Many Labor MPs want it all, and no amount of pleas from the top of the government about depleted public finances seem to make a difference.
Mainly the Left MPs want to quickly correct all the wrongs done in the last 15 years. Their next chance to demand more cash will come on March 3 when Rachel Reeves delivers her spring statement.
There are all signs that the chancellor will try to marry caution about public finances – aimed at backbench MPs – with a hopeful message about economic recovery.
Whatever she says, many on her side will demand that Liz abandon economic orthodoxy in favor of a bolder vision delivered with Truss-like energy. Where the former prime minister extolled the virtues of tax cuts as economic rocket boosters, Labor MPs instead turn government spending into an engine of growth.
Last week’s figures showing record tax collections in January have fueled this desire, suggesting that the Treasury is in good shape and accommodating their many and varied spending demands.
A drop in inflation from 3.4% in December to 3% in January is also good news, and the Bank of England is likely to cut interest rates on mortgage loans for struggling businesses and the main half of the population.
Low inflation and low interest rates, possibly from 3.75% to 3% by the end of the year, will not only ease the cost of living crisis – which is still a crisis – it will also help the public finances.
Record tax receipts in January with lower interest bills on government debt. Low inflation gives public sector firms more spending power and stifles demands from unions for mega pay hikes.
City economists estimate there could be £10bn to £11bn of headroom when the chancellor gives her an update on public finances next month. That would increase the Treasury’s financial buffer by more than £30bn.
More broadly, surveys of the private sector show businesses are more confident about the year ahead and company directors say they are considering investing again after a long hiatus.
A major injection of private sector investment has been missing from the UK economy since the 2008 financial collapse, so a rebound is exactly the kind of lift Reeves and the government would welcome.
Retail sales improved in January, beating City economists’ expectations. Shoppers bought electronics by the bag load, trading in their barely out-of-the-box TVs and mobile phones for newer models.
Yet the better economic news cannot hide the weaknesses at the heart of the UK economy and the additional demands on public finances, which should put Labor MPs worried about more spending on the back foot.
Looking back at January’s tax receipts, it’s clear that the extra money came from capital gains tax (CGT) payments and was made up by people offloading assets to avoid a future tax hike.
This means that increases in CGT revenue may be based on one-off property and financial asset sales and give little indication of long-term prospects for tax receipts.
Regardless of what happens between now and the end of the financial year, UK debt will total £130 billion and less than 4.5% of annual national income – a sign that financial markets believe the government is fiscally unstable.
The Office for Budget Responsibility (OBR) estimates that most Whitehall departments will face deep budget cuts to preserve more generous funding for the NHS, schools and defence. Only when the strict spending limits imposed on most civil servants are put in place will the annual deficit begin to fall.
Where are the pressure points on public finances? An example is the calculation of £6 billion in funding from the extra cost of supporting children with special educational needs in 2029.
A report last week from the County Councils Network estimated that in 2030 transport costs alone for sending children could reach £3.5bn. This is another bill that is outside of current budget estimates.
The Prime Minister has his own pet projects. Defense is currently his main focus and the budget for it will need to rise by £10bn to meet his commitment to increase defense spending to 3% of national income by the end of parliament.
It is not clear how he intends to spend the funds to reach the 5% of national income by 2034 that Donald Trump has demanded, but the future prime minister will consider.
This is an example of how much money is an illusion at the moment. Government finances are in a precarious position and could still be hit by factors such as rising borrowing costs or rising youth unemployment. This will continue if more investment is not used to increase wealth.
Labour’s leftist MPs are in the same camp as Green Party leader Jack Polanski and many Tory and Reform UK MPs who want things they can’t afford. There is no magic money tree. Liz Truss gave us an object lesson in chutzpah that no one wants to revive.
