![](https://uploads.counterfire.org/uploads/2024/07/reeves-starmer-lg.jpg)
There is in reality plenty of scope for real change if a new government wanted to pursue it, argues Chris Nineham
The King’s speech was high in bills but low in bucks. Very few of the multiple measures announced by the new government involve spending any further government money.
What this illustrates is that the idea that was once at the heart of Labourism, that governments should intervene directly to solve social problems, has been dropped. The concept of ‘tax and spend’ that brought us the NHS, the welfare state, comprehensive education and publicly owned utilities, has become a term of abuse.
Rachel Reeves and Keir Starmer have promised no increase in the main taxes or borrowing and that they will stick to existing fiscal rules set by the Tory government. A redistributive Labourism has been replaced by the idea of an industrial strategy to try to encourage economic growth and persuade private enterprise to invest in the services people need.
The Labour leadership likes to present its approach as responsible, grown-up politics. But the last forty years of free-market policies have proved to most people that big business is much more likely to cannibalise services rather than fix them. The evidence is all around us, in crumbling schools, the housing crisis and the meltdown in the NHS.
The reality is that the Labour leadership are surrendering to the mainstream economic dogma that the market should decide the priorities of society.
Overtaxed?
Their immediate justification is that Britain is overtaxed and deep in debt so no more funds can be raised to pay for the things people so desperately need. This is nonsense. Today’s overall tax bill may be high by British standards, but in fact Britain is only in the middle of the range of tax rates of developed economies.
More important, as any child should be able to see, it’s not just the overall tax bill that matters, but who is paying and how much. Britain (is anyone surprised?) has one of the most regressive tax systems in the so-called advanced world.
Taxes on the rich have fallen drastically over the last few decades. Income tax, nominally progressive, provides the biggest source of government income at 336.4 billion in 2019/2020. But income tax in Britain is much less progressive than in many other countries.
At 45%, the top rate of income tax is way below that of France (55%), Denmark (56%) Sweden (52%) Portugal (53%) Greece (54%) and significantly below that of most of the other stronger European economies.
Meanwhile, regressive, indirect taxes like VAT, Council Tax and Business Rates raise a massive 200 billion. Numerous allowances, reliefs and thresholds hugely reduce potential tax revenue and almost always benefit the rich.
The extraordinary result of all this is that the government’s own data show that the ratio of taxes to income of the lowest ten per cent and the ninth decile (next to top) is exactly the same at 31%.
In other words, very rich people are paying the same proportion of their income in tax as the very poorest.
Inequality
This outrageously unfair tax regime has helped lead to the situation in which Britain is the most unequal country in Western Europe in terms of both income and wealth distribution. At the same time, our public services are in meltdown and on most indicators the UK has a worse health service than any other G7 country other than the US.
To justify this gross level of inequality, Reeves and Starmer like to suggest that higher rates of tax on the wealthy and on business would impede growth. There is absolutely no evidence for this. All of the higher-taxed Scandinavian countries mentioned above for example have more productive economies than Britain. As Pranesh Narayanan, a fellow of the Institute of Public Policy Research explains:
‘The fixation on overall tax levels is a distraction from the real issues. The likes of Germany and France, and many other advanced economies, have seen sustained growth in incomes whilst maintaining much higher tax levels than the UK.’
A recent LSE study into the state of public services called for an increase in public investment of 1% of GDP, or a rise of £26bn a year at current prices. However, as economist Michael Roberts points out, Rachel Reeves and Labour plan just £7.3 billion ‘over the course of the next Parliament’, through a National Wealth Fund ‘making transformative investments across every part of the country’.
The Corbyn-led Labour party proposed £25bn; but the Reeves-Starmer leadership aims to spend just a fraction of what even the LSE economists reckon is needed. In fact, Labour’s plan for us actually implies a fall in public investment as a share of GDP.
It is relying on accelerated growth to give it some headroom to spend more, but there are few if any forecasters who think that is going to happen. If it doesn’t and Labour sticks to its plans not to raise tax income, an already dire situation will become an emergency.
Meanwhile, there is one sector in which tax and spend still applies; military spending. The new Labour government has pledged to raise defence spending to 2.5% of GDP in this parliament, in their words, to secure Britain from the threat of invasion by Russia or China. In reality of course this is to meet the demands of the US and Nato.
Even The Financial Times pointed out in a recent analysis of Reeves’ plans that Labour could raise a lot more funds. The paper argues Labour could increase capital gains tax, it could raise a few billions by dialling back on the Bank of England’s bond sales involved in the unwinding of quantitative easing, and it could make ‘changes to the definition of debt targeted by the Treasury’. All of this is being ruled out, as the FT points out, because Reeves ‘wants to stick with the definitions currently used by the treasury’.
Reeves’ obsession with what she calls ‘financial responsibility’ is then a political choice rather than the basis of any kind of necessary or even plausible economic policy. It is driven by the attempt to get big business and the City on board with a Labour government.
This conforms to the Labour leaders’ instincts. They know that acting more courageously would involve a confrontation with business and the banks, and that is something that they want to avoid at all costs. As Michael Roberts suggests, they have probably been spooked by the banks and bond holders’ attacks on the economy when Liz Truss tried to increase borrowing. Asa Roberts says, ‘The Labour leaders are afraid of a similar investment-strike by financial markets if they borrow “too much”. So instead, they are planning to borrow too little.’
Before you go
Counterfire is growing faster than ever before
We need to raise £20,000 as we are having to expand operations. We are moving to a bigger, better central office, upping our print run and distribution, buying a new printer, new computers and employing more staff.