Two things have
become clear to many people since Labour came to government. The
first is that the party had done less preparation work for becoming
the government than Blair/Brown did in 1997. Given what happened in
2019 its focus was understandably on winning the election. There were
important exceptions of course, in the areas of worker’s rights and
greening the economy for example. But as the Sue Gray episode, ending
the pensioners winter fuel allowance and abolishing NHS England show,
a lot more preparation for becoming a government could have been
done.
The second is that
Labour policy in government, like its policy in opposition, is
governed by the need to win elections. In opposition that meant,
correctly in my view, embracing policies and rhetoric that appealed
to social conservatives rather than social liberals, despite most
Labour party members being social liberals. Making Brexit work was
the obvious example of that. Perhaps because the party hadn’t
prepared as much as they should for government, it has meant
continuing that socially conservative stance in government.
That is most obvious
in the rhetoric Labour uses on issues like immigration, but it also
extends to poverty reduction, foreign aid and welfare. The government has not
abolished the two-child limit despite it being a major cause of
poverty. Cuts to the welfare budget are also popular with a public
who believe (incorrectly)
that there is widespread fraud and abuse of the system.
Whether Labour are
right that this positioning will help win them the next election as
it did the last is unclear. In the last election most social liberals
voted Labour or voted tactically because they desperately wanted the
Conservatives out of office. Many of these voters will not vote
Labour in local elections or byelections, because they don’t like
some of the policies the Labour government are implementing. This
virtually guarantees Labour will have a torrid time at the polls over
the next four years. That doesn’t make a recovery before the next
election impossible, particularly if the Conservative/Reform split
continues, but it makes victory more uncertain. There is a real
danger that being the moderate socially conservative party worked a
treat when Labour were in opposition, but it may fail just as
spectacularly when Labour are in government.
While that is
debatable, Labour’s position on tax is in my view much more
obviously damaging to its future prospects. Apparently according to
some
government sources suggesting Labour raise taxes is
‘unserious’, so what follows is why I think that suggestion is
itself unserious, and reflects poor strategic political analysis. My
argument is an elaboration of a recent
letter to the Financial Times signed by a number of
economists, including myself.
Labour ruled out
raising most (by revenue) taxes when in opposition, because they
feared doing otherwise would lose them the election. They have
carried over that belief into government. Despite plenty of
opportunities to say that the ‘world has changed’ and to row back
on these pledges, Labour have so far kept to them. In addition, in
the October budget Rachel Reeves was fairly conservative in raising
taxes on unearned income, and she has also ruled out a wealth tax.
.
The Conservatives
lost the 2024 election, and Labour won, in large part because the
country was clearly broken. GDP per head was less than in 2019, and
public services were in a critical state. Labour pledged to fix both,
and voters will hold them to that pledge. Indeed voters are already
doing so, which is why Labour’s electoral honeymoon disappeared so
quickly and Reform is doing so well in the polls.
With some
justification Labour can argue that it is far too early for voters to
judge them on their pledge to get the country working again, but what
voters can see and Labour leaders seem in denial about is that the
government is not doing nearly enough to get the process of renewal
started. On growth, all the last Budget did was end the cuts to
public investment the previous government had pencilled in, so public
investment will not be an engine of growth. Neither will the planned
closer relations with the EU be nearly enough to make a significant
difference to growth. Making the planning process for new housing and
infrastructure quicker is welcome, but it alone will not get
productivity growing again.
On public services,
the October budget implied a roughly constant share of spending
relative to GDP over five years. As the share of health spending in
GDP invariably needs to rise (as it has done in most countries over
the last few decades), that means cutting other areas of public
spending as a share of GDP over time. Barring miracles, that will
not lead to significant improvements in the provision
of public services by the time of the next election, and certainly
not improvements that voters will notice.
Reform of public
services is not an alternative to spending more as a means of
renewal. Indeed, successful reform often requires spending more
money, while reform done on the cheap can just cause dislocation and
a deterioration in service provision.
The UK taxes its
citizens far less than comparable countries.
Share of total taxes
in GDP in 2022, OECD data
Virtually all our
neighbours raise more in taxes than we do. (The only exception is
Ireland.) The United States has lower tax, but that is largely
because most US citizens pay for health by other means, so comparing
our tax rate with the US is illegitimate. [1] Quite simply, if we
want as good public services as France, Germany, Spain or Italy, we
need to pay more in taxes. This the last Labour government came to
understand, but this Labour government seems to have forgotten.
As much of the media
is controlled by or made up of people who are relatively wealthy, the
argument above is rarely made there. Instead we typically get fed two
facts. The first is that taxes in the UK as a share of GDP are close
to the OECD average. But the countries with lower taxes than the UK,
like the US but also Turkey and Mexico for example, invariably supply
much less in public services. The second is that UK taxes are at
record high levels. But this is an inevitable consequence of health
spending steadily rising as a share of GDP, as
it has in most other countries.
I have set out the
detailed analysis of why taxes have to rise to get the provision of
public services close to the level enjoyed in our European neighbours
and that we had at the end of the last Labour government here.
It can be summed up with one simple statistic: planned total current
public spending in 2029/30 (39.7% of GDP) is slightly below levels
recorded in 2022/3 and 2023/4 (40.7% and 39.8% respectively, from OBR
data bank). If the government doesn’t think this analysis is
serious, perhaps they would like to provide some analysis of their
own. I suspect however that the reason the government will not take
the argument for higher taxes seriously is far simpler. It is that
taxes increased in the last budget, and to increase them any further
would be very unpopular, particularly given the cost of living
crisis.
There are two fatal
flaws in this argument. The first is that much of the tax increase in
the last budget were simply reversing the unaffordable tax cuts
announced in the last year of the previous government. The second is
that crumbling public services are unpopular too, and this government
was elected to do something about this. Most voters (unlike much of
the media) put improving public services way above cutting taxes as
an objective (source),
which is why the Conservatives lost so badly.
Another argument
used is that it is a mistake to raise taxes during a cost of living
crisis. There are two reasons why this argument is wrong. First,
there is considerable scope to increase taxes on the well off who are
relatively unaffected by higher food and energy prices. There is in
my view a
strong case for much higher taxes on the very rich and
wealthy. Second, for some time earnings have been rising
significantly faster than prices, and the need for higher defence
spending is a plausible and economically solid reason for breaking
earlier tax pledges. Reeves followed Osborne in not raising fuel duty
last year, and Stewart Wood calculates
that the total cost of freezing fuel duty since 2010 is around £100
billion! As Osborne understood in 2010, higher taxes at the start of
a government does not mean electoral disaster at the next election.
As an election approaches, of course, it becomes politically harder
to raise taxes.
Not raising taxes
more in her first budget, and not raising them now, are the major
strategic mistakes that Reeves has made. They are far more important
than anything involving fiscal rules. [2] These mistakes in turn
reflect the absence of any serious analysis of what will be required
to allow a noticeable (to voters) improvement in public services
before the next election. As a consequence, the best we can probably
hope for is that despite this lack of improvement Labour leads the
government after the next election, and like the previous Labour
government restores the UK’s public services in its second term.
Given the critical state of so much of public provision, that delay
is both an electoral gamble and very bad for the country.
[1] Partly because
of this, the US system for providing health is uniquely inefficient.
The only other G7 country that raises slightly less tax than the UK
is Canada, and it would be interesting to know why that is.
[2] Although the
falling debt to GDP ratio rule is stupid, I suspect it is fears
following the Truss debacle and worries about labour shortages that are holding back public investment. Current spending is
constrained by the ‘golden rule’, but not wanting to raise taxes
is not a good reason to break that rule, and I can see few
good reasons to break it right now.
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