The Treasury has a Finance Problem

One of the defining debates of Starmer’s premiership was  Rachel Reeves’ first budget in 2024. A flurry of repeated themes in the press appeared: “Reeves and the fiscal rules”, “in hock to the bond markets”, or “rising public debt” were present. In politics, Starmer claimed to have “returned” stability to the UK finances, while the Tories accused him of business raids over National Insurance increases, and voices on the left called him a failure for eschewing a wealth tax. 

Avid news-readers may have felt something fundamental was missing from this flurry. The budget debate remained within the same tired pre-supposed boundaries: the household budget model presented is unquestionable, but spending priorities within the model are fair game for public and political debate. 

In the pre-supposed model, the Treasury collects tax receipts to fund spending for other departments and devolved institutions. The model logic means that we see our budget as lacking the tax receipts to balance out spending, and we have filled the deficit with borrowing. As in any household, we conclude that the debt is unsustainable, and we must get rid of it through more tax receipts, higher receipt yields, and cuts to our outgoings. 

Treasury-led policy has reflected all three actions. Attempts to cut benefits have appeared, in the hope that claimants will seek gainful employment. Attempts to increase the tax receipt yields via fiscal drags and by increasing National Insurance contributions. Yet this has not produced the change the electorate longs for: housing is still unaffordable, jobs are in short supply, and wages have stagnated. Everyday communities remain deprived and fragmented. 

For decades now, commentators have been writing about the need for an industrial strategy or a ‘Green New Deal’ as the route to fixing these issues. Yet these propositions have not come to fruition, primarily because they rely on issuing gilts for funds. Debt financing does not challenge the household model described and leads other commentators to decry the strategy as ‘economically illiterate.’ 

So clearly, the household model must be challenged. Doing so allows us to imagine the role of our state’s central budget through the prisms of new models. One such model has been suggested by Michael Spence in After Capitalism. 

Spence posits that the economy is synonymous with the community sphere, while the state is synonymous with the rights’ sphere, with a duty to protect individual rights. In this model, rather than the Treasury collecting some cash and divvying it out to other household members, the Treasury acts more like a police chief, working with the police officers in their area to fulfil their duty to safeguard their community from harm. 

When seen through this prism, the Treasury now has a duty to understand why things are happening in the community, what the consequences are for all members of the community, and to devise responses to address community harms or safeguarding concerns. 

There is one harm specifically identified by Superintendent Burnham, which he has chastised as ‘40 years of Thatcherism.’ The fundamental issue was the proliferation of financial markets in the UK, namely London, which permits individuals to trade rights to economic activity between one another without having any stake in the activity itself, and permitting individualist accumulation. 

The harm is visible in ONS data. Although the financial sector provides under half of the Gross Value Added to the UK economy per annum of warehouse and retail/hospitality workers, or indeed health and social care workers, financial wealth is concentrated in the top income decile group. On the other hand, while workers in distribution and government sectors collectively provide more added value to the economy/community, they do not share the fruits. 

One proposed response is a wealth tax, but if this were a brainstorming session amongst police officers preparing to launch a sting operation, it would have been somewhat shot down. So what other solutions are available? Richard Murphy, an ex-accountant now taking on tax evasion and avoidance, notes that the listings on the London Stock Exchange have been dropping since 2006. This has limited the ability of rights-holding individuals to invest in British companies, instead seeking returns abroad. 

One response is that the police get involved in community engagement. Partnership structures such as those used by accountant or lawyer firms could be emphasised across sectors, rather than public listings. Care workers could be given knowledge support to launch partnerships and put on retainer by their local council or health trust. Those interested in computing, websites, and data could run partnerships operating renewable-powered local servers. 

To fund this proliferation of entrepreneurial partnerships, a central loan facility could be set up for pension funds to make time-bound deposits into. Funds interested in continuing their relationship with a particular organisation can become involved via corporate sponsorship. 

By looking at central government finances through the prism of the police person model, rather than the household model, the Treasury and indeed the other ministries become more dynamic. A path opens for Burnham to redirect the flow of loans from gilt repayments through the Bank of England, to UK pension funds depositing money into a central loan facility with time-bound interest guarantees. 

Some readers might say out-loud at this point: “Hang on, isn’t this just the Green Investment Bank? Didn’t we try that already?” Or indeed, “didn’t Rishi Sunak announce an infrastructure bank?” Well, not quite – the focus of this particular loan facility is not limited to infrastructure or green projects and would not operate purely on carrots like these previous initiatives. 

Given the urgency faced by Burnham in the face of climate disaster and proliferating conflicts, the PM needs to put a stop to the tendency to tinker and use the stick as well as the carrot. To achieve any meaningful stick regarding public finances, Burnham will inevitably have to enter a tussle with Andrew Bailey over at the Bank of England.

Image: Wikimedia Commons/Robin Sones

Licence.

No image changes made.