Labour is taking us back to 1975, not 1997

The state’s response to stagnant growth and price pressures has unnerving historical parallels

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Government borrowing was far higher than expected in October, with the British state racking up additional debts of no less than £17.4bn in a single month – the highest October borrowing figure ever outside of the pandemic.
How much is £17.4bn? It’s around two-fifths of annual defence spending. Or more than the extra revenue raised if Chancellor Rachel Reeves added 2p to the basic rate of income tax – which would, of course, be hugely controversial.
Quarterly figures released last week, the first since Labour took office, showed extra borrowing of £12.5bn in August and £16.1bn in September, the state amassing £46bn more debt over the last three months. That’s roughly equal to total annual council tax revenues ­– in just one quarter. We’re talking serious amounts of money.
In June, before the July general election but with the Tories clearly beat, Economic Agenda warned “the ghosts of the 1970s will haunt Labour’s resurrection”.
I said the incoming Government’s claims it could hike spending “without raising taxes on working people” relied heavily on “pro-growth” policies delivering the economic expansion needed to spread our ever-growing debt pile across a bigger GDP.
Without a serious growth spurt, I argued, swathes of extra liabilities risked sparking bond market turmoil and resulting economic chaos, with investors extending ever more credit to the UK only by charging ever rising interest rates.
Well, growth isn’t happening. The UK economy expanded just 0.1pc between July and September, sharply down from 0.5pc the previous quarter. Inflation is meanwhile rising, the consumer price index surging to 2.3pc during the year to in October, up from 1.7pc the previous month, not least due to rising energy costs.
In her October Budget statement, Reeves imposed a 1.2 percentage point increase in employer National Insurance contributions to 15pc along with an inflation-busting rise in the minimum wage – all of which will add to firms’ costs and feed into rising price pressures, as will her massive public sector pay increases. The alarming escalation of the Russia-Ukraine conflict will also likely push up oil and gas prices, adding further to economy-wide fuel costs.
The Bank of England lowered the base rate 0.25 percentage points in both August and earlier this month, from 5.25pc to 4.75pc. But inflation could well crank up again – at best slowing the pace at which the Bank brings down benchmark borrowing costs.
While policymakers are lowering rates and looking to cut more, those pesky financial markets, taking their cue from how much investors charge the government to borrow, which itself is linked to rising state spending and ever more debt finance, have lately been pushing rates up.
The 10-year gilt yield has soared from roughly 3.75pc to 4.5pc since mid-September, the same territory as during the aftermath of Liz Truss’s October 2022 mini-budget.
Back then, the market was also spooked by concerns that liability-driven investments could unravel, as well as the Bank’s deeply unfortunately decision to announce, just days ahead of the Truss Budget statement, it was throwing tens of billions of pounds of additional gilts at the market as it unwinds its enormous quantitative easing programme.
Now, even without those aggravating factors, gilt yields are once again at levels previously seen as high enough to provoke a collective political meltdown – and a wholesale policy reversal.
We’re in a situation where, while the Bank of England has been lowering rates and talks about doing so more, albeit at a slower pace, government borrowing costs – the true benchmark for mortgages, business finances and other commercial loans – are going in the opposite direction.
I would suggest this is a deeply worrying trend – indicating that market expectations are becoming disconnected from policymakers’ statements and actions.
While the Bank wants to lower rates more, as it again tries to convince itself inflation is licked, financial markets – increasingly mindful this Government is far more statist and fiscally profligate than Labour administrations led by Tony Blair and even Gordon Brown – is pushing borrowing costs up.
When this happens, there is often much bluster from politicians and state-financed economists. But history shows the outcome is inevitable: the market always wins.
When Blair took office in 1997, UK government spending was 35pc of GDP, rising to around 40pc a decade later – the long-run pre-Covid historic average. The 2008/09 financial crisis saw a sharp increase to 45pc, not least due to bank bailouts, which then fell back to 40pc in 2019 after 10 years of Tory-led rule.
Lockdown changed all that, with state spending ballooning to an unprecedented 55pc of GDP and, since then, rather than returning to type, government spending is still at 45pc and, under Reeves, rapidly heading up even more.
The big problem is that, while spending is rising, it is largely financed by borrowing – which is why markets are getting worried and debt service costs are rising, whatever the Bank of England says.
During October alone, the state paid a mind-blowing £9.1bn in debt interest. Official estimates of total debt service costs during the fiscal year 2024/25 have soared since Reeves’ budget, from £89bn to almost £120bn – a rise exceeding the entire £25bn annual tax take from the extremely painful rise in employer NICs.
Back in 1976 – amidst slow growth and high inflation – attempts by Jim Callaghan’s Labour government to spark growth by ramping up borrowing and spending resulted in the UK being bailed out by the International Monetary Fund, what I’ve dubbed Britain’s “economic Suez”.
I’m not saying we’re heading for that now – but, with stagnant growth and rising price pressures aggravating already massive debt service payments, to dismiss the possibility would be reckless in the extreme.
While Labour just lately won a landslide, this is by no means 1997. The more accurate historic comparison – and I say this advisedly – is 1975.
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