Starmer has crushed private sector growth – but it’s boom time for the civil service

The Budget was a blatant pitch to Labour’s most reliable voters

Going into the election, Rachel Reeves and Keir Starmer told us again and again that they wouldn’t tax working people; in Wednesday’s Budget, they took almost £8bn out of working people’s pay packets by raising employer’s national insurance rates.
In their manifesto, Labour promised Britain they would go all out to secure “the highest sustained growth in the G7”; the new OBR forecasts have us lagging well behind the IMF estimates for the USA in every single year, with the Government’s decisions actually lowering GDP by the end of this parliament.
To borrow a phrase from Johnny Rotten: ever get the feeling you’ve been cheated?
If you voted Labour hoping to see a meaningful change, tough luck. The show will continue as scheduled. If, on the other hand, you voted Labour in order to benefit as part of the public sector, congratulations: you clearly read the room.
The net effect of Wednesday’s Budget is a huge transfer of resources from the private sector to the public. By 2029, Britain will be facing a higher tax burden than it was in 1948, or any year after.
At over 38pc of GDP, it will be heavier than the burden in Spain, Portugal and Slovenia in today’s international league tables.
This rise in tax won’t be enough to offset the additional £70bn in annual spending pencilled in by the Government, and as a result the Government will also be borrowing £32bn more each year (equivalent to another 1pc of GDP). The size of the state will settle at roughly 45pc of GDP, around 5pc higher than it was before the pandemic.
This is great news for the public sector, and those working in it. It’s less good for those who fund it. While the public sector pay budget will tick along, growing at over 3pc in each year of the six-year forecast, the private sector will lag well behind, with pay in the former growing 9pc more by the end of the period.
Any sense that Britain is becoming a little two-tier in its treatment of its citizens won’t be helped by the observation that this is explicitly the case in at least one area. While private sector workers will see their pay packets squeezed by the rise in employer National Insurance, public sector employers are being compensated for the increase by the Treasury.
Then again, this is just a particularly visible instance of the Budget approach. Higher government consumption in the form of spending on day-to-day services is set to squeeze out private consumption.
And while Rachel Reeves believes that massive state investment will “crowd in” the private sector, the best estimate of the Office for Budget Responsibility is that any such incentive will be “more than offset” by the crowding out effect of a bigger state, even over the long-term ten-year horizon. In other words, the more that the public sector takes, the less there is for everyone else.
To be fair, loosening fiscal constraints does have some growth upsides. For the first few years of this parliament, the economy will likely be larger than it would otherwise have been as the spending sugar rush works its way through the system. By the end of this parliament, however, the forecast effect of the Budget overall is a slight contraction.
But for public sector decision makers, GDP growth is a slightly abstract concern. Their pay and conditions are not as tightly intertwined with economic performance as those of the private sector. And alongside the transfer of spending power to the state, the other component of this Budget was a transfer of political power from Downing Street and Westminster to the quangocracy that surrounds them.
Viewed from a certain angle, the Chancellor’s role looks less like that of a decision-maker and more as the spokesperson for a collection of public bodies subject to little political oversight.
Last month, Keir Starmer told the country that there would be no NHS spending without reform. On Wednesday, the Government handed over an extra £2bn. This is another blank cheque offered to an organisation that effectively governs itself.
Similarly, the Government recently handed out £9bn in public sector pay rises. But it was only accepting the recommendations of independent Pay Review Bodies. It’s impartial, apolitical expertise. Why bring politics into this?
And yes, you or I, faced with a sclerotic planning system that chokes off growth, might decide that it should be less burdensome. The Budget took a different view: the immediate response has been to eschew cutting red tape in favour of hiring 300 more planners.
Dig a little beneath the surface, and the control politicians have over departments and budgets is already less than it might seem. They should be very wary of weakening their grip further.
The Budget suggests that public investments should be delivered by “expert institutions” and their cost-benefit ratio carefully evaluated. This could work in principle. When the Bank of England was handed independence, the cost of borrowing fell as markets believed it would be better able to control inflation without political pressures.
But that same example should also give us pause. The Bank’s performance has been far from perfect in recent years. With the consequences for failure effectively confined to criticism and an exchange of letters, however, the incentives to perform better are not always present. Who will be held accountable if Government investments fail?
Even the incoming requirement for OBR assessments of government spending plans and forecasts of the growth effects of policy can warp policy around the worldview of the public sector, with the assumptions fed into models heavily determining their outputs.
It’s not a huge stretch to imagine a world where spending cuts are deemed to mechanically lower growth, and tax cuts are effectively impossible. Dreadful for you and I, but rather good for the public sector decision-makers calling the shots.
None of this is guaranteed to happen, of course. But it is undeniable that many of those working for the state share a certain worldview, and a particular set of incentives. The Government should think very carefully before it decides to feed the beast further: once you hand power away, it can prove very hard to win back.