In the wake of the May 2021 Hartlepool by election and the botched reshuffle of Angela Rayner, Keir Starmer was widely accused of possessing “no politics”: a competent bureaucrat innately lacking the ‘what it takes’ skill and instinct set to survive in frontline Westminster politics let alone that needed to climb Labour up its electoral mountain to power again.
That shroud of doubt has emphatically lifted. His last two years as leader has been marked by an increasingly assured leadership style, which while not capturing the nation’s imagination nor even enthusing a coherent vision or strategic interlocking policy map, has been a central feature of, if not instrumental to, Labour’s sustained and continuous electoral lead over the Conservatives, seemingly big enough to win a large overall parliamentary majority later this year; a prospect that was hardly even imaginable in the aftermath of Labour’s 2019 electoral defeat.
Starmer has in the past compared himself to Harold Wilson. Parallels with Wilson’s election victory in 1964 are indeed discernible, not least in the replicated existence of a deeply unpopular incumbent Conservative government, mired in incompetence, corruption and sleaze; tired of, and waiting, if not begging, to be relieved of its responsibilities after 13 increasingly tumultuous and divisive years.
Both came from humble backgrounds with their meritocratic rises stemming from their understated ability, determination, and diligence, not performative charisma nor entitled confidence.
Although Starmer is lawyer rather than an economist and statistician, who grew up in a southern commuter rather than a northern mill town – Oxted rather than Huddersfield – their backstories were and are in keeping with the economic geography and the social spirit of their respective times, exuding lower middle England ambition and capacity for hard work, not upper-class privilege.
Differences, of course, there are. The UK in 1964 still benefited from a historically sustained and robust established pattern of economic growth sufficient to reduce the post war debt to gdp ratio (by increasing the numerator) and to provide additional resources to expand real wages, personal consumption, and public services.
It was one, however, that was becoming progressively prone to shallow recessions getting deeper, constrained by a worsening balance of payments problem that in era of capital controls and fixed exchange rates could not then be by-passed by foreign borrowing and sterling depreciation.
And, unlike 1997, when New Labour inherited from its predecessor a recovered and improving economic and public finance position, a new Starmer-led Labour government will inherit an economic legacy marked by a prolonged period of sustained stagnation of growth and productivity, a record peacetime-incurred debt/gdp ratio, and medium-term public finances predicated on the future withering way of the welfare state.
Unable therefore to rely upon an already established mixture of steady growth and modest inflation to deflate that ratio down, the task of a Starmer-led government will be made that much more difficult by rises (see debt increases chart) in interest-rate related debt servicing costs from close to one per cent in 2020-21 to four per cent of gdp in 2022-23, even should some stirrings of renewed growth begin to take root in the real economy.
Not only the debt-gdp ratio, but the tax to gdp ratio also stands at a record post war level. Although both were partly propelled by covid-related spending, their overarching driver is the reduced and stagnant post-2010 post-covid growth record that has become a structural feature of the modern UK economy.
The fiscal austerity of the Cameron/Osborne years hollowed out public service provision to the point that that future political space for further cuts was all but used up: that is without a risk of inducing an electoral backlash and assuming a future governmental willingness to further reduce the coverage and quality of universal public services through cutting into their bone.
Self-denying governmental ordinances and electoral promises not to increase headline direct tax rates combined with stagnant growth also meant that successive governments have had instead increasingly resorted to stealth sources of taxation and/or promises of future public expenditure cuts to meet an ever more frequently shifting and contingent set of fiscal rules.
The non-indexation of income tax thresholds is the most recent and egregious example of such stealth taxation. In March 2021, the standard rate threshold from 2022-23 to 2025-26 was frozen and not indexed to future inflation – as per the default statutory requirement – at £12,750 and the higher rate threshold at £50,270, which, in November 2022, was extended for a further two years to end 2028-29: just before the next election but one (if the next government serves a full five-year term).
The Office of Budgetary Responsibility (OBR) forecasted in November 2023 (see Table A of link) that this extended freeze, if unchanged, by 2028-29 will raise additional annual tax proceeds reaching c£35bn (£44.6bn, when similarly frozen National Insurance Contribution (NIC) and other thresholds are also taken into account): broadly equivalent, in revenue terms, to a 10% increase in the main rate of employee directly paid Class One NICs.
Freezing tax thresholds mean that rising inflation-related nominal and real earnings are not offset by thresholds indexed to inflation, resulting in progressively larger number of taxpayers paying more tax and national insurance.
That tendency known as fiscal drag, will tip, according to the OBR, 11% more taxpayers into the standard rate, and an eye-watering 68% more into the higher rate band consequently causing four million additional individuals to pay income tax at the standard rate and three million more to pay the 40% higher rate by 2027-28.
Such stealth taxation is a prime product of the real crisis of the fiscal state: the mismatch between the public expenditure requirements of the UK (assuming a continuing public desire and demand for accessible and universal public services on the European social democratic model) and the political and electoral willingness for them to be met through forms of taxation that are efficient, sufficient, and transparent.
The supposed fiscal ‘headroom’ that according to the chancellor, Jeremy Hunt, allowed him last November to cut national insurance, derived from the failure to index both tax thresholds and public budgets to inflation: stealth fiscal measures on both sides of the budget combined with dishonest and/or illusory promises to make substantial cuts to public budgets in the future made to meet a debt reduction fiscal rule, which, when the time comes closer, on past practice, will be shelved or reformulated and/or put forward further in the future – invariably beyond the next due election date.
Another facet of the real fiscal crisis of the state is that both Conservative and Labour parties have progressively withdrawn from offering the electorate meaningful choices concerning tax and public expenditure policy or welfare state (social policy) development; both have tended to mimic or to follow the other to rule out headline personal tax increases or any shift to alternative more economically efficient taxes on wealth and unearned income.
Honest and deep debate on public funding requirements matched to sources is accordingly swerved, invariably subverted to short-term political presentational purposes, causing the fiscal can and the ultimate resolving of the crisis to be forever kicked down the road and made worse in the process.
This may well reflect electoral reality. Whilst the voting public through polling data may collectively express an abstract desire for more to be spent on public services and even to pay more, when push comes to shove individual votes are more likely to be determined by perceptions of the immediate impact of tax measures on their short-term household budget positions.
Hallowed out public services also have diffused impacts. These include delayed justice, limited police interventions for some crimes, planning bottlenecks, higher hospital waiting lists, reduced mental health services, eliminated youth provision, more severely rationed adult social care, declining local bus services, and so it goes; the list is almost endless.
However, taken in isolation, such individual impacts are not usually directly felt by the mass of the population: at any one time, few of us tend to be directly affected by each at an intensity felt sufficiently hard to register an electoral response, (save for possibly health service access), compared to the short-term impact of tax changes affecting swathes of the population directly in their pockets. People of any age or period seldom, if ever, welcome or invite taxes, especially ones that weaken and disrupt their short-term budgets, including the author of this post.
For Starmer and Labour now electoral victory later this year is paramount. Failing to win a majority then would be even more calamitous than it was in December 2019 or in 1992. Labour’s current record poll lead and the general abjectness of recent Conservative governments would mean that it would be akin to a top of a league football team losing to one facing relegation, when 3-0 up with 20 minutes to go, which it needed to win to secure coveted promotion. Snatching defeat from the jaws of victory at all costs must be avoided.
Morgan McSweeney, an established and instrumental key Starmer aide now responsible for 2024 election strategy and organisation, reportedly advised Labour’s National Executive Committee (NEC) last November that the party would need to win at least 162 seats across every country and region to secure a stable working majority – more than Tony Blair did in 1997.
That – notwithstanding current poll leads, fortuitous political developments in Scotland following the partial implosion of the Scottish Nationalist Party (SNP), along with some evidence of favourable tactical voting behaviour occurring in recent by-elections across key middle England and Red Wall battleground seats rather than previously confined to metropolitan and university centres – remains a momentous task, leaving little room for accident, false steps, or complacency.
It underscores why fiscal responsibility and costed policy commitments has been and is the mantra coming from Starmer’s shadow cabinet, setting the limits to its retail electoral offer – a stance quite consistent with both the real fiscal crisis of the state and the electoral high stakes involved.
The Conservatives promise a low tax economy but cannot deliver nor present nor promise policies on the expenditure side consistent with the achievement of that outcome on a structural and sustainable basis.
Labour wants to repair and rejuvenate public services damaged by years of fiscal austerity, correct welfare and other injustices, and extend opportunity to the many, but cannot present and promise concrete policies consistent with such outcomes that would cost money not matched by identifiable tax increases that it cannot present for fear of the electoral consequences.
A new Starmer Labour government according to its current no unfunded service promises regardless of need or justification, will rely on future growth and lower interest rates to generate resources for such strategic purposes, much as the Conservatives now rely upon future but unrealisable public expenditure cuts to provide sufficient space for current and trumpeted future tax cuts.
The sources or drivers of such future growth, however, remain unclear and/or wishfully optimistic. Future falls in interest rates, determined as they will be the Bank of England’s Monetary Policy Committee (MPC), are likely to be gradual.
Starmer’s updated decarbonisation version of Wilson’s 1964 election rallying cry to harness the ‘white heat of the technological revolution’, the Green Prosperity Fund (GPF), already in recent months has been increasingly scaled back in ambition and scale, backloaded to the end of the next parliament with existing government spending included in its posited delayed annual £28bn budget, attached with requirements to lever-in at least three times as much private finance for each unit of direct public investment, and, potentially, most crucially, made explicitly conditional on its rolling out not breaching Labour’s set fiscal rules.
This is despite its flagship investment status, funded by capital rather than current spending, covered by the borrowing for investment fiscal rule component, and the apparent illogicality of making of making a key climate emergency, energy security, or even a growth-inducing programme subject and subordinate to the vagaries and uncertainties of a rigid fiscal gdp/debt rule.
Most economists with expertise in the area consider that such a rule is arbitrary and unnecessary, economically sub-optimal if not downright harmful at times when additional public investment is either vital or necessary, especially one calibrated to a fixed rather than rolling period, subject to wide short-term forecasting swings.
For example in this, a former Treasury and Oxford economist – whose (free to access) blog for decades has consistently made the case for an economically rational fiscal policy – advises that the sole fiscal target should consist of a five year ahead rolling target for the government’s current deficit (excluding public investment), not be attached with any additional targets, and it should apply only outside recessionary periods, while the OBR should be equipped with a stronger remit to police it.
The fiscal constraint is political rather than economic. Of course, any government, whether for populist or short term electoral or for ideological reasons, which indulges in patently unsustainable fiscal policies that elicits such a market unwillingness to purchase its bonds that it induces an upward interest rate spiral, will inflict often lasting economic and social costs and damage, as, in September 2022, did the short-lived Trussonomics debacle. A strong fiscal council institutional check, however, would provide a better defence to that outcome than a nebulous fiscal rule set.
At the end of the day, whether a fixed debt/gdp ratio rises or falls by small micro-percentage relative to gdp at some fixed time in the future without reference to the economic and other circumstances prevailing at that time, will have little or no effect substantive macro-economic effect: subverting the macro-economic and wider governmental policy framework, as a Starmer Labour government seemingly intends, to the mechanistic achievement of such a target over the lifetime of a parliament would simply be crazy, both economically and politically.
Similar considerations apply across Labour’s main other potentially growth enhancing programmes, most notably the housebuilding proposals and planning reforms that Starmer has put his personal stamp on.
These promise a fresh generation of fast-tracked new towns and urban extensions, brownfield schemes, and the expansion of affordable housing; indeed, all integral to the trumpeted achievement of a 1.5million new homes by the end of the next parliament target – an annual average of 300,000 new homes.
For that to have any remote hope of attainment enabling public investment will need to be front-rather than back-ended across the lifetime of the next parliament, freed from an incorrectly defined fiscal debt rule straitjacket.
Sight should also not be lost that net public investment as a share of gdp has fallen in recent years to what most independent commentators consider to economically inadequate levels. That outcome will not be reversed even if annual spending on the GPF did reach £28bn annually sooner rather than later in the next parliament’s lifetime.
In short, Labour’s overriding debt/gdp fiscal rule and its putative detrimental impact on productive investment clearly needs rethinking; certainly, the self-defeating totemic overriding political fetish it has acquired for political electoral reasons over the last two years should be shed, as soon as is possible.
A much better alternative on both economic and political grounds would be to make public investment decisions demonstrably subject to a much robust and transparent selection, prioritisation, and delivery capacity appraisal process, capable of objectively ranking projects based on their clearly demonstrated economic and social returns relative to their claimed cost and capacity to deliver on time and on budget (given the lesson of HS2, optimism bias and uncertainty adjustment clearly should be better entrenched in that process).
This website some years ago in Investing in productive infrastructure presented a possible institutional model for that purpose, accommodated with an expanded remit of the well-established National Infrastructure Commission (NIC). Other models that could secure the same aim given the timescales involved and depending on their relative institutional feasibility could and should be considered.
In that light, it may well be no bad thing that the GPF has attracted critical scrutiny and concerns, including its wish-list nature and unevidenced value-for-money and its effectiveness relative to claimed outcomes justification.
A move to an institutional fiscal council type approach to major public investment appraisal and delivery would be consistent with both better ultimate outcomes and for political support for public investement borrowing, as well as for successful possible complementary linkages with, say, the housing, research and development, and training programmes.
The November 2023 autumn Budget provided an exemplary example of the hall and mirrors and some smoke that characterise modern fiscal events, determined in practice by the political and policy parameters set by the real fiscal crisis of the state.
The stealth threshold freeze was extended by Jeremy Hunt in the aftermath of the Truss interlude debacle to allow the government to present itself as fiscally on track to reduce a shifting debt target without having to impose more salient and politically damaging direct tax increases close to an election; the revenue increase generated is largely back-loaded into later years although fiscal drag during 2022-24, as noted above, gave him some of the supposed headroom for a reduction in the employee NIC rate from 12% to 10%.
This was touted as reducing the record tax burden, which it did taken in isolation at an annual forecast cost of c£9bn (taking account of reduced self-employed NICs that will also become operative in April 2024), but its benefit will be substantially offset and then exceeded for most taxpayers by the continuing impact of the freeze in tax allowances, until and when they are unwound.
Instructively, a January 2024 Institute of Fiscal Studies analysis also reports that the future distributional impact of their combined effect (a de facto tax increase) will vary. An employee earning close to the average £35,000 will be £130 better off over the course of 2024-25 with the maximum gain received at and above the now aligned NIC upper earnings limit and the higher rate threshold of £50,270. But most taxpaying employees earning less than £29,000 will be worse off next year.
But going forward, if the threshold freeze is maintained as planned until 2028-29, an employee on average earnings will by then be paying about £440 a year more in direct tax – because of the combined impact of the changes to income tax and NICs made since 2021.
The other side of that coin is that revenue raised from freezing thresholds this coming April 2024 alone – rather than uprating them by 6.7%, in line with the usual inflation measure – will exceed the annual cost of cutting the NICs rate. A resulting c£3bn net gain next year (depending on outturn inflation and earnings growth) will then balloon to c. £35bn by 2028-29, assuming no further changes.
Starmer’s Story Must Be Labour’s Story published by this website soon after Starmer became Labour leader identified that his key challenge was to fuse strategy with tactics to effectively advance a radical but feasible and sustainable social democratic agenda aligned to current and future national needs.
Hitherto he has combined both to best protect the prospect of electoral victory, without which such an overarching agenda would remain merely rhetorical.
The forthcoming March 2024 Spring budget, as the Institute of Government has pointed out, is an unnecessary second fiscal event occurring within five months of the last one, having little no economic or fiscal management objective purpose or point. It will take place to provide a political platform and mechanism for some good old fashioned pre-election voter inducements.
It will, however, provide an opportunity for Starmer and his Treasury shadow team to combine tactics with strategy to hammer home the message before, during, and in the face of the political spectacle and spin that the extended freeze of income tax thresholds represented one of the largest tax increases made in recent memory.
Most commentators expect the spring budget to include a cut to the basic rate of income tax and changes to inheritance tax, which could even be abolished.
Following the November 2023 NIC cut that became operative on 6 January, Sunak’s government will hope that any tax cutting package that it offers will maintain some hoped-for momentum on voter sentiment up to election day, even though the polling dial, as February approaches, remained unmoved.
The imminent election puts a political premium on salient cuts in direct personal tax rates with associated ‘headline’ short term impacts on household budgets; meeting abstract fiscal rules five years into an unknown future will take very a much back seat, even if it manages to get into the car at all.
A one penny cut in the income tax standard rate even though it would be of little or no benefit to low paid workers who, unlike higher and additional rate taxpayers, will not receive the benefit of such a cut across the entire current standard rate threshold range (£12,570 to £50,270).
The government could combine it with a promise to unfreeze thresholds in later years. As the tax threshold freeze tips ever more people into the standard and higher tax bands as reported above, its maintenance to April 2029 will become increasingly unsustainable as its distortionary and arbitrary effects become progressively understood and felt, making it unlikely that any new government could avoid beginning the process of unwinding it prior to then.
Labour certainly should not weakly commit to accepting an opportunistic income tax rate cut, adding to the self-denying list of potential future taxation measures that it has already seemingly ruled out, including re-aligning taxes on capital gains more closely to income tax, thus constricting even further its future fiscal maneuverability, demonstrating an asymmetry of its treatment of spending and tax commitments relative to its proclaimed fiscal stance.
Instead, based on the independent OBR and IFS work discussed above, it should continue to hammer home the ‘giveth on one hand and taketh more on the other’ message that it has begun to present, while laying bare the tax history of the Sunak government.
Rebasing the basic and higher rate thresholds closer to where they would have been had they been indexed with inflation since 2022-23, would reduce the tax that ‘hardworking families’ in future would need to pay, while offering some future flexibility to taper the benefit receivable by the higher paid and thus its net cost (as well as its distributional fairness), which lower future inflation should also tend to.
That unwinding process could be done in parallel with changes to universal credit tapers and allowances to reduce the poverty trap, where the combination of higher tax and reduced Universal Credit (UC) entitlements result in low-income wage households incurring one of the highest effective tax rates.
Turning to inheritance Tax (IHT), its abolition would overwhelmingly benefit the wealthiest one percent, entrenching not only inter-generational inequality, but also the perception that the Conservatives remain at heart the party of the already wealthy and privileged at resulting electoral risk. Opposed by many Conservative MPs, it is unlikely to occur in March.
More likely is that either the basic nil rate IHT threshold – ostensibly £325,000 but due to significant allowances and reliefs, the effective threshold for most payers is much higher – or the 40% rate or that both will be changed.
IHT is rightly not levied on the living spouse or civil partner of a deceased person’s estate as otherwise they could well be forced to sell their home or to face other financial difficulties at a time of spousal, bereavement and stress.
However, any unused portions of the basic and the additional £175,000 residence nil-rate bands (applicable to those owning but not renting their homes) are then also transferred to the surviving partner. This means that on their death, up to £1 million (£325,000 +£175,000 x2) in assets can be passed on tax-free: an effective threshold that in combination with other reliefs, results in very few beneficiaries of estates worth £1m or less paying any IHT, unless the estate deceased was a renter and/or single, and/or did or wish or was able to employ a tax accountant to reduce future liability.
Unsurprisingly, the wealthiest utilise the services of a small cottage industry of legal and financial advisers to maximise the benefit of the complex and extensive array of reliefs available to minimise their liability to the point that the payment of IHT proportionate to the value of their estate becomes often voluntary.
Various reform permutations involving the removal of the residential nil rate and/or the capping of agricultural and business reliefs, which currently allow the value of farms and businesses held with an estate to be netted off its taxable IHT liability, and/or the bringing in defined contribution pension pots (such as SIPPS) within the scope of IHT, could fund an increase in the basic threshold and/or a cut in rate levied as, for example, was proposed by the Conservative-aligned Onward pressure group in 2022 as an alternative to outright abolition, or most recently as this December 2023 IFS commentary discussed.
The wider socio-economic backdrop to IHT is that taxable inheritances, invariably large and getting bigger, are usually received by beneficiaries in late middle age already wealthy, are realised from the estates of the wealthiest geographically concentrated in London and the south-east.
Those now in young adulthood pushed to the margins of home ownership by rising real prices (translated for existing owners into housing wealth), whose parents had accumulated modest wealth as a product of their lifetime honest toil, their careful spending and stewardship of savings, and from buying their home when to do so was affordable, rarely receive inheritances reduced by IHT.
IHT in general reality in its present form allows the entrenchment of existing and widening wealth inequality inimical to social mobility rather than taxing the cascading of modest inter-generational wealth – largely home ownership equity – within the bulk of the population.
It currently raises c£7bn annually, a figure that is projected to rise in real terms to £15bn by 2032-33, generating proceeds that that any new government will require – at least in the absence of more buoyant and politically less sensitive sources that it can identify and harness – to ride the real fiscal crisis of the state to fund public services subject to increased real cost in an ageing society adequately.
That provides the real-world backdrop that Starmer’s Treasury Team should focus on and convey to parliament, press, and country. They, accordingly, should reject a IHT rate cut (and, of course, abolition, if it was tabled in March) unless it was accompanied by changes to reliefs and effective incidence that would result in the wealthiest estates paying more to the point that the basic threshold could be raised to reduce its future incidence on the moderately wealthy in a way that was at least revenue neutral and which reduced distortionary and rent-seeking behaviour.
But, more fundamentally, Starmer and his Treasury team should go on the offensive to counter the question as to what Labour would specifically do to reduce the tax burden, one invariably asked in isolation from its relationship to the wider public finances, to debt rules, to the rejuvenation of public services, and to the future growth and inflation trajectory, as well as to the UK’s position as a relatively low taxing country compared to certainly its European social democratic peers.
The electorate should be treated with respect and not treated as little children incapable of seeing and understanding that wider picture, as juries of randomly selected members of the public facing complex and difficult issues invariably do, with the exceptions tending to prove the rule.
Notwithstanding the challenge of the real crisis of the fiscal state laid bare earlier, Labour should recognise and project that the voting public will not be taken-in by last minute politically expedient tax cuts, reversed in effect sooner rather than later, consistent with the see-sawing nature of recent tax measures.
The multiple challenges of squaring future public expenditure requirements with tax policy, while turning around a stagnant economy should be honestly conveyed.
In that vein, future Labour tax policy narrative should be underpinned by the ThreeSs (3Ss), the pursuit of stability and sustainability through seriousness, communicated honesty: qualities generally well matched to Starmer’s.
It could embrace the establishment of an Office of Tax Transparency (OTT), provided with a remit to report clearly and comprehensibly the future expected and projected impact of tax changes proposed by any fiscal event on household budgets and on the future public finances, as well as their distributional consequences, defining transparently their contingent assumptions and sensitivities, referenced to alternatives.
One of its first tasks should be to produce a standard user-friendly ready reckoner on the model of that introduced and developed by the Australian government, allowing and encouraging the public and the media to regularly assess the direction of tax (and spending) policy, including the revenue-raising and distributional impact of particular taxes compared to alternatives. The future development of IHT could provide an early case-in-point.
The OTT could then work in parallel with the Office for Value for Money (OVM) that the shadow chancellor, Rachel Reeves, has already signalled will help guide the strategic spending decisions of a future Labour government, identifying and defining system and budgetary changes to make programme revenue spending more effective, efficient, and economical in tune with long-term societal needs and demands, as well as with long-term fiscal sustainability.
The precise scope and detail of the future remit of the OVM remains to be filled-in but a clear and pressing need to review the funding and delivery of public services, and to identify feasible policy medium term directions and reforms is present. It should also complement the work of an expanded-remit NIC to ensure smarter, and more and efficient selection and delivery of public investment programmes, including the nascent GPF.
Examples of future joint-working between a newly established OTT and OVM abound. They could include a review of the triple lock, taking cognisance of trade-offs between its future cost and the timing of future age eligibility and that increasing the age of eligibility disproportionately impacts upon lower income householders; the future sustainable and equitable funding of adult social care and its more efficient, effective, and person-responsive joined up delivery with NHS and local community services, supporting and complementing each other rather than working in silo.
All these new fiscal council-type institutions, if established expeditiously without delay on a strengthened OBR-type model, in effect, would begin and underpin the fundamentally vital process that has to start to address the real crisis of the fiscal state within sustainable and transparent social democratic parameters, as well as provide a more substantive and short-term response to the diversionary ‘return to Labour tax and spend’ jibes that are bound to intrude across the 2024 election run-up.
Such institutional reforms would manifest such a new 3Ss way of working or political methodology in practical concrete form, as required by the enveloping challenges now facing Britain, that could provide a defining hallmark of the next Starmer-led Labour government, as political triangulation was with New Labour, making him in the process a transformative prime minister, with a more legacy more lasting than either Wilson or Blair, in stark contrast to someone who back in 2021 was close to being written-off as one possessing ‘no politics’.
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