Labour’s pursuit of power has left it impotent
As everyone knows, the public finances are in the most ghastly mess. As a country, we’ve been overspending, under taxing and borrowing the difference for decades; the roots of this condition go back many years, long predating the financial crisis.
Yet things still wouldn’t look quite too bad but for one overarching and relatively recent event – the pandemic.
Both in terms of its impact on economic output and its fiscal costs, the pandemic and the response to it appear to have inflicted more damage on the UK than almost any other advanced economy. This for no obvious advantage in terms of public health outcomes.
The lasting effects look equally bad, with rocketing debt servicing costs, a bloated public sector workforce and a sick-note work culture which has caused expenditure on benefits to surge.
Incredibly, Britain’s lumbering Covid-19 public inquiry – costing around £100m so far, and rising – has only just got round to taking evidence on the Government’s economic interventions, and won’t begin public hearings on them until the week after next.
The way things are going, we’ll be onto the next pandemic before the inquiry into the last one is even completed. We do not, however, need to await its conclusions to know that lockdown has left the nation up to its neck in debt at a time of much higher interest rates and extraordinarily low economic and productivity growth.
When Rachel Reeves, the Chancellor, talks of the worst economic inheritance since the war, she lays the blame for it squarely on the last government.
Yet if she’s referring to the public finances, the much bigger underlying cause is not 14 years of Tory mismanagement, but rather their various economic interventions during the pandemic, virtually all of which were fully supported by Labour.
Truth be told, Labour would have gone further still had it been in power at the time. As leader of the opposition, Sir Keir Starmer repeatedly called for longer and more severe lockdowns.
In any case, the costs were in many respects similar to those of a major war, and must now, one way or another, be paid for.
The Tories planned to do it largely through spending cuts; Labour proposes tax increases instead. That, and ducking the issue altogether by borrowing even more on the wing and a prayer that it generates a little growth.
The problem that Reeves faces as she approaches the Budget in less than three weeks’ time is that she has tied her hands with manifesto pledges on virtually all the taxes capable of raising significant sums of money, including income tax, VAT and National Insurance.
The Chancellor is thereby left scraping the bottom of the barrel in the hunt for extra revenue.
Never a day passes without news of some hare-brained idea for tax raising said to be under consideration at the Treasury, or otherwise being floated in the City to gauge its feasibility.
If I were her, I would bite the bullet, reverse Jeremy Hunt’s cut to National Insurance and hope that the voters have forgotten by the time of the next election.
She’s already established the narrative for breaking her manifesto pledges by saying that the public finances are in far worse shape than she ever suspected.
But she’s also said she won’t go there, so I suppose that’s the end of the matter. She’s also said that she won’t do anything that would damage growth. This would appear to limit her options to precisely zero, since it is hard to think of almost any tax rise which wouldn’t in some way undermine it.
In any event, by ruling out so much in its bid to gain power, the Labour leadership has rendered itself almost wholly impotent.
The art of taxation, said Jean-Baptiste Colbert, Louis XIV’s finance minister, “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.
For Reeves, it’s proving hard enough even to seize the goose, let alone pluck a few feathers. As it is, the poor blighter already appears almost completely plucked, with the tax burden the highest in 80 years.
Take capital gains tax, strongly tipped for tax raising measures.
By inexplicably leaving four months between coming to power and her first Budget, Reeves has allowed speculation to run riot. Not only has this had a chilling effect on business and consumer confidence, it’s also prompting a veritable tsunami of evasive action.
By prompting a great wave of asset sales, speculation over higher capital gains tax may ironically be quite good for tax revenues this year, but it damages them further out; and if she does indeed increase the tax, it significantly reduces the incentives for further wealth creation.
But don’t take it from me. HM Revenue and Customs itself says the effects are likely to be counterproductive. In a bulletin published last June, HMRC said that taking account of behavioural changes, almost any rise in capital gains tax would fail in the medium term to raise much additional revenue.
Increasing the main rate by as much as 10 percentage points, one of the options under consideration, might actually reduce the yield over the next three years by as much as £3.5bn.
Charging employers’ National Insurance on pension contributions is similarly likely to trigger a number of countervailing responses. One is to pass the costs onto consumers, causing higher inflation than otherwise. Another would be to limit pay rises until the new tax is paid for. And for companies paying more than the minimum auto-enrolment pension contribution, a third possibility would be to cut company pension contributions to match.
There are no easy options when it comes to taxing the economy more; what seems certain is a huge amount of hissing for very little in the way of feathers.
On the other hand, there would seem to be lots of opportunities for economising on the other side of the ledger – spending.
Public spending as a proportion of national income had been steadily falling up until the pandemic – what Labour likes to call “Tory austerity”.
That process was rudely interrupted by Covid, but here’s the point. It has since failed to return to its pre-pandemic level and is now stubbornly stuck nearly three percentage points of GDP higher than it was back then. It scarcely needs saying that all that extra spending has failed to yield any improvement in public services.
Debt interest and benefit payments have soared, and public sector productivity has collapsed. Don’t expect a Government that has just granted a no-strings, inflation-busting pay rise to public sector workers to do much about it.
Instead, ministers cling to the delusion that those with the “broadest shoulders” can always be made to pay. That’s quite a message for hapless business leaders still planning to attend the Government’s “investment summit” in London on Monday. Check your wallet before you leave.