Brown’s plan to save the banks prevented a still bigger slump.

The impact of the pandemic was exacerbated by failures on PPE (personal protective equipment) and slowness in responding – but Boris Johnson deserves credit for getting the vaccines delivered so fast.

Politically, we have lost a sense of perspective and balance about our public debt. Too much of the debate going into this election is about how the Tories have delivered the highest tax burden since the war with an outsized public debt and miserable public services – forgetting what Rishi Sunak did as chancellor to keep the country going, and preventing even more damage to the NHS.

The much-maligned Liz Truss, who was indeed generally a disaster as PM, was actually right to start subsidising gas and electricity bills – hugely costly, and very “big state”. Not only do Labour choose to forget the costs of what befell us in 2020 (and the Covid support policies they actually thought were too mean), but so do the Tories too often refrain from mentioning the pandemic in mitigation.

By the same token, looking further back, it was always disingenuous for George Osborne and David Cameron to use the debt and deficit against Brown in the 2010 election as evidence of Labour’s profligacy. And both parties seem to have entered a mutual vow of silence over Brexit.

For most of the 20th century, Britain had an even bigger national debt, the legacy of two world wars when the nation had no choice but to mortgage itself to retain its independence – it was hardly a matter of choice, and no one ever voted for it because it just wasn’t an issue. The same should be true of the present national debt and its causes; it is what it is, and we can blame the bankers, the coronavirus and Vladimir Putin for it, none of whom are standing for the Commons in 2024.

Whichever party was in power in the last decade and a half – and they’ve all had a go – would have been faced with the same existential crises, and would have responded in a similar fashion. And none of them have any magic bullets to get us out of the mess now.

The constraints on the public finances are so severe that whoever gets in next time will find themselves with very little room for manoeuvre. The next election still matters, for all sorts of reasons, but don’t expect that things can only get better.