UK
The Labour Party must not follow Tory economic policies
Labour is counting on the unpopularity of the Conservative Party to catapult it into power but in the absence of specific policies and failure to improve quality of life, electoral goodwill will quickly evaporate.
Left Foot Forward Opinion
This week two interesting events took place. Firstly, Chancellor Jeremy Hunt gave oral evidence to the House of Lords Economic Affairs Committee, and secondly Shadow Chancellor Rachel Reeves gave the Mais lecture at City University in London. Both spoke about their policies for reviving a stagnant economy. Both failed to offer hope to millions.
Reeves set out some aspirations: “We need strong public services to support economic growth, including a serious plan to get the long-term sick – let down by ballooning NHS waiting lists, failing mental health support, an inflexible welfare state, and inadequate employment support – back to work. We will swiftly implement the plans we have already set out for an urgent resource injection into our public services: to cut NHS waiting lists, tackle the crisis in dentistry, transform mental health services, recruit and retain teachers, and provide breakfast clubs in every school”.
However, she had little to say about how this is to be achieved, other than through elusive “economic growth”. Rather than distancing herself from disastrous Tory plans, Reeves, as in previous speeches, she promised to follow them.
Labour and Conservatives have become slaves to arbitrary fiscal rules even though they have failed to deliver almost every target relating to economic growth, inflation, public debt, investment and more. Labour emphasises that it wants to reduce the government debt to GDP ratio in five years’ time. However, no rationale is presented for such a straitjacket. No assessment is made of the consequences of removing billions of pounds from the economy. No rationale as to why low debt to GDP ratio is an indicator of the prosperity of a nation and why this should take priority over investment or redistribution. Analogies with household budgets or maxed out credit cards are misleading as governments, especially those with global currencies such as the Pound Sterling, can create money to achieve desired social objectives and levy selective taxation to eliminate inflationary effects. But Labour is no student of the modern monetary theory.
Rachel Reeves mentioned economic growth 58 times and assumes that this will somehow be achieved by a bonfire of regulations, especially planning regulations, and the private sector and the finance industry will take the lead. Despite swathes of privatisations, deregulation, low interest and corporation tax rates, sustained growth has been elusive for the last 30 years even when the UK was a member of the European Union. Until the late 1980s, the UK invested 23% of GDP in productive assets, falling to 17% from 2000 onwards. This compares with an average of 20%-25% in G7 countries. Despite a plethora of subsidies and tax reliefs the UK languishes in the 35th position out of 38 OECD countries for investment in productive assets. Research and development (R&D) spending in the UK over the last 30 years has averaged around 2% of GDP, compared to 3.5% for Japan and 2.8% for Germany and the USA.
Seen from the above perspective, the UK needs an entrepreneurial state that invests directly in productive assets and new industries, not the one that leaves it all to markets or is constrained by arbitrary fiscal rules. There is no shortage of money. After the 2007-08 banking crash, the government found £1,162bn, consisting of £133bn cash and £1,029bn of guarantees, to bailout banks. It found £875bn of new money in the form of quantitative easing to support capital markets. It found billions to fund wars in Ukraine, Afghanistan, Iraq and elsewhere. No doubt, if another financial crash were to occur the government will find vast sums to manage the crisis. However, the same zeal is missing when it comes to rebuilding the economy, infrastructure, and eradication of poverty.
Since 2010, the government has sought to manage public debt through austerity. Direct investment by the state in new industries and infrastructure has become a taboo. The preferred policy has been to hand cash to the private sector which has only been happy to use it for dividends and executive pay. For example, £75bn has been handed to rail companies in the last decade, and service is worse and more expensive than ever before. Avanti West Coast managers joked about receiving “free money” from government and performance-related payments being “too good to be true”. The cash handouts have neither reduced public debt nor stimulated the economy. In 2010, the public debt was around £1.03 trillion (65%of GDP), rising to £1.791tn (79.1% of GDP) in February 2020 just before the pandemic. By February 2024, public debt rose to £2.659trn, 97.1% of GDP.
Debt can be used to rebuild the economy even if Labour and Conservatives are hostile to it. The Post-Second World War boom was built upon direct public investment in new industries and social infrastructure. In 1946, public debt stood at over 270% of its GDP. This provided jobs and fuelled demand. It fuelled corporate investment as the state bought goods and services from the private sector. It laid foundations of emerging industries, such as biotechnology, information technology, aerospace and more specially as the private sector showed little appetite for long-term investment and risks. Within a generation, the public debt came down to 49% of GDP and I can’t recall our parents and grandparents fretting about the public debt.
Instead of a dynamic state, both Labour and Conservatives support further cuts in public spending even though that will reduce investment, slow economic growth, and inflict long-term damage. Too many public buildings and schools are crumbling away. The government response is that college spending per student aged 16–18 in 2024 will be 10% below 2010 levels, and about 23% below them for school sixth forms. Since 2010 local council funding has been cut by 23.3% in real terms, leading to degradation of public services and higher council tax on hard-pressed households. Hospitals in England have a waiting list of 7.6m appointments. None of this can be addressed by adherence to arbitrary fiscal rules.
There is a strong case for redistribution of income and wealth, but Hunt and Reeves ignore it even though higher disposable income for the less well-off has a greater multiplier effect. No amount of economic growth can be sustained unless people have good purchasing power to buy goods and services. Both parties reaffirm their faith in trickle-down economics which has seen wealth sucked upwards and prevent economic recovery. The UK has 171 billionaires with combined wealth of £684bn. The richest 1% of the population has more wealth than 70% of the population combined. The richest 10% of households hold 43% of all wealth, and the poorest 50% own just 9%.
A typical FTSE100 CEO surpasses the median annual wage of a worker after just 3 days. Despite real increase in GDP, the real average wage of workers is stuck at the 2007 level. In February 2024, the pre-tax median annual pay was £27,972. Corporations are declaring record profits, but wages are not enough to live on. 38% of the universal credit claimants are at work. Some 17.8m adults have income of less than £12,570 a year. Out of a population of about 68 million, despite welfare payments 12m people (18% of the population), including 4.3m children live in poverty. Part of child poverty is manufactured by the government’s austerity policies. Since 2017, the government has imposed a two-child benefit cap which deprives some 402,000 families of £3,200 a year. Labour have promised to continue with the cap.
Taxation can be used to redistribute but both parties have promised not to eliminate tax perks of the rich or broaden the tax base. Billions can be raised by aligning capital gains tax rates (10%-24% from April 2024) with income tax (marginal rates of 20% to 45%), taxing dividends at the same rate at wages, charging national insurance on investment income, levying wealth taxes, financial transaction taxes, restricting pension tax relief at 20% (the basic rate) only. Neither wants to reduce indirect taxes which hurt the poorest the most. For example, the poorest fifth pay 28.3% of their disposable income in indirect taxes, such as VAT, compared with 9.0% for the richest fifth.
Labour is counting on the unpopularity of the Conservative Party to catapult it into power but in the absence of specific policies and failure to improve quality of life, electoral goodwill will quickly evaporate. Therefore, it is imperative that it develops and delivers policies that will end the Conservative neglect, give people hope and deliver prosperity to the many not just the few.
Yesterday
Reeves set out some aspirations: “We need strong public services to support economic growth, including a serious plan to get the long-term sick – let down by ballooning NHS waiting lists, failing mental health support, an inflexible welfare state, and inadequate employment support – back to work. We will swiftly implement the plans we have already set out for an urgent resource injection into our public services: to cut NHS waiting lists, tackle the crisis in dentistry, transform mental health services, recruit and retain teachers, and provide breakfast clubs in every school”.
However, she had little to say about how this is to be achieved, other than through elusive “economic growth”. Rather than distancing herself from disastrous Tory plans, Reeves, as in previous speeches, she promised to follow them.
Labour and Conservatives have become slaves to arbitrary fiscal rules even though they have failed to deliver almost every target relating to economic growth, inflation, public debt, investment and more. Labour emphasises that it wants to reduce the government debt to GDP ratio in five years’ time. However, no rationale is presented for such a straitjacket. No assessment is made of the consequences of removing billions of pounds from the economy. No rationale as to why low debt to GDP ratio is an indicator of the prosperity of a nation and why this should take priority over investment or redistribution. Analogies with household budgets or maxed out credit cards are misleading as governments, especially those with global currencies such as the Pound Sterling, can create money to achieve desired social objectives and levy selective taxation to eliminate inflationary effects. But Labour is no student of the modern monetary theory.
Rachel Reeves mentioned economic growth 58 times and assumes that this will somehow be achieved by a bonfire of regulations, especially planning regulations, and the private sector and the finance industry will take the lead. Despite swathes of privatisations, deregulation, low interest and corporation tax rates, sustained growth has been elusive for the last 30 years even when the UK was a member of the European Union. Until the late 1980s, the UK invested 23% of GDP in productive assets, falling to 17% from 2000 onwards. This compares with an average of 20%-25% in G7 countries. Despite a plethora of subsidies and tax reliefs the UK languishes in the 35th position out of 38 OECD countries for investment in productive assets. Research and development (R&D) spending in the UK over the last 30 years has averaged around 2% of GDP, compared to 3.5% for Japan and 2.8% for Germany and the USA.
Seen from the above perspective, the UK needs an entrepreneurial state that invests directly in productive assets and new industries, not the one that leaves it all to markets or is constrained by arbitrary fiscal rules. There is no shortage of money. After the 2007-08 banking crash, the government found £1,162bn, consisting of £133bn cash and £1,029bn of guarantees, to bailout banks. It found £875bn of new money in the form of quantitative easing to support capital markets. It found billions to fund wars in Ukraine, Afghanistan, Iraq and elsewhere. No doubt, if another financial crash were to occur the government will find vast sums to manage the crisis. However, the same zeal is missing when it comes to rebuilding the economy, infrastructure, and eradication of poverty.
Since 2010, the government has sought to manage public debt through austerity. Direct investment by the state in new industries and infrastructure has become a taboo. The preferred policy has been to hand cash to the private sector which has only been happy to use it for dividends and executive pay. For example, £75bn has been handed to rail companies in the last decade, and service is worse and more expensive than ever before. Avanti West Coast managers joked about receiving “free money” from government and performance-related payments being “too good to be true”. The cash handouts have neither reduced public debt nor stimulated the economy. In 2010, the public debt was around £1.03 trillion (65%of GDP), rising to £1.791tn (79.1% of GDP) in February 2020 just before the pandemic. By February 2024, public debt rose to £2.659trn, 97.1% of GDP.
Debt can be used to rebuild the economy even if Labour and Conservatives are hostile to it. The Post-Second World War boom was built upon direct public investment in new industries and social infrastructure. In 1946, public debt stood at over 270% of its GDP. This provided jobs and fuelled demand. It fuelled corporate investment as the state bought goods and services from the private sector. It laid foundations of emerging industries, such as biotechnology, information technology, aerospace and more specially as the private sector showed little appetite for long-term investment and risks. Within a generation, the public debt came down to 49% of GDP and I can’t recall our parents and grandparents fretting about the public debt.
Instead of a dynamic state, both Labour and Conservatives support further cuts in public spending even though that will reduce investment, slow economic growth, and inflict long-term damage. Too many public buildings and schools are crumbling away. The government response is that college spending per student aged 16–18 in 2024 will be 10% below 2010 levels, and about 23% below them for school sixth forms. Since 2010 local council funding has been cut by 23.3% in real terms, leading to degradation of public services and higher council tax on hard-pressed households. Hospitals in England have a waiting list of 7.6m appointments. None of this can be addressed by adherence to arbitrary fiscal rules.
There is a strong case for redistribution of income and wealth, but Hunt and Reeves ignore it even though higher disposable income for the less well-off has a greater multiplier effect. No amount of economic growth can be sustained unless people have good purchasing power to buy goods and services. Both parties reaffirm their faith in trickle-down economics which has seen wealth sucked upwards and prevent economic recovery. The UK has 171 billionaires with combined wealth of £684bn. The richest 1% of the population has more wealth than 70% of the population combined. The richest 10% of households hold 43% of all wealth, and the poorest 50% own just 9%.
A typical FTSE100 CEO surpasses the median annual wage of a worker after just 3 days. Despite real increase in GDP, the real average wage of workers is stuck at the 2007 level. In February 2024, the pre-tax median annual pay was £27,972. Corporations are declaring record profits, but wages are not enough to live on. 38% of the universal credit claimants are at work. Some 17.8m adults have income of less than £12,570 a year. Out of a population of about 68 million, despite welfare payments 12m people (18% of the population), including 4.3m children live in poverty. Part of child poverty is manufactured by the government’s austerity policies. Since 2017, the government has imposed a two-child benefit cap which deprives some 402,000 families of £3,200 a year. Labour have promised to continue with the cap.
Taxation can be used to redistribute but both parties have promised not to eliminate tax perks of the rich or broaden the tax base. Billions can be raised by aligning capital gains tax rates (10%-24% from April 2024) with income tax (marginal rates of 20% to 45%), taxing dividends at the same rate at wages, charging national insurance on investment income, levying wealth taxes, financial transaction taxes, restricting pension tax relief at 20% (the basic rate) only. Neither wants to reduce indirect taxes which hurt the poorest the most. For example, the poorest fifth pay 28.3% of their disposable income in indirect taxes, such as VAT, compared with 9.0% for the richest fifth.
Labour is counting on the unpopularity of the Conservative Party to catapult it into power but in the absence of specific policies and failure to improve quality of life, electoral goodwill will quickly evaporate. Therefore, it is imperative that it develops and delivers policies that will end the Conservative neglect, give people hope and deliver prosperity to the many not just the few.
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
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