Thursday, 16 October 2025

Sucking money out of the economy

 

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.

No comments: