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Labour returns to tax and spend – but will the public back it? Labour gambles on tax and spend – but will the public back it?
(about 2 hours later)
Labour’s manifesto has an old-fashioned feel about it. It has been many a year since one of the two main political parties has gone into an election on a platform that is unashamed about the virtues of tax and spend.Labour’s manifesto has an old-fashioned feel about it. It has been many a year since one of the two main political parties has gone into an election on a platform that is unashamed about the virtues of tax and spend.
The document sketches out a picture of Britain in which the size of the state is bigger – apart from during the special circumstances of the financial crisis – than at any time since the 1980s. You would have to go back even further – to the early 1950s – to find a time when tax as a share of the economy will be as high as it would be under Labour’s plan for 2021-22.The document sketches out a picture of Britain in which the size of the state is bigger – apart from during the special circumstances of the financial crisis – than at any time since the 1980s. You would have to go back even further – to the early 1950s – to find a time when tax as a share of the economy will be as high as it would be under Labour’s plan for 2021-22.
Jeremy Corbyn said Britain was ready for a new and radical approach. Scrutiny of the documents suggests it is based on four key assumptions – and one sleight of hand. Jeremy Corbyn said Britain was ready for a new and radical approach. Scrutiny of the documents suggests it is based on three key assumptions – and one sleight of hand.
Assumption number one is that in an era of anti-politics everything has to be costed. So John McDonnell, the shadow chancellor, has insisted that current spending commitments have to be matched by tax increases: there is £48.6bn of pledged spending matched by £48.6bn of new taxes.Assumption number one is that in an era of anti-politics everything has to be costed. So John McDonnell, the shadow chancellor, has insisted that current spending commitments have to be matched by tax increases: there is £48.6bn of pledged spending matched by £48.6bn of new taxes.
Assumption number two is that the public will wear tax increases because they will only be levied on companies and the better off. The gamble is that on tax, if not welfare or immigration, Britain has moved to the left over the past decade, with bubbling public anger at “fat cat” pay and the widening gap between rich and poor.Assumption number two is that the public will wear tax increases because they will only be levied on companies and the better off. The gamble is that on tax, if not welfare or immigration, Britain has moved to the left over the past decade, with bubbling public anger at “fat cat” pay and the widening gap between rich and poor.
Almost half of Labour’s proposed tax increases come from corporation tax (£19.4bn) and another £6.4bn comes from a 45% income tax for those earning more than £80,000 a year and a 50% rate for those earning more than £123,000 a year. The Institute for Fiscal Studies estimates that those earning between £80,000 and £100,000 a year will be paying between zero and £1,000 in extra tax a year, while somebody earning between £123,000 and £150,000 will paying between £2,725 and £5,425 a year. That assumes that people don’t change the way they behave as a result of the higher taxes and that companies don’t shift their operations out of the UK. Almost half of Labour’s proposed tax increases come from corporation tax (£19.4bn) and another £6.4bn comes from a 45% income tax for those earning more than £80,000 a year and a 50% rate for those earning more than £123,000 a year. The Institute for Fiscal Studies estimates that those earning between £80,000 and £100,000 a year will be paying between zero and £1,000 in extra tax a year, while somebody earning between £123,000 and £150,000 will be paying between £2,725 and £5,425 more a year. That assumes that people don’t change the way they behave as a result of the higher taxes and that companies don’t shift their operations out of the UK.
Labour has made an allowance of £4bn for possible losses that might occur as a result of behavioural change, but on the side of the ledger has included £6.5bn from a crackdown on tax avoidance – a traditional recourse for politicians seeking to make their sums add up.Labour has made an allowance of £4bn for possible losses that might occur as a result of behavioural change, but on the side of the ledger has included £6.5bn from a crackdown on tax avoidance – a traditional recourse for politicians seeking to make their sums add up.
The excessive pay levy (the fat cat tax) will generate relatively little extra revenue (£1.3bn) because only a tiny proportion of people will pay for it. Even then, the cost is unlikely to be borne by Premier League footballers – one group that would be eligible – but by the club’s supporters through dearer tickets and higher-priced merchandise.The excessive pay levy (the fat cat tax) will generate relatively little extra revenue (£1.3bn) because only a tiny proportion of people will pay for it. Even then, the cost is unlikely to be borne by Premier League footballers – one group that would be eligible – but by the club’s supporters through dearer tickets and higher-priced merchandise.
The Institute for Fiscal Studies doubts whether Labour will raise £48.6bn – or anything like it – from the proposed tax changes. Paul Johnson, the thinktank’s director, says £20bn to £30bn would be closer to the mark.
The third assumption is that Britain is ready to move on from the age of austerity and will accept some extra borrowing. That gamble is necessary because Labour’s tax increases only cover day-to-day spending and not investment in public infrastructure of £25bn a year.The third assumption is that Britain is ready to move on from the age of austerity and will accept some extra borrowing. That gamble is necessary because Labour’s tax increases only cover day-to-day spending and not investment in public infrastructure of £25bn a year.
Labour believes that the failure of the Conservatives to get the budget deficit down despite year after year of austerity has made it possible to make the case for a different approach under which McDonnell would take advantage of low interest rates to borrow to invest. The economic case for higher spending on infrastructure projects has been made by bodies as august as the International Monetary Fund. It remains to be seen, however, whether voters in key swing seats are ready for it.Labour believes that the failure of the Conservatives to get the budget deficit down despite year after year of austerity has made it possible to make the case for a different approach under which McDonnell would take advantage of low interest rates to borrow to invest. The economic case for higher spending on infrastructure projects has been made by bodies as august as the International Monetary Fund. It remains to be seen, however, whether voters in key swing seats are ready for it.
Finally, there’s the sleight of hand. Labour’s manifesto does not include costings for renationalising the railways, water, the Royal Mail and energy. There will be an upfront cost of this but the state would then get a guaranteed stream of income in return. But if Labour’s aim is to use nationalisation to, for example, keep water bills down, that stream of income will be lower. Finally, there’s the sleight of hand. Labour’s manifesto does not include costings for renationalising the railways, water, the Royal Mail and energy. This will be an expensive business: the water industry alone is valued at more than £60bn. How would Labour pay for this? From even higher taxes? From the £25bn of borrowing it has earmarked for public infrastructure? From additional borrowing in addition to the £25bn? The manifesto was silent on this and it was telling that one shadow cabinet member, Sarah Champion, said the water proposal was an “intent”.
Certainly, the upfront cost of acquiring a private company would then see the state obtain an income stream. But if Labour’s aim is to use nationalisation to, for example, keep water bills down, that stream of income will be lower. Perhaps caught unawares by the timing of the election, the nationalisation programme does not appear to have been fully thought through.