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It is as predictable as it is depressing that the two main parties in the UK’s general election have decided to compete on being the least perceived as likely to raise taxes. No matter that the ruling Conservatives have brought the tax take to its highest level in decades, nor that most voters are resigned to seeing their taxes go up anyway: the name of the (campaigning) game is to promise, cross-my-heart-and-hope-to-die, that none of the taxes most citizens notice will go up.
For those who care about the state of Britain, this excess of fiscal responsibility is unhelpful. The greater worry is that it will prevent the next government from delivering the transformations the country needs.
This is a particular problem for Labour, which is campaigning as the agent of change. But voters would be hard pressed to pin down what Labour would do differently from the incumbents, at a scale that makes a difference. Until not so long ago, the answer was “securonomics”, shadow chancellor Rachel Reeves’s ugly moniker for the good idea of borrowing sizeable amounts to invest in green energy, tech and infrastructure for a transformed economy. Bidenomics with British characteristics, if you will.
Scared of making the case for borrowing to invest now that interest rates are no longer near zero, Labour has largely given up on this programme. Perversely, the political consequence of Liz Truss’s aborted deficit-funded tax cuts has been to make Labour fear looking suspect on the public finances.
It should not have. The Treasury can still borrow long-term at around a 2 per cent real annual rate. For anyone aware of how poor infrastructure holds back UK productivity, it beggars belief that the country should be lacking in investment projects with a far higher return than that. A genuinely responsible government would pursue them.
But campaign managers in both main parties judge that it’s electoral poison to make this case, with both Labour and the Tories now committing to make minimal resort to debt funding. When, in addition, they compete over how many taxes they can promise not to raise, can any future government be expected to deliver change worth the name?
There is a lazy version of this critique, which is to point out that the sort of transformation the British economy will need — acceptable public services for an ageing population, and infrastructure to restore productivity growth and address regional inequality — involves spending that is only possible with a higher overall tax take in the long term. Labour (like the Conservatives) has all but ruled that out, although (again like the Conservatives) it is set to keep the stealth tax increases implied in freezing nominal thresholds.
That the critique is lazy does not mean it is wrong. The most common counterargument — that higher taxes would themselves be bad for growth — is unfounded, at least in a country so lightly taxed by European standards. But there are ways to refute the critique that do not dabble in economic myths. One may simply judge that the British public is sufficiently tax-averse that whatever voters say they want more of, they are not willing to pay the bill come voting day, so the British state must be run on the cheap compared with European peers.
But Labour’s problem is deeper. The lazy critique can obscure the sharper one that there is a lot that can and should be done to improve the tax system without growing the state’s footprint in the economy. But Labour’s “stability” commitment — if it is taken to entail, as it no doubt will be, not touching any of the big taxes — may prevent it from pursuing even a revenue-neutral, but comprehensive tax reform.
Take the broad principle favouring low and uniform rates and as broad a taxable base as possible. In the UK that points to a lower main rate of VAT while shrinking lower-rated categories and the turnover threshold for VAT liability (one of the world’s highest). It would also point to combining income tax and national insurance into a simple, uniformly progressive system. These and other simplifications could do wonders for productivity and growth. But because some people would face tax rises, a government pursuing such wide-ranging reform would, plausibly enough, be accused of promise-breaking.
What should be in Labour’s manifesto — but won’t be — is an acknowledgment that a commitment to stability and only modest tax increases is no obstacle to growth-boosting comprehensive tax reform and simplification. It will regret not seeking a mandate for that now.
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