by Bob Lyddon – 4 minute read
A VOTE FOR LABOUR was always going to be a no-risk action, as my Global Britain paper suggested, the result was certain disaster. Now it unfolds.
We have had the announcement of Miliband’s Net Zero follies and Rayner’s housing targets for concreting over the green belt, both soon to be facilitated by the melting of planning regulations.
Then, on Monday 29th July, we got the unveiling of Rachel Reeves’ ‘plan’ for the economy and, as I wrote an extensive analysis on, it is exactly in line with her Mais Lecture in March, though none the better for being revealed in action:
- Ensuring our energy supplies from our own resources are cut off before any of Miliband’s follies are complete, by raising and prolonging the windfall tax on North Sea oil and gas profits: Shell already announced the sale of a raft of its North Sea assets;
- Accelerating the imposition of VAT on private school fees, ensuring the switching of 1000s of pupils into the state sector – the equivalent of an unquantifiable spending commitment;
- Means-testing pensioners’ £200 winter fuel payment, meaning depriving 11 million pensioners of it.
This last action was not contained in the Labour manifesto, though in fairness very little was, and indeed there was no popular support for the manifesto: the same people voted Labour as have always done so. There was very little swing to Labour (only 1.7%), and no popular mandate.
The move on winter fuel payments exposes how thin Reeves’ assurance is that taxes on ‘working people’ will not be raised: pensioners are by definition not ‘working people’ so they are ripe for having their pockets picked.
There is no doubt the Conservative Government mismanaged the public finances in their final years in office, although several indicators are better than when they came to power in 2010. They will have window-dressed the figures in the way of all politicians looking towards a General Election, but limited by the existence and roles of the Office for Budget Responsibility and the Office for National Statistics.
Reeves’ contention that ‘it’s worse than we thought’ is sustainable solely thanks to Labour’s Commons majority, not thanks to truth. It is a smokescreen and a distraction from what her initial actions have been – to make the situation she criticised worse. Reeves’ solution to the Tories having let too much seep through the floodgates is to throw them wide open.
We have the award of above-inflation pay rises to millions of workers-from-home in Labour’s supporters club – the public sector. An award of 22.3% over two years to the junior doctors, to buy them off, ought to be illegal. These pay rises are crassly inflationary.
We have the vindictive imposition of VAT on private school fees which will move pupils into the state sector and cause expenditure to increase for local authorities.
These are unfunded or unknown spending commitments. In what way do these differ from the supposed ‘unfunded tax cuts’ that necessitated, according to the ‘grown-ups’, the defenestration of Liz Truss and Kwasi Kwarteng?
This extra spending is immediate, substantial, inflationary, and part of the ‘day-to-day’ expenses of the public sector, which are in deficit (by £14.5 billion in June), and which Reeves contended should be brought into balance and without increasing borrowing.
She has ensured, at least between now and the implementation of her October budget, that the monthly deficit will get worse, and that borrowing will increase.
It beggars belief that Reeves sees no contradiction in painting a picture for the domestic audience that the UK is a fiscal basket case thanks to the Tories, needful of major and immediate increases in public sector wages and draconian (and probably ineffective) tax increases to follow, whilst at the same time planning to project to an overseas audience that the UK is a ‘safe haven’ compared to the Eurozone and an investment paradise poised to ‘crowd in’ tens of billions of pounds for Miliband’s Great Net Zero Bonanza and Starmer’s National Renewal.
Both versions cannot be true.
The Bank of England reduced interest rates by ¼% on 1st August, and would have hoped that a ‘soft landing’ of the US economy would signal better global economic conditions, and an end to inflation. Instead global shares have fallen sharply in response to US economic weakness, and a quicker pace of Bank of England interest rate cuts might be needed to avert recession here.
But how can rates be cut when public sector pay is being increased by between 3% and 19% above inflation, and when those pay rises are unfunded spending commitments that increase public borrowing in the short term? How can interest rates fall in the medium term against a background where the amount of extra tax that will be raised by Reeves’ current and future measures is no matter of certainty but the extra spending is?
VAT on private school fees will not raise 20% of all private school fees paid last year: let’s posit that 20-30% of pupils will be withdrawn. The 20% VAT on 70-80% of the fees may or may not be enough to cover the extra cost falling on the state sector. The outcome will be net revenue nowhere close to the £1.5 billion claimed in Labour fiscal plan, and it may even be a net loss.
The same can be said of the windfall tax on North Sea oil and gas profits. What if extraction tails off and no new investments are made? Then the tax take drops off and disappears entirely at some point. This measure was supposed to raise £1.2 billion but is one that could easily be net negative.
Reeves, with her adherence to ‘modern supply-side economics’ (which has no relationship at all to ‘supply-side economics’) may not have heard of the supply-side economist Arthur Laffer, perhaps because she does not wish to think about the ‘Laffer Curve’. The UK has reached – and Reeves’ measures prove it – the inflection point on the Laffer Curve where increases in tax scope/rates cause tax receipts to fall.
The further tax-raising measures being bandied around – favoured no doubt by Pensioner Hater General, Sir Edward Troup – include on capital gains and on inheritance, but these are not guaranteed to bring in substantial cash and quickly. Death may not be avoidable but pensioners are living longer. Realising a capital gain is discretionary and can be postponed.
Reeves seems to have forgotten that asset prices can go down as well as up: if the UK is a basket case as Reeves says, they will go down, reducing capital gains and reducing estate values for death duties. Labour think tanks argue these taxes are acceptable because they do not affect many people: then they won’t bring in the required huge amounts of extra tax, will they?
Only rises in income tax, National Insurance and VAT can bring in the large amounts of extra tax that are required now that Reeves has declared the UK to be a fiscal basket case and then opened the spending floodgates.
What we saw on July 29th was an economic incompetent making unfunded new spending commitments that cannot be met by either borrowing (according to market discipline and her own fiscal rules) or tax increases. This person inflicted an extinction-level recession on our North Sea oil and gas industry.
How can anyone imagine that Reeves and her team of vindictive tinkerers can magic up economic growth, or attract foreign investors other than via bribery – cooking up schemes under which they expose the UK public and businesses to being milked via high charges for road usage, water and electricity (there won’t be any gas) in addition to their paying far higher taxes?
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Bob Lyddon is an independent financial analyst specialising in international and central banking. The views expressed are the author’s own and not necessarily those of Global Britain Limited.
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