Ryan Bourne: The tax hikes that could fall in the south. And tear the Tory coalition apart

22 Jun

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

Who’s going to pay for all this? Andrew Neil’s GB News interview of Rishi Sunak has changed the fiscal conversation. The Chancellor deflected the question by saying he couldn’t discuss tax policy outside of Parliamentary “fiscal events.” Convenient. But many commentators are “rolling the pitch” for higher taxes to fund all this higher government spending already – often devoid of context of today’s true burden.

Much debate starts with the ahistorical view that the UK is a “low tax” economy. Yet revenues from taxes are already forecast to exceed 34 percent of GDP every year from 2023/24 onwards—a threshold not breached in consecutive years since Hugh Gaitskell and Rab Butler were Chancellors in the early 1950s. The world wars don’t bode well for the longer-term legacy of an acute borrowing shock either. Ten years’ after World War One, the tax burden was 12.5 per cent of GDP higher than pre-war; ten years’ after WW2, it was 11.4 percent higher again.

The pandemic is shorter and less destructive than mass mobilisation wars. We also don’t need a second welfare state. But we do have an aging population and slower growth. With those pressures, any government unwilling to reform age-related entitlements and committed to major new state investments will need revenues eventually.

Internationally, many Western European countries tax their populations more heavily than us. The UK was just below the OECD average as a share of GDP in 2019. But UK taxes are already higher than in English-speaking developed economies: Australia, New Zealand, Ireland and the United States. The rises that Sunak has pre-announced would take us close to the levels of pre-pandemic Spain and Poland. Go a bit further, and we will have gone Germanic.

That, sadly, appears where we are headed. ConHome’s Editor explained yesterday that  “levelling up” need not mean just more tax-and-spend, but might be centred on the supply-side. He should tell CCHQ. The “levelling up” member survey recently used that banner to ask for views on more NHS spending, the “lifetime skills guarantee,” catch-up schools funding, infrastructure investment, the Towns Fund, and money for high-street regeneration. The direction of travel is clear: levelling up means more redistribution—hence why a strange coalition of fiscal conservatives and certain level-uppers want to whack up taxes on the old Tory base to shower the new.

This is where the politics of tax becomes interesting though. For the “progressives of all the parties” have talked so far as if “someone else will pay” for any largesse. Polly Toynbee says that UK voters want a Scandivanian welfare state with US-style tax rates. But it’s the redistributionists that are selling the Red Wall something for nothing. How about “asking for more” from the top one per cent, big tech companies, wealthy homeowners, tax-avoiding multinationals or other bogeymen, they say? Ordinary hard-working families will be spared for all the goodies.

As a new Institute for Fiscal Studies tax tool shows, however, the difference between the UK and the big governments of Western Europe is not lower taxes on the rich. No, broad-based social security contributions are higher in Europe. The evidence there suggests a more generous welfare state or higher permanent spatial redistribution requires tax rises “larger for the median worker than for one near the top of the distribution”. Good luck selling to your new blue-collar voters.

And so, thus far, an unwillingness for broader hikes, coupled with an uncertainty about the wisdom of burning the old base, has meant that the “tax debate” has been all smoke and mirrors. Efforts to raise revenues have been stealthy. The headline Corporation Tax rate is being raised again, with Sunak stating that it was “fair and necessary to ask businesses to contribute.” Of course, research shows the ultimate burden of profit taxes falls on workers, as well as shareholders – not the message the Chancellor would be keen to promote.

Income tax thresholds have similarly been frozen until 2026, and the 45p rate threshold has been kept at £150,000 since 2010. This will slowly lure more and more upper middle income families into higher tax nets. The problem is that spiralling spending demands quickly use up the options which voters don’t notice. Eventually you need other big sources of revenue, and that’s when the discussion usually re-centres on taxing savings income or pensions more heavily, or indeed hiking property taxes—despite the fact that the UK has the highest overall property tax burden in the OECD already.

Let’s leave aside the economics here. What do these policies all have in common? Well, the highest earners, the more expensive properties, and those with the highest savings are more likely to reside in the South East. The only Conservatives making the running on the “who is going to pay for it?” question so far, then, are those level-uppers who want to whack the South East to keep the goodies for the north flowing.

Yet not all are convinced. This is a growing Conservative faultline among MPs and the party’s voters. The Brexit coalition incorporated relatively affluent home counties’ areas and a working class elderly base nationwide. For some Westminster types, it simply makes sense to deliver for the new voters by squeezing the south.

Others, though, think the older working class Northerners don’t want Labour-lite, and that the best way to deliver for both would be targeted hawkishness on spending. For what it’s worth, Dominic Cummings told me: “the gvt wastes so much I’d rather save and not put up taxes.” He usually understands what these voters truly want, but would Johnson’s government slay any meaningful spending projects without him?

Tax policy, I suspect, will really test this Tory coalition. Hot housing markets in the South East have widened regional wealth inequality in the past 15 years, but after-housing-cost incomes have risen slower in London as people rent or service large mortgages. So many people feel squeezed, even before new tax bills come in. And massive geographic redistribution occurs already: London and the South East generate large public sector surpluses—averaging net public surpluses of £4,350 and £2,380 per person.

Now I’m not going to go all Mary Riddell and suggest last week’s by-election result already reflected a middle-class tax revolt. But if the mood music is for higher and higher spending in the North, and the conversation about paying for it focuses on raising property taxes, raiding pension pots, taxing savings, alongside stealthy income tax squeezes for the middle-classes, would it be surprising if voters in traditional Tory heartlands reassessed their allegiances? In a world of ever-rising spending and an unwillingness for broadening tax bases, there’s only so long the Chancellor can obfuscate on who will really pay.

Iain Dale: The student said men are physically stronger than women. Now she’s been referred to the Student Disciplinary Board.

21 May

Iain Dale presents the evening show on LBC Radio and the For the Many podcast with Jacqui Smith.

On Wednesday, Ryan Stephenson was selected as the Conservative candidate in Batley & Spen. The way some Tories are carring on, it’s already in the bag.

This is dangerous talk. Hartlepool is not Batley & Spen. Not all northern constituencies are the same. Indeed, this used to be a Conservative seat, with Elizabeth Peacock representing it from 1983 to 1997.

Since then, it’s been fairly solidly Labour, although at the last election the majority was reduced to 3,525. That year, an independent candidate, Paul Halloran, polled more than 6,400 votes, the majority of which seem to have come from Labour, if you compare the 2019 result with that of 2017.

Will Halloran stand again? I’ve had a look at his Facebook page, and he’s certainly strongly hinting that he might. However, if Jo Cox’s sister, Kim Leadbeater, gets the Labour nomination – the party is selecting on Sunday – that might put him off.

Labour seem to have learned their lesson from the disastrous imposition of their candidate in Hartlepool from a shortlist of one. This time, the local party will have a selection of candidates to choose from.

Everyone is assuming that Leadbeater is a shoo-in, but one should always remember that local candidates, though often seen as a real advantage by commentators, usually have local enemies. And local Labour Parties are usually a hotbed of plotting and chicanery.

Finally, it appears that George Galloway will be throwing his Fedora into the ring. He will try to win the substantial Muslim vote, which would normally be expected to row in behind Labour. The result of this by-election could well depend on how successful Galloway is.

For that and many other reasons, this by-election is likely to become the most well covered by the media for many years: indeed, this site carried a report from Andrew Gimson yesterday. Put your seatbelts on and hold tight.

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The other by-election on the horizon is Chesham & Amersham, on June 17th. The Conservative candidate, selected a fortnight ago, Peter Fleet, has a majority of more than 16,000 to defend.

On the fact of it, the seat doesn’t look like the place where political earthquakes take place, but stranger things have happened. I was listening to the LibDem podcast this week (so you don’t have to), and they certainly have their dander up and think they can win it.

They base this on the fact that the seat had a 55 per cent Remain vote (or at least did in 2016). I’m not sure how relevant this is any longer. I mean, ‘Bollocks to Brexit’ worked for them so well in 2019. The vaccine rollout has certainly converted many people to the Brexit cause as well.

But complacency is the enemy of victory, and Conservative strategists should certain not rest on their laurels.

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Yet another example of the world going completely mad. A student at Abertay University, Dundee has been referred to the Student Disciplinary Board because in a seminar on Gender, she had the temerity to state that men are physically stronger than women.

This is obviously a thought crime and, in true Orwellian style, she must be banished to the Student Disciplinary Board for correctional training. And they say there is no need for a Free Speech Bill (Universities) Bill…

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Looks like the West Ham Variant will be hitting Europe in August… Come on You Irons!

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For the last three and a half years, I have hosted an hour-long panel show called Cross Question on a Wednesday evening on LBC. It’s similar in format to Any Questions or Question Time  with the main difference being the questions come from our callers.

We had to pause it during lockdown, because we couldn’t have four guests in the studio. But, since the beginning of March, we’ve had them all on a giant Zoom wall, and it’s worked rather well.

I deliberately keep the tone light and discourage too many heated confrontations. If people talk over each other on Zoom it sounds far worse than it does if they’re physically present. What I have found is that this engenders an atmosphere of positivity, with panellists agreeing with each other surprisingly often.

As well as big name politicians and commentators we’ve also used the show to try to discover new talent too. This week, we had Ndidi Okezie, chief executive of UK Youth on. She was an absolute revelation, with original things to say on every subject we covered. And we covered a lot of ground.

The show has been so successful that from next week we’re going to be doing it three times a week (Monday, Tuesday, Wednesday), live from our new studio in Westminster.

On Monday, we have a very tasty first panel with Diane Abbott, Sarah Vine, Polly Toynbee and Brandon Lewis. Our challenge is to keep up the quality of the guests, given that we’ll have three programmes to fill every week. And the great things is, as well as listening people are able to watch via the Global Player or Youtube. That’s modern radio for you!

Kristian Niemietz: What difference does the size of the state make to how is deals with Covid? None.

9 Feb

Kristian Niemietz is Head of Political Economy at the Institute of Economic Affairs

We are not having a very good pandemic so far.

With over 1,500 deaths per million people, Britain has one of the highest Covid death rates in the world. You can quibble a bit with those figures, but only at the margins. The number of excess deaths – that is, the number of deaths over and above what we would expect in a normal year – matches the number of Covid deaths far too closely for this to be a statistical fluke.   

In addition to having a higher Covid death rate, we have also had a worse economic downturn than most comparable countries. The UK economy shrank by about 10 per cent in 2020, compared to a European average of seven per cent, and about five per cent in North America and Japan.

And it is not as if we had lighter or shorter lockdowns than others. Our only redeeming feature so far has been the very fast approval, procurement and rollout of the vaccine. But there can be no denying that at least until the end of 2020, the UK has been coping extremely badly with this pandemic. The question is why.  

Britain’s left-wing commentariat was quick to ascribe all this to “austerity”. For example, Polly Toynbee, the Guardian columnist, talks about “an incapacitated public realm, naked in the blast of this epidemic. It wasn’t just the NHS and social care […] but every service crippled by cuts: public health, police, local government, the army and Whitehall – all denuded.” 

Owen Jones, the arch-Corbynite writer, asserts: “a state hollowed out by austerity and market dogma is, in large part, to blame: it cannot be stressed enough that it is mostly because of these ideologically driven failures that Britain has been – is – one of the worst-hit countries on Earth.”

Michael Marmot, the “inequality czar”, wrote a Guardian article with the self-explanatory title “Why did England have Europe’s worst Covid figures? The answer starts with austerity.” 

I could easily find dozens of similar quotes, but you get the gist. It is a highly fashionable opinion. But as is usually the case with fashionable opinions, it is also completely baseless.

“Small-state Britain” is a myth. Despite all the waffle about “austerity”, in 2019, UK public spending still stood at about 40 per cent of GDP. This is a perfectly normal figure for an OECD economy, neither unusually high, nor unusually low.

But that is beside the point anyway. As I show in my new report Viral Myths: Why we risk learning the wrong lessons from the pandemic (published by the Institute of Economic Affairs), the size of the public sector is completely unrelated to how well, or how badly, different countries have been coping with the pandemic.

If the size of the state were the critical factor, Belgium, where government spending accounts for over half of GDP – one of the highest levels in the world – should have been superbly prepared for the pandemic. Alas, they were not. With a Covid death rate of over 1,800 per million, they did even worse than Britain, and their economy also shrank by over eight per cent.

In Italy, where public spending accounts for almost half of GDP, both the Covid death rate and the economic “growth” rate are about the same as Britain’s. France, which has perhaps the largest state in the world (unless you count North Korea and Cuba) fared somewhat better than Britain, but not by a huge margin.

Australia and New Zealand, on the other hand, fared better than most developed countries, with public spending levels that are (moderately) lower than the UK’s. South Korea, with public spending levels of less than a third of GDP, was one of the star performers, and so were Taiwan, Hong Kong and Singapore, where public spending stands at less than a quarter of GDP.

It was not government largesse that saved the best performers. It was specific policy packages, containing measures such as early travel restrictions, a rapid roll-out of mass testing, effective test-and-trace-and-isolate systems, and a rigorous enforcement of quarantining requirements (combined with financial support to make this economically viable).

This is, of course, Captain Hindsight speaking. Being right with the benefit of hindsight is, admittedly, not very impressive. But it is still better than being wrong despite that benefit.