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An incoming Labour government could find itself with “more money to play with” than many expect, according to Lord Nick Macpherson, the top official at the UK Treasury for more than a decade.
Macpherson said that gloom about the British economy was overdone and that contrary to widespread expectations, whoever wins the next general election could see healthy revenues flowing into Treasury coffers.
The former mandarin noted some people had said that the 1997 election, won by Tony Blair’s Labour party, would be a “bad election to win” but in fact the new government had enjoyed the fruits of an economic rebound.
Referring to the electoral contest that Prime Minister Rishi Sunak is expected to call in the second half of this year, Macpherson said in an interview with Radio 4’s Week in Westminster on Saturday: “It could be quite a good election to win.”
“It’s very easy to get depressed about the British economy but the plain fact is that it generally grows,” he said.
“There is more money in people’s pockets, the worst of the energy crisis is behind us. If anything I would expect the economy to outperform expectations for the rest of this year,” he added.
Macpherson, permanent secretary at the Treasury from 2005-2016, noted that a stronger economy might not help Sunak in the short term because the Bank of England may have to keep interest rates higher for longer.
But he said it might allow chancellor Jeremy Hunt to make another fiscal statement in the autumn and announce further tax cuts, a scenario labelled by shadow chancellor Rachel Reeves as a “scorched earth” policy.
Macpherson said he could understand why Reeves said that but added: “She may find herself with a bit more money to play with.”
While the former Treasury official argued that revenues could be stronger than expected after the election, he warned that pressures to spend them will be higher than either Hunt or Reeves are prepared to accept.
Apart from having to spend more on health and social care, “the demographic time bomb has long since arrived”, he said, adding that defence spending would also likely have to rise in the face of Russian aggression.
“The defence issue is really quite serious,” he said. “I’m a former Treasury official and I never wanted to give money to the Ministry of Defence.
“But it wouldn’t surprise me at all if, in the end, we have to spend up to 1 per cent more of our national income on defence. That would be another £25bn-£30bn. Where’s that going to come from?”
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