Enough magical thinking – we need to be honest about the economy

Tax cuts are back. Just when you thought it was safe to go back into the (economic) waters. Although really, with inflation running hot and the Bank of England pumping up rates, did anyone really imagine those waters were safe?

Rishi Sunak has reportedly pushed for 2p off the basic rate of income tax. This would be an inflationary move. Fiscal policy really ought to align with monetary policy (interest rates). This means you shouldn’t be talking about an attempted tax-cutting sugar rush when prices are going through the roof and interest rates are going the same way.

Did Sunak learn nothing from Liz Truss? More importantly, can we really afford tax cuts at a time when Britain’s public services are collapsing?

This isn’t just a criticism of Sunak. Keir Starmer has proved more than happy to take potshots at the prime minister in the House of Commons about the high level of tax.

He says he wants to keep taxes for working people “as low as we can”. But wait: “The NHS is broken, the criminal justice system is broken. There’s almost nothing that isn’t broken.” That’s what he told the Daily Mirror a few weeks ago.

So how are you going to fix it, Keir? And how are you going to pay for that fix? Labour will, we are told, “hit the ground running and restore the sense of hope that has been lost”. OK, but what does that actually look like in practical terms?

To be fair, Starmer and his shadow chancellor Rachel Reeves are planning some quietly radical reforms to the way the British economy is run. “Bidenomics on steroids” is how this has been reported, in reference to what the American president has been doing – making large subsidies available for technology and green energy.

It will involve borrowing as much as £28bn a year until 2030 to spend on green transition policies. Subsidising wind farms, insulating homes, building battery factories and, more controversially, accelerating Britain’s nuclear programme.

Borrowing to invest is good borrowing, because if you get it right, you get a return in terms of economic growth, jobs, and ultimately higher tax receipts. Coupled with something resembling an industrial policy worthy of the name, this makes sense.

But Starmer still faces the same problem Sunak faces: those creaking public services and how to pay for them. Schools running deficit budgets that the Department for Education appears not to be aware of. A health service in which people with chronic conditions have to engage in guerrilla warfare to get the regular checks they need to avoid horrible, and horribly expensive, complications. Eternal waiting lists.

Growth, which Labour’s plan is designed to address, ought to help with these issues. Growth delivers revenue, which helps to fund things you want (and need) to do.

But, as things stand, the British economy isn’t expected to see much of that. Inflation remains stubbornly high – high enough to require further corrective action from the Bank of England, which will constrain growth. I’m afraid base rates could very easily top 5 per cent. Those rates could, if they remain high for longer than expected, create quite the headache for Starmer, because they make borrowing much more expensive.

Moreover, Brexit is estimated to have shaved 4 per cent off Britain’s GDP, which is a huge number amounting to tens of billions of pounds in real money. Former Tory cabinet minister Chris Patten described it as “one hell of a mess”.

Trouble is, there’s that word “former”. The current generation of politicians don’t want to talk about said mess. They don’t even want to admit it. The public increasingly sees the problem. But in Westminster, magical thinking rules the day on both sides of the aisle.

Underlying all this are Britain’s demographic issues. Our population is ageing. Social care is a creaking mess with thousands of unfilled vacancies. This is set to get worse as time goes on.

On the subject of tax, immigration, the economy and Europe, the national conversation is swamped by myth-makers. Eventually all these problems are going to have to be addressed. But the first step would be admitting that they exist. Neither of the two main parties seems to be of a mind to do that.