The bet the government is making

Rachel Reeves is staking her success on capital spending. It's more Keynsian than her detractors think, but doesn't come without risks.

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(First of all - some throat clearing. I’m not an economist - far from it. I’m a political analyst. I look at the ways in which politics is affected by economic circumstances, but I don’t usually try to reverse-engineer that. Like most people, to me, economics is a baffling world of large numbers and obscure concepts. So this analysis is more about looking at the political choices and narrative of the economics.

I did check the broad shape of my thoughts with a much cleverer colleague who does understand this stuff. He didn’t look at me like I’m an idiot (and trust me - I’ve definitely seen him make that face) but anything I now get wrong is my fault not his.)

The word austerity has suffered the usual political fate of any complex political concept. It has come to mean everything - and therefore nothing. A government that increases spending in some areas - sometimes by record levels - while cutting back in others - might be being more frugal than some would like, but they are not indulging in austerity.

That frugality is driven by a few different pressures that are both real and contentious. The power of the bond market is very real when it comes to pressure on what governments can and cannot do when it comes to borrowing for day-to-day spending. it adds pressure when a large part of that day-to-day spending is in paying off that debt. When interest rates go up, that becomes more expensive in ways that mean it is harder to borrow more and there is not a lot of appetite for lending in this way from those we would borrow from.

The political pressure is obvious just by looking at the state of the Tories right now. This is a party languishing somewhere in-between the doldrums and a death spiral. And in part, that is a result of their unwillingness to make exactly the kind of hard choices facing Rachel Reeves. Politically, they could not politically raise taxes - there would have been a backbench revolt even beyond what we’d seen. Electorally, they couldn’t cut services any more than they had done.

The demographic pressure is often discussed on a superficial level but very little understood. We are a country that is rapidly ageing and is not replacing long living people retiring from the labour market and going on to live for decades with enough children to move into the labour market and support them doing so. We aren’t willing to import that Labour either and as such we have a dwindling amount of working age taxpayers and a growing number of people who live a long time drawing a pension from the state.

All of which make it very hard to raise money for day-to-day spending without borrowing at exorbitant rates or raising eye watering taxes. So, what Reeves has taken a gamble in is on what one might call a third way.