Why Labour cannot save the economy

If I had to distil into a few sentences why Labour is presently incapable of changing this country’s economic trajectory, I couldn’t do better than this extract from today’s Times:

John Healey is set to increase taxes on Britain’s banks to help fill a hole in the government’s finances from rising borrowing costs.

The chancellor is looking at options to increase revenues from Britain’s financial institutions before the budget this month.

The extra money would help fund a planned package of help for poorer households and businesses with their energy costs over winter.

That John Healey faces in this Budget a truly miserable task is by this point well-trodden ground. He needs somehow to find enough money to sustain Andy Burnham’s insistence that happy times are here again, whilst contending with the various bits of fiscal tightening baked into his spending plans by Rachel Reeves, and all without raising any of the useful revenue taxes.

As such, you would probably not infer from the speculation floating around at the moment that Britain was a country in a deep, long-running and structural economic malaise. Most of it is very small beer: a tax on streaming platforms to fund the BBC here, a tax on banks there. Not much mention of deregulation, no mention of prisons or justice, some chatter a little while ago about postponing the defence funding target. 

But the real problem with this approach is not merely that it seems to consist of a trifling collection of tax rises, but where the money is going. Because if the Times is correct, the Chancellor is planning a tax raid on one of the British economy’s few really productive sectors to fund yet more fiscal transfers to some of the least productive people in the economy.

Here is how this doom-loop works: as the condition of the British economy worsens, the more people face economic hardship, and the more people face economic hardship, the superficially stronger the argument appears for giving them more money. But the only way to find this money, now that simply borrowing it all is off the table, is by raising taxes — which places further strain on the shrinking and overburdened productive part of the economy.

Britain already has a very lop-sided tax-system which exempts huge numbers of people from making any meaningful contribution whilst extracting wildly disproportionate sums from higher earners. Again, this might sound fair enough in the abstract. 

The problem is that Britain is a stagnant, high-cost, low-wage economy and high-earners are generally the people most able to adapt their behaviour to such a regime, either by restructuring their income, working less, or moving overseas. (This gets even more pronounced for taxes even more narrowly targeted, such as inheritance tax or corporation tax.) It also crushes the disposable income of the people who tend otherwise to spend the most in the consumer economy, which has knock-on effects of its own.

Worst of all, all of these effects come without the prospect of serious revenue. The only way to get that is to hike one or more of the major revenue taxes, i.e. the taxes most people pay. But the political cost of hiking income tax, national insurance, or VAT would be very high; the best the government can do is maintain fiscal drag, allow inflation to drag people on stagnant incomes into higher tax brackets, and count on the media continuing not simply to describe the result as a rise in income tax.

There might, in theory, be a left-wing case for revitalising the British economy by seriously raising taxes and making big public investments with the money. That is certainly the sort of prime minister Burnham wishes people to see in their peripheral vision. Yet current conditions in Britain make implementing such a vision almost impossible.

Why? Because the high and yet mounting burden of fiscal transfers — including not only welfare but also such spending as pensions and the NHS — has squeezed to nonexistence the slack in the budget for such projects. Instead, time and again, governments have chosen to delay or abandon capital spending projects rather than make politically painful cuts to revenue expenditures.

That means that in practice there is no way around making steep cuts to the sort of spending that makes Labour MPs feel good about themselves, even for a serious and sincere left-wing prime minister. And those MPs have made it very clear that they are simply not prepared to let that happen — nor to allow deregulation of the labour market or anything else which might provide a fillip to growth.

So as we drift through the journalistic liminal zone of the pre-budget briefings, we can at least hold on to the unhappy certainty that whatever the Chancellor eventually announces, it isn’t going to be the sharp change in direction this country urgently needs.