We won’t know
exactly how much money Rachel Reeves is planning to suck out of the UK economy
until she stands up and delivers her budget on 26 November. There is a sense in
which the actual number matters little – the underlying principles remain the
same. One of the big ‘ideas’, a term which can only be used loosely, is to cut
spending on benefits. It is true, of course, that, if the government spends
less on benefits, then the gap between spending and income will reduce, and
(assuming that to be a ‘good thing’, which seems to be the position of both
government and opposition), the overall government finances will look ‘better’
as a result. But the thinking of those looking at government finances – whether
Reeves or the Tories – seems to stop at that point, as though government
finances can be considered in isolation. In reality they can’t.
Reducing benefits
reduces the spending power of some of the poorest in society, which – in
economic terms – reduces overall demand in the economy. (To those not glued irrevocably
to economic mantras, it also impacts people’s lives, health and welfare, but I
don’t really expect either Reeves or the Tories to worry unduly about that.)
One of the key differences between the Tories and Labour on this is that the
Tories seem committed to ‘giving away’ part of the money saved in the form of
tax cuts, whilst Labour seem more committed to larger reductions in the current
account deficit. Superficially, in overall economic terms, reducing taxes
decreases the size of the hit to the economy of that reduced demand, but that
ignores the way in which the costs and benefits are distributed. Reducing the
spending power of the poorest (which is what benefit cuts do) whilst increasing
the spending power of the richest (which is what tax cuts do) means that
inequality continues to rise. It’s where simplistic economic analysis starts to
break down – the total numbers tell us one simplistic story about the overall
impact, but the detail tells us that there are winners and losers. That detail
is important. Well, to most of us it probably is. But most of us includes
neither Reeves and Starmer nor the Tories.
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