By tradition, Labour Chancellors soak the rich. By historic standards, Alistair Darling’s new 45 per cent tax rate is not a soaking, more a light sprinkling. And it is a sprinkling deferred: those affected have been given two years to shield their income from the taxman.
Nonetheless, Mr Darling’s move is a milestone. He has broken New Labour’s taboo against increasing direct taxes and ended its unrequited love affair with
He has of course used the B-word: borrowing, as casually and profligately as Gordon Ramsay expleting in his kitchen. He is going to let government borrowing reach 8 per cent of GDP, a level not seen since Denis Healey’s horror-year of 1976, when we had to call in the IMF. Denis Healey managed to reduce borrowing to 6 per cent of GDP the following year and 3 ½ per cent the year after – a performance which his successor is unlikely to match. Moreover, Mr Darling has abandoned any pretence that he is borrowing to invest. He is borrowing to maintain existing expenditure, by government and by consumers. There are no mantras about prudence, responsibility, stability.
Not only the Budget measures but their language and reasoning mark the demise of New Labour. Its passing was unmourned, even by its parents and former lovers. Even Peter Mandelson had abandoned it. New Labour’s schoolboy crush on high finance contributed to the scale of the economic crisis in our country. New Labour’s policies and assumptions offered no hope to the government of economic recovery or political revival. That is why they have been buried and the Labour leadership would be happy if the opposition parties disinter the remains.
Labour will now fight the next election – in 2010 – on its traditional territory. It will claim to be the party which goes to the limit to protect the living standards of average and lower-income families, save jobs, and maintain the current level of public services. It will try to trap the Tories into the role of defending the rich and the privileged and threatening jobs and public services.
Although the Budget has transformed Labour’s political strategy and galvanized its supporters, it may do little for its election prospects.
The plain truth is that Budgets, and government policy generally, no longer exert the traction in the British economy which they used to do. That is partly because of globalization.
In the old days, it was reasonably certain that a Budget like Alistair Darling’s would stimulate activity in this country. Consumers would spend more, retailers would order more stock and employ more people to shift it, industry would invest more to provide that stock and employ more people to make it, bankers would lend more to everybody to help them fulfil their intentions.
Today none of these effects can be guaranteed. What Keynes called the “animal spirits” of all of these economic actors are very low indeed. Bankers remain frightened to lend to each other, let alone to anyone else. Industry and retailers see little reason to increase stock. Consumers have deep current problems and future anxieties. It would be ironic if they rediscovered prudence just when the government has decided to abandon it, but that it only too likely. If consumers decide to use their extra post-Budget income to pay down debt rather than buy new goods and services they will not lift the economy as the government hopes.
The only certain thing about the British economy next year is that it will contract and that many families will face serious pain. There will be more job losses and business failures and home repossessions. Many still in work will face reduced pay and benefits or lower hours. School and college leavers will have to look longer for jobs and reduce their expectations. More retirement pensioners will be squeezed. With this economic pain will come more stress and illness, more broken families and neighbourhoods, and more crime. Those who experience these effects may be impervious to the government’s new political alignment – and the opposition’s. They may, very simply, blame the government which has been in charge since 1997. If so, David Cameron can look forward to a landslide.
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He and his team will then discover the same melancholy truth as their predecessors. Their policies, whether New Tory or Old Tory, will make little difference to the economy, and it is now much more important to be lucky than to be right.