Blighty newsletter: Mind the budget gap

UKGood evening from London,At the moment the conversation in Westminster is dominated by Labour’s first budget, and the mix of tax and spending decisions that Rachel Reeves is preparing to make. She claims to be dealing with the worst economic inheritance of any government since the second world war. (Other views are available.)If it feels like a slower countdown than usual, that is because it is. There will have been three months and 26 days between the general election on July 4th and the first budget on October 30th. That is by some distance the longest gap following a change of government since at least 1979. (By contrast, George Osborne’s first budget fell one month and 16 days after the general election of 2010.) That delay may help explain the slight sense of drift that has afflicted the government since July.Most of the attention in the budget will be on the tax measures. My colleague Archie Hall that the party has been kicking around, from higher capital-gains taxes to a reform of inheritance duties. Do they amount to a war on the wealthy? Plenty of rich folk have been spooked, he writes. that the budget is shaping up to be a huge missed opportunity if Ms Reeves merely tinkers with tax thresholds and rates—rather than fundamentally reforming the system itself.The more important shift is likely to come on tweaks to the government’s fiscal rules. Ms Reeves has sent clear signals in recent weeks that she hopes to increase public borrowing for investment in infrastructure and other assets. She told Labour’s annual conference that “it is time that the Treasury moved on from just counting the costs of investments, to recognising the benefits too.” We argue that excluding the Bank of England’s quantitative-easing losses from the definition of debt used in the fiscal rules could allow another £10bn-20bn of borrowing for investment. But going much further—by, for example, moving to a measure that would include the state’s assets, not just its liabilities—would risk spooking bond markets.There is also the question of whether public opinion would tolerate more borrowing. This is an area of historic vulnerability for Labour: think of the Conservative Party’s successful election campaign of 2015, and their charge that Labour would mean “more spending, more borrowing, more debt”. But figures in the new government think public opinion is more forgiving now—on the condition that such borrowing is strictly directed at growth-enhancing schemes (such as infrastructure) rather than public services.Support for that view comes from new polling from the Institute for Public Policy Research, a think-tank close to the new government, and Persuasion , a new research outfit. The polling suggests that voters are relatively discerning in how they think of government debt. It produces a net support of 46% for greater public borrowing “to invest in public infrastructure”, but only 4% “to invest in general government spending”.The pollsters presented respondents with a series of hypothetical policy outcomes which could form the basis of the government’s “record” at the end of its first term—and with each outcome, an associated trade-off. The results suggest that voters would look favourably on a scenario in which road and rail infrastructure had improved even if it meant government debt was higher over the medium term; voters gave this hypothetical government a net approval rating of +4%. Similarly, on the taxation side, voters would look favourably on this hypothetical government if the health service had improved even if the trade-off were higher payroll taxes, with a notional approval rating of +4%. Conversely, under this exercise, a government that reduced borrowing costs but oversaw a deterioration in public services would receive an approval rating of -11%.There are limitations to this exercise: the verdict on the government at the next election will rest on a wider range of factors. But take it not as a prediction but as an indication of opinion now, and it suggests that a government that wants to make a case for higher public borrowing for defined reasons—roads, railways and bridges—may get a more sympathetic hearing than it would have done in 2015.