Can you cut taxes and level up at the same time?

The Conservative leadership campaign has been a competition to demonstrate the best small-state tax-cutting credentials, with little concern for what that means for public services or investment.  Even Rishi Sunak seems to have forgotten the generous promises of the 2019 manifesto, which helped to win those ‘Red Wall’ seats.  ‘A Conservative Government’, it declared, ‘will give the public services the resources they need, supporting our hospitals, our schools and our police.’  There would be ‘millions more invested every week in science, schools, apprenticeships and infrastructure… [and] to underpin this national renewal, we will invest £100 billion in additional infrastructure spending – on roads, rail and other responsible, productive investment which will repair and refurbish the fabric of our country and generate greater growth in the long run.’

The sense of betrayal in Yorkshire, the North-East, North-West and beyond at the failure to follow these promises through is already strong.  Abandoning the new Leeds-Manchester line, the key to Northern Powerhouse Rail, has been a particular source of disgust. Last Saturday’s Yorkshire Post carried a strong op-ed by Justine Greening and an interview with Ben Houchen, Boris Johnson’s favourite elected mayor, both warning their party about the absence of concern for poorer regions in the leadership campaign and the likely consequences at the next election of having let these regions down.  But Conservative party members are concentrated in the prosperous home counties, and there’s little mileage in telling them to pay more tax to level up the rest of the country.

This failure, however, also presents a dilemma for us.  The seats we hope to win from the Conservatives are also mostly concentrated in the prosperous home counties, where we are seeking to attract wavering voters who will look for taxes to be spent on improving investment and services in their own areas.  Richard Foord and Helen Morgan have spoken up about the distribution of Levelling Up funds to their constituencies, and Tim Farron has active interests in rebalancing the country, but this is not a priority that’s so easy to sell on the doorsteps of Wimbledon or Guildford.

Nevertheless, we are a national party, and as Liberals we should worry that our deeply unequal society – our economic inequality easily the widest in Europe – is incompatible with a healthy democracy.  What’s more, we control some Councils in the north of England, have active Council groups on many others and hopes of winning some parliamentary seats in the next election and more thereafter.

We have to find a way to appeal to the sense of national community, even patriotism, to persuade the well-off to contribute to the economic and social recovery of the neglected towns and regions of our country: to make the case for long-term public and private investment, to restore prosperity to the whole of our country. It’s worth reading the Resolution Foundation’s new paper, Stagnation Nation, for detailed figures on the scale of spatial inequality and of the long-term investment needed to correct it.

And we have to attack the Tories for running the country down, for putting lower taxes and squeezed public services before the long-term interests of the nation.  And while we’re at it, we should be pointing out how blatantly Johnson’s government has directed the limited funds it’s provided to Conservative seats at the neglect of wider priorities.  The UK suffers from lower productivity than our neighbours partly because we have skimped on education and training, on FE colleges and apprentice schemes.  But it also suffers because private companies have invested less in the UK than in France or Germany – not because our corporate taxes are higher (they aren’t) but because they are less confident about the stability of our government and its trade and economic policies.

It’s not as easy to make the case for longer-term investment as to promise tax cuts today.  But that’s what we have to do if we’re a serious party, and if we bear in mind that we might find ourselves in a position to influence policy after the next election.  It’s even possible that the spectacle of contenders for the Conservative leadership competing to slash taxes without an apparent care for the consequences may persuade many of our target voters that they are not serious, and we are.

* William Wallace has fought five parliamentary elections in Manchester and West Yorkshire. He is a former president of the Yorkshire regional Liberal Democrats.

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20 Comments

  • How refreshing to hear such common sense good old fashioned radical Liberalism from my old friend, William. I hope those running the party take due note – for there is a mighty vacuum these days north of the Trent.

  • Peter Martin 20th Jul '22 - 12:02pm

    “Can you cut taxes and level up at the same time?”

    A good question when inflation is pushing up into double figures; and, especially as the real issue is about more spending in the regions. Any government should be more cautious than usual about new spending commitments. If conventional economic thinking is applied, the answer is likely to be ‘no’.

    However, if a more enlightened lateral thinking is applied we might include the following considerations:

    1) All government spending comes back as taxes sooner or later so anything and everything can be said to be “fully costed”.

    2) The real test of affordability is the extent of available resources in the economy. If they aren’t there in sufficient quantities then any new spending could be inflationary.

    3) The geographical location of those resources needs to be factored in. New spending in the less prosperous regions is less likely to be inflationary.

    On this basis the answer could be a cautious ‘yes’ to more regional spending. But no general tax cuts until the level of inflation is seen to be falling and under control.

  • Simon McGrath 20th Jul '22 - 12:05pm

    Lord Wallace has to his credit been consistent in his desire to tax Lib Dem voters and potential voters more highly.
    He may have missed though that his colleagues in the Commons have been calling for lower taxes – VAT cut, increase in tax thresholds, opposition to NI increase.

    Has he had any discussion with them about this ?

  • Peter Davies 20th Jul '22 - 2:19pm

    Levelling up was always a desirable outcome rather than a policy. Levelling is relatively easy and does involve higher taxes. Nothing in the Tories history or actions suggests that they ever intended to act on this half of the slogan. Up is a direction we would all like to go but they have been heading consistently in the opposite direction in recent years.

    We have some quite good policies on levelling (notably basic income) but apart from re-joining some European economic institutions, I don’t think we have a distinctive plan to create growth yet.

  • Chris Moore 20th Jul '22 - 2:29pm

    @Peter Martin:

    1. This is false.

    Some public spending doesn’t create taxable income.

    Some public spending does create taxable income, but will produce less tax than the amount spent.

    So you can’t say all public spending is “fully costed”.

    Finally, there is nothing “enlightened” or “lateral” about such dogma.

    2 and 3 are sounder.

  • Brad Barrows 20th Jul '22 - 3:41pm

    @Peter Davies
    The idea of ‘levelling up’ was supposed to be different from just ‘levelling’. Yes, it is easy to level by merely taxing some people more and transferring the wealth to those at the bottom, but that was not the idea behind levelling up which was more about using the proceeds of economic growth to invest in those at the bottom so at to level up through time. Cutting taxes is not an effective way to level up as many of those at the bottom pay little or no taxes.

  • Joseph Bourke 20th Jul '22 - 3:51pm

    When we assess tax policy we always have to consider tax incidence (who ultimately pays whether it be in higher prices or lower take home pay) and equity. Horizontal equity refers to the idea that people in the same circumstances should be treated in the same way. Vertical equity refers to the idea that people on higher incomes should take on a greater share of the responsibility for paying for public services.
    There is much that can be done to make the current tax system more equitable. Virtually every analyst/economist (including the Resolution foundation) recognises the inequity of council tax both spatially and at a household level.
    Capital investment does not require raising taxes. Building new houses is not inflationary whether it is done by the state or private housebuilders. The money created by spending on investment is offset by loan repayments on prior loans. Excess lending for buying and selling of existing housing stock is inflationary.
    Spending in the economy is circular and is income to someone else. That is the case for both public spending and private spending. With more vacancies than there are people seeking employment there is little labour slack in the economy. That is when day to day public spending that requires tax funding begins to crowd out private consumption or requires the transfer of resources to the public sector rather than utilising spare resources.
    The key to higher living standards is what it has always been. Improving productivity among the existing workforce and capital stock with a focus on investment, training, innovation and International competetiveness and an equitable distribution of returns to land, labour and capital.

  • Steve Trevethan 20th Jul '22 - 4:17pm

    Might we adopt a strategy of becoming the political party known for its clarity and honesty?
    Thus we might encourage voters to look longer and deeper than the usual and current, unexplained and context free, slogan of “Cut Taxation!”
    Might we explain that taxation is but one form of money extraction and is one which goes into the public purse and is returned to us in services?
    Might we explain that bank rates comprise another form of money extraction but which is not returned to us in another form but goes to the banking industry and its associates?
    Might we explain that the money extracted in bank rates goes to the very rich from the not rich?
    In other words, only those with debts, which include home mortgages, pay and those who “lend”/subcontract the money creation involved, get the money.
    Might we explain that H.M.G has to “spend” more than it gets in tax in order that there is money for business and domestic uses?
    The attached article is well worth reading on this matter and its author well worth following!
    https://www.taxresearch.org.uk/Blog/2022/07/20/banks-and-building-societies-might-make-30-billion-out-of-increasing-mortgage-rates-not-a-penny-of-which-will-be-due-to-their-efforts-so-when-is-a-windfall-tax-going-to-be-imposed-on-them/

  • James Fowler 20th Jul '22 - 10:32pm

    I’m not sure how levelling up via a policy of tax and spend works for us as a Party at the moment given where our strengths lie. I can see how it might work for the Labour Party though.

  • Chris Bowser 21st Jul '22 - 8:49am

    @Peter Martin

    “1) All government spending comes back as taxes sooner or later so anything and everything can be said to be “fully costed”

    I’m also not sure about this, imagine we decided to build a hospital. In todays world most of that money would end up abroad, think the architects firms, construction companies, materials, the actual labourers and the people actually financing it they are likely to be european or even chinese.
    So there may be taxes paid, but not in the UK

    Then think that the wealthy recipients of the construction money are less likely to spend on goods & services and more likely to invest e.g. shares, real estate etc. these have more favourable tax positions and that’s before we start talking about offshore and non-dom.

  • Peter Martin 21st Jul '22 - 12:22pm

    @ Chris B @ Chris M,

    I did say “sooner or later” re all spending returning to government. Where else can it go? Burnt or lost permanently maybe?

    ChrisB makes the point that “most of that money would end up abroad”, but is “end up” the correct term? Those ££ may be in foreign ownership temporarily. They may be swapped for another currency but whoever then holds them will have the same choice of saving them or spending them in the UK economy. They are unlikely to be spent in someone else’s economy but if they are it will only affect theirs. If they are spent and respent here they will be whittled down as taxes are, or should be, paid on each transaction. More saving, either foreign or domestic, will slow this process down. Less saving will speed it up.

    But “sooner or later”……

  • Linking tax cuts and levelling up suggests that these are the two poles of the political spectrum. That is indeed the received wisdom in our Tory and Labour dominated world, but we should see them as distinct issues.

    Take spending: the test is NOT ‘affordability’ but ‘value’ meaning a scheme-specific combination of low capital cost and low running cost that delivers maximum benefit. If that’s done properly, there is little to no financial constraint because every scheme is paid for by its benefits. It’s how schemes are supposed to be evaluated now but aren’t, not even close

    Take HS2 for example. Revenue projections struggled to justify a cost of £30bn, the ultimate price tag may be over £100bn so >£70bn has been blown, more than twice the benefit. Miscalculations happen but, as Fleming wrote, “Once is happenstance, twice is coincidence, three times is enemy action.” The ‘enemy’ here is those with snouts in the trough and those who go along with it. (NB: I don’t dispute that some scheme was needed, but HS2 is not the right one.)

    The famously Tory-voting Daily Mail readership totally gets the point so it’s political dynamite. Check out best-rated comment on this story from today and its ratio of UP and DOWN votes (692 to 21 just now).

    https://www.dailymail.co.uk/news/article-11034639/Interest-bill-UKs-2-4tn-debt-mountain-DOUBLES-record-19-4bn-June.html

    The lack of value-based thinking makes the UK’s cost-base too high to be internationally competitive and that in turn drives underemployment, poverty, mental stress etc.

  • The OECD has some salient advice on UK tax policy UK’s outdated property taxes favour the wealthy, says OECD
    “In a series of recommendations that will make difficult reading for supporters of low property taxes, the Paris-based organisation said governments could cut taxes on workers’ incomes by raising charges on property wealth.

    Laying out a six-point plan for property tax reform, the OECD said countries that sought to spur economic growth by cutting taxes on property transactions were propping up sky-high prices and favouring already wealthy sections of society.”

  • Peter Martin 22nd Jul '22 - 10:29am

    ” Interest bill £2.4tn debt mountain more than DOUBLES in June to £19.4bn ”

    A couple of points:

    1) ‘Debt Mountain’ is a pejorative term. £2.4 tn is about the same as our annual GDP. Would we say that someone earning £50k pa (after tax) and who had a mortgage of £50k had a ‘debt mountain’ ?

    2) If we say inflation is 10%, to keep the numbers simple, then the real value of that £2.4 tn is falling at the rate of £240bn per year or £20 bn per month. Just about the same as the figure claimed by the Daily Mail! Incidentally I’d like to know where I could get anywhere near 10% p.a. on any money I might like to lend to the Govt!

  • Peter Martin – You say “All government spending comes back as taxes sooner or later” and when questioned you replid “I did say “sooner or later” re all spending returning to government. Where else can it go? Burnt or lost permanently maybe?”

    Could I suggest it might just go abroad – maybe?

  • @Peter Martin – “Would we say that someone earning £50k pa (after tax) and who had a mortgage of £50k had a ‘debt mountain’ ?”

    I would go further and ask whether someone with a typical 1980’s mortgage of x3 earnings had a ‘debt mountain’.

    I think the big problem is the debit servicing and the extent to which it takes precedence over the here-and-now government spending. I suspect Liz Truss (and other ‘tax cutters’) are of the opinion the debt repayments can be simply kicked down the road – something particularly attractive if you are focused on winning a GE in a year or so.

    Perhaps Liz Truss needs to be reminded that sink schools are a product of poor investment, something the Conservatives have demonstrated over many decades they are good at.

    What I find interesting is todays announcement about more people willingly paying for their healthcare, whilst I suspect the Conservatives would regard this a success to their campaign to soften people up to American-style healthcare, it can also be interpreted as a tax increase. So Conservative policy is effectively to reduce tax and increase peoples out-goings; preferably to businesses that sponsor the Conservative party…

  • The money supply is expanded by bank lending in excess of loan repayments (the main source) as well as government spending and debt issuance in excess of tax collections and debt repayments. One of the consequences of expanding the money supply faster than the rate of economic growth are inflation of asset prices (particularly housing and financial securities) and/or consumption goods and services and relative currency devaluation, which to an extent feed in a loop.
    To reign in excess bank lending the BofE can employ interest rates, quantitative tightening and macro-prudential regulation. Increased government deficits are only non-inflationary to the extent that they drive a commensurate level of economic growth and/or offset deleveraging in the private sector. The kind of non-inflationary deficit spending that will drive economic growth is typically capital investment in economic infrastructure and housing – or fiscal stimulus when there are significant unutilised resources sitting idle in the economy i.e. when there is an output gap.
    In an inflationary environment with tight labour markets such as we have today there is no economic argument for tax cuts. There are strong arguments for redistribution and tax funded spending on essential public services.
    The so called inflation tax is, in effect, a tax like any other and one that today is seeing the value of money wages and pensions fall by more than 10% based on RPI.

  • Peter Martin 23rd Jul '22 - 6:38am

    From a Lib Dem POV the main political problem is persuading voters in the South to go along with “levelling up” in its geographical sense.

    The question to be asked is: is it advantageous to them have an economy which encourages a net migration of population into their region? Or, would it be better to have a less uneven economic gradient throughout the country to try to prevent that?

    If everyone in the South is happy as things are, with sky high house prices, overcrowded roads and schools etc then “levelling up” is always going to be a big vote loser there.

  • Alex Macfie 23rd Jul '22 - 8:47am

    @Peter Martin: They aren’t. The South of England isn’t all Chelsea Tractors and large houses, and in any case people recognise there is a problem when even young people from relatively well-to-do backgrounds and with their own bright futures struggle to get onto the housing ladder.

  • Can you cut taxes and level up at the same time?

    A rare example where Betteridge’s Law doesn’t apply. It’s a false dichotomy. Tax cuts can be used to help ‘level up’ up both selected geographical areas and entire economic sectors. For example, freeports and development (enterprise or investment) zones may use tax cuts in various forms to boost local economies. Investment allowances or business rates relief can help boost manufacturing. Much the best way to ‘level up’ areas is to encourage private investment creating productive jobs.

    …private companies have invested less in the UK than in France or Germany…

    That’s not the case in most high-technology sectors…

    ‘Levels of investment in UK FinTech continue to increase despite global slowdown’ [July 2022]:
    https://www.innovatefinance.com/news/levels-of-investment-in-uk-fintech-continue-to-increase-despite-global-slowdown/

    Overall, the US received the most investment in the first half of 2022, bringing in $25bn in FinTech capital, with the UK firmly in second place with $9.1bn, rounded off by India ($3.9bn), Germany ($2.4bn) and France ($2.3bn). […]

    “The UK is currently receiving more investment in FinTech than all of Europe, second only in the world to the US.”

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