The Prime Minister warned of a “painful” October Budget in a speech on Tuesday – the language could not be clearer in teeing up tax rises and spending cuts to plug the claimed £22 billion ‘black hole’. Thatcher once spoke of cuts as ‘harsh medicine’ – they don’t go down easy, but ‘the patient requires it’. Labour have promised not to increase income tax, national insurance, or VAT; eliminating the shortfall will require some ingenuity. But it didn’t need to be so hard.
The Chancellor’s framing of the £22bn deficit as a ‘black hole’ is neat political messaging, but on current figures, the government will collect around £1 trillion in tax this fiscal year; £22bn seems a small number to fret about. But Labour, in eliminating the big three of income tax, NI, and VAT, have restricted themselves to just £150bn of taxes – squeezing out an extra £22bn is a tough ask.
The £22bn hole, which includes recent public sector pay deals – a can kicked down the road by the last government – is almost exactly the size of last autumn’s £20bn national insurance cut. Implementing several small tax increases risks more political damage than simply biting the bullet and reversing the national insurance cut. We give teenagers a 3-in-1 vaccine booster simply because they prefer one needle to three, even though the dose is the same.
Duncan Robinson points out in the Economist that the so-called ‘pastygate’ – a Cameron-era proposal to apply VAT to pasties, worth just £110mn – produced far more outrage than a 2.5% VAT rise worth £13bn. Labour risks controversy-by-a-thousand-cuts with a tax rise here-and-there strategy. Targeting tax rises to a few groups, rather than the public at large, could cause more trouble than it’s worth.
Tax increases don’t have to be cruel – Starmer has promised that ‘working people’ won’t pay more; “those with the broadest shoulders should bear the heavier burden”. Spending cuts, however, often are, or are easily framed as such. Even if means-testing the winter fuel allowance is desirable, it seems cruel – many voters remember the 90s, when a large number of pensioners, now more likely to be millionaires than in poverty, were genuinely unable to heat their homes. If the government can demonstrate their ability to spend effectively, and, with some luck, the economy does better, the reversal of an NI cut won’t be first on the list of attack lines from the opposition by 2029. A ‘raid on pensioners’ could be.
The PM promised that there will be no ‘austerity 2.0’, but even minor spending cuts to already creaking public services in need of reform is a hard sell. Is an increase to public sector pay coupled with spending reductions really a net positive? Labour’s NHS promises require more money, not less – public spending will have to rise by another £18bn this year just to stay on level pegging.
“If we cannot afford it, we cannot do it” Reeves states, an almost perfect opposite of Keynes’ “Anything we can actually do, we can afford”. Labour should steer clear of this austerity-minded language; Starmer should reject austerity not only because it would be incredibly unpopular, but because austerity is bad policy. Labour is not, and should not be a party of fiscal conservatism – but it’s easy to conflate conservatism with responsibility.
Tax rises should be coupled with spending increases, not cuts – Labour want to ‘tax and spend’, the Tories cry – why this would be a bad thing is not elaborated. Why not have capital gains tax match income tax, if it will pay for better healthcare and more housing (two priorities voters consistently rank as their highest)? Such a tax could be easily framed as one on the wealthy, only intended to equalise the tax burden between the working-to-upper middle and the ‘true’ upper classes.
The reality is, voters are fickle when it comes to taxes – almost everyone wants more ‘good stuff’ from the government, but few are willing to pay more for it. National insurance is one of those taxes that, despite accounting for £180bn of the tax intake, voters pay little attention to. Only a few open their payslip to see their contributions. Council tax is far more unpopular – one of the most obvious, paid by direct debit. Likewise, a 40% ‘death tax’ doesn’t go down well with voters, even if only 4% of us ever pay it.
None of this is to say Labour should go down a populist road. Corbyn’s free broadband promise comes to mind; now is hardly the right time for some massive reform of the tax system. But “Labour increased 12 different taxes in their first budget” is more politically salient than “Labour increased NI contributions by 2%”. Labour needs a clear vision for the future, more than a plan for clearing up the mess of the past. The government must show not only how they’ll pay, but how the money will ‘get us out of this mess’. Johnson’s 1.25% Health and Social Care Levy was hardly bad policy – but it’s not something the Tories could get behind.
Starmer has a real opportunity to show that spending can work (e.g., ‘Bidenomics’). Else, he’ll pay for it down the line if public services are no better than when he entered government. Yes, the tax burden is at record levels – but still below many of our European neighbours. Starmer’s speech lacked what Corbyn and Johnson had – a strong vision. “Short term pain for long term gain” won’t be enough. Infrastructure tied together Biden’s policies, modernism Blair’s, Brexit Johnson’s; what will tie together Starmer’s? He seemed to bristle at the idea of ‘Starmerism’ when questioned.
Fixing potholes goes a long way. “A spoonful of sugar helps the medicine go down”.