Schools at risk of falling down. Councils going bust. If ever there were any doubts that the Tories are on course to be booted out at the next election, then the events of the past few days have surely dispelled them. The government is a shambles and needs to be put out of its misery.
As with any party that has been in power a long time, past policy errors have started to become glaringly apparent. There are specific reasons why Birmingham council has run into problems, but it is far from alone. Councils are in financial difficulties – and have been forced into risky money-making schemes – because they have been starved of cash since 2010. In the years of austerity that have followed, repairing schools has not been a priority.
The Conservatives have also run out of luck. Even when there has been good news recently, such as the hefty upward revision to post-lockdown growth announced last week by the Office for National Statistics, it has been outweighed by the fallout from the latest policy screw-up. Rishi Sunak is heading for defeat, and the only real issue is whether he can keep that defeat to respectable proportions.
Labour’s approach is to play things ultra-safe and leave no flanks exposed. The latest example of this was the categorical announcement by Rachel Reeves that she has no plans to introduce a wealth tax. “We won’t be doing that. It’s a denial,” the shadow chancellor told the Sunday Telegraph last month.
As an election-winning strategy, this approach has its merits. At all costs, Labour wants to avoid a rerun of 1992, when the campaign was dominated by the proposal by the then shadow chancellor, John Smith, to introduce a new top rate of income tax. As today, the Tories were defending a rotten economic record, but managed to switch the focus to Labour’s alleged “tax bombshell”. It was classic project fear stuff, and it worked.
That’s not to say the Reeves approach is politically risk-free, because it isn’t. When the next election arrives, voters will want to hear more from Labour than how the Tories have mismanaged the economy for the past decade and more; they will want to know what the opposition plans to do to put things right. And, if the answer is that nothing much will change, Labour’s apparently commanding opinion poll lead could shrink.
But the drawbacks of Labour’s safety-first approach will really be exposed only if and when it wins power. That’s when the problems will start in earnest. In 1997, the last time Labour won an election as a party of opposition, the economy had been growing strongly for five years. Today it is flatlining. As in 1997, years of public sector neglect will need to be addressed. Pressures to spend more on an ageing population are bound to increase.
Reeves says Labour will speed up the economy’s growth rate and so generate the revenues for higher public spending without the need for higher taxes, but this is a triumph of hope over experience. Raising the pace at which the economy can sustainably expand will be a gruelling process that will take years to bear fruit, and it is fantasy to assume otherwise.
Sooner or later, Reeves will need to accept the inevitable. Taxes will need to be raised in order to do the things that Labour desires: repair schools, reduce NHS waiting lists and stop councils from going bust. As the Institute for Fiscal Studies put it in a recent report: “Without tax rises, UK public service and benefits provision will not simply tread water, it will deteriorate. Unless levels of tax increase substantially, a reduction in the scope of the public services that the British state provides is likely inevitable.”
That’s a sobering but realistic assessment. Although taxes as a share of national income are at their highest in 70 years, they will need to be even higher. The only real question is who is going to pay them – and taxing wealth more stringently is the obvious choice.
Incomes adjusted for inflation have barely risen since 2010, while asset values – house and share prices most notably – have soared. In large part that’s down to the impact of low interest rates and the money creation scheme known as quantitative easing, both of which have encouraged speculation. The richest 10% of households own almost half of the UK’s wealth, the bottom 50% just 9%. Britain’s tax system encourages investment in bricks and mortar rather than innovation, symbolised by the fact that there is no capital gains tax on the sale of main residences. Reforming the tax system so that it better serves employees rather than rentiers would help to boost the UK’s growth potential.
By ruling out a new wealth tax, Reeves appears to be denying herself a lucrative source of revenue, but things are not necessarily that bleak, according to Prof Richard Murphy, a tax expert. He says Labour is right to rule out a bespoke levy – something that he says would be difficult to collect, owing to the ability of the super-rich to employ the best financial advisers and lawyers – but it can more easily tax the wealthy through the current system. To take one example, the better-off get higher rates of tax relief on their pension contributions than those earning less. Restricting pension tax relief to 20% would raise up to £14.5bn a year, according to Murphy’s calculations.
There are other options, too. For example, national insurance is currently paid by workers, but not by landlords. Capital gains tax could also be raised. Financial services could lose their exemption from VAT. In total, Murphy has a list of 30 reforms that he says would raise £50bn a year for Reeves, enough to pay for both better public services and tax cuts for the less well-off.
Politically, a one-off wealth tax on plutocrats is an easier sell than telling someone earning £60,000 a year that the tax relief on their pension contributions is going to be cut. But while it is human nature to want somebody else to foot the bill for better public services, a degree of honesty is needed here. Taxes in the UK are high by historic standards, but not when compared to most other western European countries. If it is a fantasy to think that all will be well if the economy can grow a bit faster, then it is also a fantasy to assume that all will be well if the super-rich are stiffed for a one-off tax.
Labour needs to start telling it as it is. Significantly, perhaps, Reeves has ruled out a new wealth tax but has not said what her plans are for the taxes that already exist. That is wriggle room she will need to exploit.