Labour will regret its rejection of low-hanging fruit

Labour’s manifesto explicitly states that its ambition is for people to have a fair chance in life. In fact, Keir Starmer, in his introduction to the document, claims that “if you work hard then - whoever you are, wherever you started in life - Britain is a country that will respect your contribution and give you a fair chance to get on”.

However, ambitions for Britain are placed in a fiscal straight-jacket. At the top of its list of missions for government, the first is its plans to “deliver economic stability”. No one will argue with that principle and aim. However, as part of this, it commits itself to fiscal rules that risk undermining any hopes of fixing Britain’s crumbling public realm and economy.

The rule it promises to follow is that “debt must be falling as a share of the economy by the fifth year of the [budget] forecast.” Despite claiming in the manifesto that “there will be no return to austerity,” this rule and its tax pledges cast cold water on this notion.

The problem is the government’s fiscal rule on debt falling means that, given already tight forecasts and Labour’s green borrowing pledge, there is virtually no fiscal headroom at all in the forecasts, and that’s already assuming that Labour honours the cuts pencilled in for departments in the years ahead. At the time of the Spring Budget, the OBR forecast only a 54 per cent chance that the fiscal rule would be met, given the immense uncertainty in forecasts and the paltry nature of the headroom put aside. Given that Labour would cut this headroom further, it seems likely that the probability of meeting the rule on current policy is even less certain.

This lack of fiscal space is particularly concerning for the nation, given what’s already been pencilled in for future spending. Real growth in current spending of one per cent per year is expected in the next spending review; it’s this assumption with which we’re only just meeting the above fiscal rule.

Austerity resurrected

However, this picture of spending growth, albeit incredibly slow, is illusionary and under these figures lies the heart of future austerity. Faster spending growth, which will be needed in a range of areas due to existing commitments, from the NHS, defence and foreign aid to childcare and elsewhere, means that other parts of the public realm will face significant cuts. The Institute for Fiscal Studies estimates that areas such as the justice system, further education, and other ‘unprotected’ departments will face cuts of up to 3.5 per cent per annum. As Oxford economist Dieter Helm put it, for departments already savaged by austerity to have their budgets decimated in the coming years seems “unsustainable”.

To illustrate this, let’s momentarily take just the prisons and justice system. The Prison Governors’ Association warned during the election campaign that prisons are full, and there’s little to no space for new inmates. The chief reason for this is that the number of people on remand has increased by a staggering 84 per cent in five years and now contributes towards a fifth of the entire prison population. The main reason for this? The enormous backlog in our courts. Although not the political football that is the NHS backlog, this, too, has severe and significant consequences for those involved. The National Audit Office has already said that the government’s target of reducing the backlog won’t be met, even as more than a quarter of cases have been waiting at least a year for a resolution. Without significant investment, tackling these shortages, backlogs, and systemic problems is impossible. Not only is that not set to occur, but further cuts are expected to be absorbed by our crumbling justice system.

With this devastating backdrop, one may assume Labour would be committed to raising taxes in targeted areas to finance spending. That’s certainly true. Unfortunately, the total tax rises proposed by Labour account for just 0.5 per cent of GDP by the end of the Parliament, and this is already dedicated to new programmes and commitments made in the manifesto.

Instead, Labour has sought to rule out taxes at a frightening speed, narrowing its capacity to respond to events in government and making avoiding austerity more challenging. The party pledged that National Insurance, Income Tax and VAT would all be locked from increases as part of its promise to “not increase taxes on working people”. In the name of stability, Labour has gone further still, promising no increase to corporation tax, a revenue-neutral reform to business rates, no changes to council tax bands or capital gains tax on selling your main home. Taken together, Labour have ruled out raising taxes that accounted for well over 80 per cent of HMRC revenue in 2023.

The consequence of ruling out revenue-raising measures, whilst committing to tight fiscal rules with regard to borrowing, is that spending will be sacrificed on the altar of stability. This is something that the Labour leadership has been preparing the ground for some time. In December, Starmer warned Labour wouldn’t be able “to quickly turn on the spending taps” in office. Since then, Labour’s pledge to spend £28 billion a year on green industries has been gutted by more than 80 per cent. Even with its additional but minimal green spending, Labour’s plans would likely require total public investment to be cut more in the next five years than the Conservatives have over 14 years.

Delusions of growth

So, how does Labour intend to circle this square? Growth, growth, growth. On the campaign trail, Sir Keir said that “our number one mission is economic growth,” and Labour politicians often use this as the explanation behind how cuts will be avoided without tax rises.

If growth is to be the means of avoiding austere cuts to crumbling services, then we may as well be praying for divine intervention. It’s estimated that the growth rate the UK would need to avoid department cuts is around two per cent per annum, a figure higher than the already optimistic estimates by the Office for Budget Responsibility and far from the average rate of 1.3 per cent since 2016.

Labour’s big idea for achieving this magical, monumental, and far above-expected level of growth is planning reform. In their manifesto, they say the nation is “hampered by a planning regime that means we struggle to build either the infrastructure or housing the country needs.”

There is reason to believe reform can increase housebuilding. Following zoning reforms in Auckland in 2016, there was a noted effect on housebuilding over the following five years. However, it’s also important to ground the discussion in reality. The impact of zoning was that Auckland built around five per cent more than it would otherwise have done, an important rise but clearly not a boom.

Moreover, the proportion of planning applications granted has doubled in the last 14 years, with around 90 per cent now approved by councils. Clearly, planning restrictions still hold back aspects of development, but we shouldn’t delude ourselves into thinking they alone will solve housebuilding and growth needs.

Furthermore, returning to the cuts pencilled in and non-existent headroom available, things could worsen for Labour, triggering further cuts in unprotected areas. Alternatively, the pernicious power of “events, dear boy, events”, as Conservative Prime Minister Harold Macmillan once said. The potential for defence spending to rise to 2.5 per cent of GDP, compensation to infected blood victims and Waspi women, refurbishing public buildings built with RAAC, tackling the maintenance backlog in the NHS, schools and elsewhere and a possible bailout needed for Thames Water could place tens of billions in further strain on the Budget.

And that’s aside from the expected pressures already faced. According to the Resolution Foundation, an ageing population and the growing cost of healthcare in the UK and worldwide means that the NHS will likely need £60 billion a year more by 2040. Meanwhile, further resources may be required, particularly in the short-term, if progress towards tackling waiting lists is to be made, at a staggering 7.57 million by the end of April.

It’s also clear that the NHS’s infrastructure is lacklustre compared to our European neighbours. On a per capita basis, the UK has fewer hospital beds and dentists than Germany, Austria, Poland, France, and others. In fact, Greece has 75 per cent more hospital beds per 1000 population, and Italy has more than 70 per cent more dentists.

Furthermore, any Labour government will, and must, come under enormous pressure to end the two-child cap on benefits. Not only is the policy directly responsible for placing an additional 250,000 children in poverty, but the overwhelming majority (some 81 per cent) of families affected by it have at least one parent in work. For a Labour Party as committed to ‘working families’ as this one is, to perpetuate this draconian measure is nothing short of inhumane and scandalous.

Add to that our universities, which are facing a severe financial crisis—more than 50 are already making staff cuts, and a number are warning of bankruptcy in the year ahead—and the potential calamity of a Labour government unable, or rather unwilling, to raise revenue and forced into increasingly savage cuts to finance bailouts, deliver healthcare, and tackle poverty.

There is also an issue that was scarcely mentioned in the election: climate change. There is a tremendous need for action to decarbonise Britain’s economy and build the way for net zero by 2050. In fact, the Shadow Chief Secretary to the Treasury, Darren Jones, admitted that “hundreds of billions of pounds” will be needed. Overwhelmingly, this will be private sector investment, but the state naturally has a decisive role. And the cost of inaction is serious, too. The Grantham Research Institute found that climate change damages will increase in cost to Britain and reach 3.3 per cent of GDP by 2050 without adequate climate change mitigation and adaptation measures.

Reeves has in the past paid tribute to the US Inflation Reduction Act, which provides generous subsidies and tax credits to support green investment, domestic manufacturing, and energy resilience while moving the nation towards decarbonisation. However, that plan is worth just shy of £400 billion. Given that Labour is now proposing just £5 billion a year more for green investment, it’s unclear whether her warm rhetoric around it will be anything more than that.

Tax wealth

When it comes to taxation, the lack of appetite for increases clearly reflects our present situation. The UK’s tax burden is at a historic high and set to reach levels not seen since the post-war Labour government by the decade’s end. However, we aren’t international outliers. In fact, we remain below the average in developed countries and below most of our Western European neighbours. What is true is that the taxation of income is quite high. The number of people paying the top rate of tax is set to exceed one million for the first time, with 6.31 million paying the 40 per cent rate.

How this can be true while inequality has continued to rise may be confusing. But this rise comes from earnings that derive not from income but, more often, for the wealthiest, the gains they make on that wealth are taxed at a lower rate than regular work. Wealth, not income, is where the scope for higher taxes lies, both in the interest of a fairer society and to raise money for our crumbling public services.

As it stands, very little tax revenue comes from wealth taxation. This is despite wealth having soared as a proportion of our economy since the 1980s, when it accounted for three times the national income. Today, it stands at around seven times the national income. Throughout this, the taxes we receive from wealth have scarcely changed as a proportion of our tax take or the economy.

I would say that the concerns over wealth taxation are largely unfounded, albeit not entirely. A full rebuttal can scarcely fit in this already bloated analysis. To summarise, however, no one is talking about depriving parents of leaving an inheritance to their children. But an ever-growing concentration of wealth amongst a small group in society is bad for everyone. Wealth is very unequally distributed in the UK, with the top ten per cent owning just under half (44 per cent) of all wealth, whilst the poorest half of all Britons own less than ten per cent.

In fact, there is a deeply conservative argument to be made here. The idea that hard work should pay off is the cornerstone of conservative politics, at least in its rhetoric. It seems odd that we would actively allow a situation to develop where, irrespective of effort and work, many cannot own a home or acquire assets due to the enormous inflation of asset prices over the last forty years.

There’s often a chicken-and-egg argument here, too. Some will argue that wealth inequality doesn’t matter as long as people can still strive towards getting their own assets. However, it is impossible to correct this problem without making the accumulation of ever-increasing wealth less advantageous than earned income.

A clear area where Labour could act is by ending the mismatch between the capital gains tax rate and income tax. This would raise billions annually and promote fairness in the tax system, but it wouldn’t even be a radical idea. Thatcher’s own Chancellor of the Exchequer, Nigel Lawson, equalised the rates in the 1980s.

Reform council tax

However, the point of this piece is also to criticise the rejection of the most logical, plain, and simple tax changes that Labour could deliver in office. The unrivalled champion of this is council taxation, something outlined previously has been ruled out by Labour. 

Think tanks across the political spectrum, from the Social Market Foundation to the Centre for Policy Studies, have all argued that council tax needs reform. The reason is clear to all familiar with the policy.

Council tax is a profoundly regressive tax. The poorest Britons pay almost four times as much as a share of their income in council tax as the richest 40 per cent. The problem is that council tax is increasingly essential to raising funds for local government. Leeds City Council’s Labour leader says that central government funding, which supported the local budget, has fallen from 36 per cent to just five. Given its regressive nature, we increasingly depend on a tax that punishes those who can pay the least.

The lack of any regular revaluation is unique and shocking. Some Australian states only revalue properties every six years. The last time properties were valued in England (and Scotland) was 32 years ago when the council tax was first introduced. Since the introduction of council tax, many parts of the North of England have seen house prices fall, whilst, in the South, the enormous decline in housing affordability due to rampant house price inflation has gone untaxed.

Paul Johnson, chief of the Institute for Fiscal Studies, has found that the result of this is that the average Westminster property pays just 0.06 per cent of its value in council tax, whilst the average home in Hartlepool pays proportionally over twenty times as much. In fact, over twenty years, someone in Easington would’ve paid almost 40 per cent of their property’s value in council tax. In Westminster, the figure is less than two per cent.

Furthermore, our banding system means many properties may be charged the same amount in tax as homes worth only half the same value. In fact, any home worth over £320,000 when properties were first valued pays the same amount. A home worth several million pounds will owe the same amount in council tax as a modest property in London. Meanwhile, Canada, New Zealand, and Australia all tax property on a progressive basis proportionate to the home’s value.

Finally, the UK is entirely unique in the Anglosphere in charging all residents, including tenants, for local property taxes. Typically, this is paid only by the property owner. Given that we already regulate our private rental sector far more liberally than most of our European neighbours, our system of effectively subsidising landlords by pushing costs onto renters fairly uniquely adds insult to injury.

More tax bands at the top and regular revaluations would help, but clearly, a proportional value tax, as exists in many other countries, namely in the Anglosphere, would be fairer. This could be increased over time, firstly in a revenue-neutral way as the changed tax system is introduced, and then it can be increased.

This is not a solution to the crisis the government will face. Changes to our fiscal rules, fundamentally higher taxation of wealth and a broader rethinking of what we want the state to do will be needed. However, Labour cannot reject these lowest-hanging fruit before it even writes its first Budget.