In today's Guardian, Will Straw argues that Labour must "pick what it thinks is the right size of the public sector." A wealth tax is one way to protect against cuts.
Alongside a group of “leading leftwing thinkers” including a number of Left Foot Forward contributors, I have a short piece in today’s Guardian outlining where I think “the Labour party should go from here”. I argue:
“The Labour party has to pick what it thinks is the right size of the public sector. Since 1997, public spending has gone up from 36% of national income to 48%. (Before the recession, it was at 42%.) But tax revenues have always been at around 38%, and during the recession fell to around 35%. The reason we’ve got a structural deficit is because Gordon Brown won the argument for investment in public services, but never took on the argument for increasing taxes to pay for it.”
The point is perhaps best made by this graph from the Institute for Fiscal Studies. Where the black and green lines end up is key to what the future of Britain will look like. The Lib-Cons with their series of tax cutting proposals want a smaller state, less redistribution, and a pared down welfare state. If Labour gets its act together, it can limit this scaling back.
This week’s Economist sets out the key strategic challenge facing the Labour party:
“For nothing will make or break the next leader of the opposition like his response to the government’s austerity programme. Oppose it all, and Labour will look incredible. Back it in grown-up fashion, and the coalition will have an easy ride. The tempting third way—supporting “good” cuts but not “bad” ones—will work only if Labour agrees on which bits of spending should go. Underlying this tactical dilemma is the more strategic question of what the left is for when there is no money to spend. Labour’s narrative was once devastatingly clear: the revenues from a buoyant economy should correct the historic underspend on public services. What is it now?”
The Social Market Foundation are on the right track today with a new report titled, “Axing and Taxing” covered in today’s FT. They recommend reducing the deficit with £39.0 billion of spending cuts and £25.3 billion of tax increases. This protects more public spending than under Labour’s plans to reduce the deficit with a 2:1 ratio of spending to tax. Indeed, if one removes from the SMF baseline the Lib-Con measures such as the £6.2 billion cuts to pay for scrapping the £6 billion employer NICs rise, their proposals would mean £32.8 billion in cuts and £31.3 billion of tax increases – close to the 1:1 ratio used by Ken Clarke and Norman Lamont in the early 1990s.
No doubt the SMF’s proposals to means-test child benefit and raise VAT will concern many on the left. But if not these we have to pick something else instead or say how taxes would go up further. In which spirit, instead of the VAT rise, which would be deeply regressive, I would instead pick a wealth tax. As the Political Climate blog points out, “recent data from the ONS show that the top 10% of households own more wealth than the rest put together”. Right-wing blogger Tim Worstall kindly points out the risks of capital flight. One way around this is to target the tax at land, which is hard to move. In an article for Prospect earlier this year, Philippe Legrain called it the “only efficient and fair way to bring Britain’s finances back into line”. After all, 0.3 per cent of Britain’s population owns 69 per cent of its land.
UPDATE 14.06
Alex Barker at FT Westminster picks out an intriguing graph from the SMF report to argue that a modest rise in VAT would actually be progressive if measure on an expenditure basis. It is certainly true that many in the bottom income decile are not the poorest in society since they are students, those on sabbatical, or self-employed people suffering from a bad year who are able to smooth their expenditure by borrowing or using savings. But there are arguably more people at the bottom of the income scale who bolster their expenditure by borrowing beyond their means. Expenditure rankings also say nothing about miserly Mr Scrooges at the top of the income scale. The SMF graph which caught Alex Barker’s eye is actually from an IFS report. They are careful to say only that the expenditure analysis gives a “different picture” rather than a better one.
And while we’re on the subject, this graph from the IFS shows that whichever way you cut it, removing exemptions to VAT – another SMF idea – would be regressive.
To reach hundreds of thousands of new readers and to make the biggest impact we can in the next general election, we need to grow our donor base substantially.
That's why in 2024, we are seeking to generate 150 additional regular donors to support Left Foot Forward's work.
We still need another 124 people to donate to hit the target. You can help. Donate today.
48 Responses to “To defend the cuts, Labour must be clear about the size of government”
Mr. Sensible
1 thing that seems to have struck me, Will, is that Frank Field seems to have learched to the right for his seat with the coalition.
Saying things like there is ‘a clear case for providing more money in the early years to help mothers to stay at home after their child was born’; a clear New Right belief.
donpaskini
Hi Will,
That Social Market Foundation research is total and utter drivel, which looks like it has been written by Treasury wonks who have no common sense.
You know this because you’ve done plenty of actual campaigning – if Labour adopts policy winners like charging people 20 quid to go and see the doctor and privatising the roads then our supporters will think we have gone mad, imagine trying to explain those on the doorstep. It would also completely destroy the coalition of support for the welfare state.
Howard Reed has a much better paper on this subject – it covers ideas like hiring more tax inspectors to collect the tax that people dodge.
The progressive case for a rise in VAT | Westminster Blog | FT.com
[…] Will Straw has run though it at Left Foot Forward, endorsing the SMF argument that taxes must rise i…. […]
Mr. Sensible
Donpaskini you have a valid point I think about tax avoidence.
Hiring more tax inspectors might cost more in the shortterm, but give Britain the tax revenue owed to it.
Fat Bloke on Tour
Will
I fear you just don’t get it.
We ran with a current account deficit in those years because:
1) Uncertain economic climate — global.
2) To finish of the job of re-inflating the public sector including both improving the services, increasing its scale and raising the real wage levels.
Please remember we had lots to do and it save us from the 2001 global recession.
3) We had room to to do this because of the previous years of surplus.
Golden Rule = Balance the current budget over the economic cycle.
Please don’t belittle the legacy, the public sector needed more money and we provided it. Sure it could have been better sp[ent at the margin but please don’t let the concept of the great being the enemy of the good take root.
The Credit Crunch is not part of the norm, an individual economic cycle and its effects should be put to one side.
Equate it to what was needed to be done to win WW2.
Please remember that the Treasury cut back on the re-armament programme in the late 30’s.
They know nothing of the real world, however they are all Hapsburgs in that they forget nothing as well as never learning.
In addition the problems the Treasury has in accurately defoining the boundary between tax evasion and tax avoidance needs to be looked at. Public attitudes need to be looked at, the Tesco DVD / VAT scam needs more publicity, is it really ethical at this time of economic uncertainty?
My thoughts that from 2001 onwards as the tax / capital management industry went into second gear we were losing 1/2% of GDP or £5bill but I may be a bit behind the reality.
Our cry should be total transparency in the private sector.
Our MP’s are rank amateurs on expenses compared to them.
Other areas should be a re-alignment of the CGT / incone tax / Corp Tax so that all those who are set up as one man bands can’t switch their income to suit the prevailing tax rates and regimes.
Again total transparency is required.
On other areas I think we need more info so that the current dog boiling consensus can be shown up for what it really is, a case of the upper middle class wanting tax cuts in te medium term.
Consequently any info on the deficit / national debt position in the 80’s?
Any info on the oil revenues?
The privitisation receipts and how they came to be taken for granted by NL?
The effect of inflation on reducing the headline GDP figure of the national debt?
As you might have guessed, I am accusing Thatch of running a banana republic, great what you can get away with if you have a couple of tame Aussies running the press.
Finally please move beyond the Treasury norms.
The Credit Crunch is a once in 80 years economic event.
It was global and GB / AD’s response will stand the test of time.
Sure it could have ben better, AD was a bit “native” in his analysis.
However Sniffy and the Poisoned Dwarf were a dream team made in hell.
One down and one to go, does Sniffy support the export policies of A’stan or Colombia?
Tea or coffee if you like?