William Wallace writes: Higher Public Spending: the big political taboo

A recent Financial Times op-ed  argued that the UK should now recognise that the Ukraine conflict has imposed aspects of a war economy on the UK – shortages, rising prices, disruptions in supply – which require serious changes in economic policy.  The business pages of the serious press urge higher public investment, spending on education and apprenticeships to raise our woefully-low labour productivity, and government intervention to promote innovation, resilience against supply-chain shocks and sustainability.

Defenders of the NHS point to its much lower spending and staffing per head than comparable European countries half that of Germany and the Netherlands, far fewer doctors and nurses per head and less than half the number of hospital beds – which as the Financial Times says ‘reflect political choices, not what is affordable.’  State schools have been similarly underfunded for many years.  Teachers’ salaries, like nurses’, have been held down to a point where recruitment and retention is difficult.   Conservative MPs and others call for higher defence spending in response to the Russian invasion of Ukraine.  Anyone serious about the ‘levelling-up’ agenda knows that it cannot succeed without a very substantial and long-term financial commitment: an additional 1-2% of GDP over a decade or more.

Yet Conservative MPs, backed by almost all political commentators outside the Guardian, still call repeatedly for cuts in taxation.  Their reactions to Rishi Sunak’s latest emergency package have expressed dismay at the rise in taxes it involves.  Sunak is still promising them that he will find a way to cut taxes before the next election, although neither he nor anyone else says anything about what cuts in spending that would imply.  And the Labour Party is silent on the subject, fearing that the Mail and the rest of the Tory press would love to label them again as ‘the high tax party’.  I saw a Labour leaflet in Wandsworth in the local election campaign that promised that if Labour won control of the Council it would keep Council tax at the same low level – a similar promise to what Tony Blair pledged for national taxation in 1996-7.

There’s an absurdly wide gap between the public rhetoric on taxation and the reality of underlying pressures for higher public spending.  Even as Sunak as chancellor raises spending to cope with the current interlocking domestic and global crises, he continues to dangle the hope that he will reduce Income Tax before the next election.  Nevertheless, Ian Duncan Smith is attacking him for abandoning the pursuit of lower taxes, which he claims to be at the core of conservatism.  

How do we change public perceptions of taxation and spending, against this dominant yet absurd narrative so vigorously defended by the Mail, the Telegraph, and the Conservative Right?  Unless we manage to change public perceptions we will be trapped, if we again find ourselves having influence over a different government, by similar constraints to those that Blair faced: that he had promised not to raise taxes, but was committed to raising public spending.  

First, we have to challenge the Tories to spell out what they want to cut every time one of them calls for lower taxes.  Do they plan to cut benefits further, or state pensions, or education, or social care?  If Jacob Rees-Mogg plans to cut the civil service, what tasks will he cut to make that work?  The Conservatives set out to cut police numbers by 20,000 in 2010 (yes, I know we should have tried to stop them) and are now scrabbling to recruit replacements as police fail to provide adequate security.  We should remind them that cuts made for ideological reasons damage our economy and society.

Secondly, we should talk ourselves about fair taxes, not lower taxes; and about public investment, not government waste. The patriotic rich should be willing to contribute to the long-term future of this country when it is faced by our current challenges; refusing to pay their fair share betrays their shared citizenship. And the moderately well-off (that includes me, and probably many of you) need to recognise that decent education and opportunity (and housing and food) for everybody is part of how we hold this country together, and that we also need to contribute towards that common goal.

Right-wing Conservatives are libertarian anarchists, in effect. They deny social solidarity, decry local or national state intervention, and prefer private provision even when it’s more expensive and less effective. Social liberals need to build a different narrative on public revenue and spending.  But we have to recognise how hard it is to establish that, against current lazy tax-cut thinking.

* 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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38 Comments

  • Laurence Cox 31st May '22 - 12:03pm

    This article from the latest New Statesman makes similar points: https://www.newstatesman.com/economy/2022/05/why-british-state-is-magic-money-tree

  • George Thomas 31st May '22 - 12:48pm

    Part of the problem Labour had at the last election, and why they’re changing tact, is that those on £80,000 don’t feel as if they’re in top 5% of earners in the UK even though they were. Another part of the problem is that the Tories managed to convince people that there was always a way the UK could afford an illegal water cannon to attack pesky protesters, as one example, but no way of affording proper funding to the community services, police, court services, prisons, NHS etc. etc.

    Tories absolutely love local or national state intervention but only if it’s attacking a group of people who are unlikely to vote for them because apparently that doesn’t count as intervention in their eyes. They’ve tricked people into believing that denying this basic truth as if accepting it would be opposition to aspiration, and suddenly we’re in a UK crumbling as soon as there is any sort of global challenge.

  • Paul Barker 31st May '22 - 1:53pm

    Excellent !
    I can see Labours problem but as the Third Party it doesn’t apply to us, we should be advocating a long-term, gradual shift to a high-tax, high-spending State; like Germany.

  • The Guardian has an article on this theme The Guardian view on taxes: high time landowners paid their fair share arguing our current tax system rewards a landlord more than a doctor. “We need to shift towards taxing wealth more and better; to that end, existing taxes on property often fail. Council tax is based on bricks and mortar rather than land, and is based on property values in 1991. A tax on land values would be a levy on something that cannot run away or be sheltered in some island haven, and would also deter hoarding by developers. And it would help build a much better public realm.”
    The war in Ukraine has dealt a supply shock to the UK economy on top of Covid and Brexit. Many commentators expect a return of the stagflationary conditions (low growth coupled with high inflation) last seen from the mid 1960s to 1970s. Tax reform has to be delivered along with increased productivity to address stagflation. Michael Hudson together with other US economists recently published a research paper showing how such productivity could be delivered Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes onto Land
    “The post-Corona economic environment puts a premium on finding fiscal means to stimulate the economy while continuing to finance current levels of expenditures and debt. We develop and carefully calibrate a model of the US economy to show that an increase in the tax rate on the value of land, balanced by decreases in the tax rates on the incomes of capital and labor, can meet this need.”

  • John McHugo 31st May '22 - 3:09pm

    Would it be possible for our spin doctors to set out to brand the Conservatives as “the party of waste”? Enough examples spring to mind.

    We then argue that the tax money needs to be better spent, and point out ways in which this should be done (e.g. costed programmes for education such as free school meals (essential for levelling up, as Justine Greening was saying on the Today Programme this morning), the NHS, defence) and argue that only when those needs have been met should tax cuts be discussed. This would put the onus on the Conservatives to attack such spending programmes which I suspect they would find politically difficult.

    There are also ways in which more tax could be raised (eg on second homes, on buy to rent income) which seem to have been overlooked by Mr Sunak. That would make the distribution of taxation more equitable.

  • Barry Lofty 31st May '22 - 5:19pm

    Would it be too simplistic to state that our country is in a real mess at the moment, even given the problems in the outside world, and it is going to take some intelligent, diplomatic and honest people to even begin to put the UK back on the right path after the complete incompetence of the present government?

  • Brad Barrows 31st May '22 - 6:07pm

    The taboo is not higher public spending but higher rates of taxation. Extra public spending is popular but higher taxation rates are not.

  • James Fowler 31st May '22 - 6:11pm

    There’s a lot sense in this article, but you can never get around the issue that people hate paying more tax. Moreover, it’s not as if earnings have been growing for the past 15 years or so – quite the opposite. Lower earnings are already taxed, if anything, too heavily and even more tax here disproportionately sucks demand out of the economy. Some things I’d like to see:
    Capital gains tax on primary residences (stamp duty abolished).
    NI and income tax merged (No NI exemption for the over 65s).
    The income tax threshold raised.
    State pensions to rise by no more than public sector salaries.

  • Barry Lofty 31st May '22 - 6:31pm

    I might add to my previous comment my old favourite ” common sense “!!

  • Mick Taylor 31st May '22 - 6:51pm

    Some of us have allegedly paid NI our whole lives to enable us to receive health benefits and one of the lowest state pensions in Europe. If this is the case then why should we continue to pay NI on these crappy pensions and other income we have saved all our lives to have in retirement?
    The real problem is the whole con about NI and health/pensions, that we as a party perpetuate. Pensions, benefits and health care are paid for out of current taxation, of which NI is just another tax. There is no ‘fund’ to draw down from.
    If we had the courage of our convictions we would abolish NI as a separate tax and stop pretending that its earmarked, when it clearly isn’t. Either that or set up a hypothecated new tax to pay for health and social care, pensions and benefits. This should be paid during our working lives, not when we are pensioners.
    If people do have really large incomes in retirement the higher rate taxes should ensure that the very wealthy pay their fair share.
    I declare an interest as a pensioner!

  • Gently, Mick, as one ageing Liberal to another, you don’t pay National Insurance after you reach State Pension age – unless you’re self-employed and pay Class 4 contributions. You stop paying Class 4 contributions at the end of the tax year in which you reach State Pension age.

  • Paul Holmes 31st May '22 - 8:00pm

    @Brad and James….and yet the Lib Dems had their three successive best GE results when they were campaigning for higher taxes to pay for investment in crumbling public services (1997,2001,2005) and their worst, in 2015, after 5 years in Government slashing public services and cutting tax.

  • Mick Taylor,

    There actually is a fund to draw on for health care and pensions. It is the hospitals, surgeries, trained doctors and nurses, schools, colleges and economic infrastructure that have been built and developed over decades; coupled with robust political institutions that provide for justice, property rights and civil liberties. Money is the unit of measure rather than the physical resources, tangible infrastructure, intellectual property and human capital that constitutes the wealth of the nation.
    Both provision for old age and the legacy we leave behind is dependent on public and private investment in our productive years. That public and private investment draws people to population centres and is reflected in the increase in the value of land in those cities and towns. The Resolution Foundation would like to impose a form of Capital Gains Tax on main residences. This would go some way towards redistributing the windfalls of million-pound home Britain. Others, like the economist Josh Ryan-Collins, have long favoured the introduction of Land Value Taxes The rise in property millionaires clearly shows the Government’s belief in trickle-down economics was wrong

  • Graham Evans 1st Jun '22 - 7:59am

    We need to dispell the myth that government borrowing is bad because it loads up debt on future generations. Unless you expect zero real terms growth over the next fifty years future generations will be richer than those living today, just as we are richer than those living fifty years ago. There may be a problem about the distribution of the new wealth but it’s not at all unreasonable for those living today to appropriate some of the benefits of future growth, particularly if this actually promotes future growth.

  • Nonconformistradical 1st Jun '22 - 8:49am

    “Unless you expect zero real terms growth over the next fifty years future generations will be richer than those living today, just as we are richer than those living fifty years ago. ”

    Seems a trifle optimistic. And to whom does ‘we’ apply? Just to those in developed nations or everyone on the planet?

    “There may be a problem about the distribution of the new wealth”
    I’d substitute ‘will’ for ‘may’ since we have this problem already of the poor getting poorer while the rich get richer.

  • Peter Martin 1st Jun '22 - 9:37am

    “Unless you expect zero real terms growth over the next fifty years future generations will be richer than those living today, just as we are richer than those living fifty years ago. ”

    Future generations will consume what they produce just as this and all previous generations have done. We can’t send real goods and services back and forth in time to settle previous or future debts.

    Therefore, the “govt debt impoverishes future generations” argument is false – regardless of the extent of any future economic growth.

    We can, of course, help future generations by providing an adequate infrastructure, a healthy economy, and clean environment for them to live in.

  • Mick Taylor 1st Jun '22 - 9:41am

    David Raw. I know that but one contributor was suggesting we should …

  • Helen Dudden 1st Jun '22 - 10:47am

    Jeremy Hunt cut funding to the NHS, I remember junior doctors protesting when I attended a hospital appointment at the time.
    Long waiting lists have been the name of the game.
    Too many overpaid at management levels.
    My direct debits are increasing, should I give up my Power Wheelchair? Of course, there are others who need medical treatment treatment with electrical equipment.
    I hope the letters of lack of faith in Johnson rise, but there needs to be a total rethink on spending and wasting of the money from the taxpayer funded reserves.

  • James Fowler 1st Jun '22 - 7:38pm

    @Paul. The politics that gave us 97, 01, 05 and yes, even 2010, is dead and buried. That confident, outward looking country is gone as well. I loved those times and miss it every day. The reality is that since 2010 there has been less and less to go round, especially for the youngest and the poorest, and when that happens peoples’ backs go up against the wall and they turn inwards. ‘Britain needs a pay rise’ – said David Cameron in 2014. And here we are in 2022 – taking a serious pay cut. If tax is the answer, then in my view it’s become morally, never mind economically, unacceptable to tax the young any further without first having tickled the pockets of the old a good deal more stringently than we have so far.

  • @ James Fowler “If tax is the answer, then in my view it’s become morally, never mind economically, unacceptable to tax the young any further without first having tickled the pockets of the old a good deal more stringently than we have so far”.

    Redistribute wealth on the arbitrary basis of age ? There are plenty of old people who are struggling and poor…….. and plenty of young people who are rich. Think again, James.

  • @James Fowler – “but you can never get around the issue that people hate paying more tax.”
    People hate paying more for anything…

    Although, I suspect many of those wanting “low taxes” will only realise the slight of hand the Conservatives are playing over the NHS when it is too late. By privatising the NHS – through encouraging general dissatisfaction with waiting lists and paying to “go private”, the Conservatives are actually intending to effectively massively increase an individual’s taxes/essential spend. (Effectively, any income an individual spends on “going private” should be included with their tax payments).

    I think one of the inspiring ideas was the creation of National Insurance – effectively a tax wholly targeted at a defined welfare objective. Without it “general income tax” would have increased dramatically. Perhaps what is needed is some clearly aligned taxes that people can identify with, rather than everything going into one constantly enlarging cauldron of tax monies.

  • James Fowler 2nd Jun '22 - 10:09am

    @David Raw. The huge growth in asset values, particularly property, since 1980 is an arbitrary redistribution favouring – above all – the older simply by virtue of incumbency. This redistribution had been in the order of trillions of pounds paid by the young through rents, mortgages and contributions to sustain current recipients of (now closed) final salary pensions. What I propose merely scrapes the surface of the problem.

  • Nonconformistradical 2nd Jun '22 - 10:36am

    @James Fowler
    It may be true that many older people are reasonably comfortably off. But there are plenty of other old people who are definitely far from comfortably off.

    Do you propose to ‘tickle the pockets’ of the less well off old people as well as the pockets of the better off ones?

  • Barry Lofty 2nd Jun '22 - 11:22am

    James [email protected] We were all young once and suffered the same or similar problems as today’s young people, but like us, if they are lucky, they will become pensioners and hopefully be living in a country that cares and provides an even better welfare state than one we receive at present, I do so dislike the blame culture that seems to be trying to split the generations, in a caring country this should not happen.

  • Those of working age can pay more in tax if they are paying less in rents and mortgages. Final salary pensions would need far less contributions from profits if inflation is controlled and the market value of pension investments is not artificially inflated, so pension savings can make a decent real return from gilts and other secure investments.
    Retirees after tax disposable income does not need to reduce, but asset prices do – particularly housing (or at least not increase for several decades). The way to accomplish this is twofold. Firstly, tax reform to shift the tax basis from wages and self-employed profits to economic rents and wealth , especially investments in urban housing wealth. Secondly, interest earnings in the financial sector on loans for the acquisition of land need to be similarly assessed as economic rents under a land value tax system. In short, rents and mortgage interest arising from the land element of housing would be subject to a high rate of taxation in effect a Land value tax surcharge. Wages and self-employed profits would be assessed at slightly lower rates and supplemented with a UBI. The proportion of tax paid from national income does not change overall – it is tax neutral. What changes is productivity, economic growth and the distribution of the tax burden between those that have income producing assets and those that do not. The additional tax yields to fund greater investment in public services that benefit all is generated by this increase in productivity and the associated higher levels of economic growth, competitiveness and equality of incomes and wealth.

  • James Fowler 2nd Jun '22 - 2:11pm

    @Nonconformistradical. Not really. CGT for primary residences would generally past the poorest by as irrelavent, ditto bringing in full NI. Lifting the tax threshold would help them.

    @Barry Lofty. Do you honesty believe that future pensioners can look forward to a future even rosier than current ones? Consider rising pension age, resource constraints, the structure of current occupational pensions and how far asset prices have already inflated.
    Pointing out injustice and inequality self evidently draws attention ‘splits’. Alternatively, people enjoying privilege should really just be left alone, untroubled by the thought of who is paying for it and reassured by the idea that, actually, everyone else will come it enjoy it too in the fullness of time…

  • Barry Lofty 2nd Jun '22 - 2:40pm

    James [email protected] did say ” hopefully ” the future will be better! You can only hope that future governments see the light and devise welfare and social care policies that are funded in a fair and equitable way for all generations? I don’t know what the future holds but I hope it is better than the shambles we are enduring at the present.

  • Taxing extreme wealth is going to be critical to avoid major convulsions and revolutions across the world.
    The covid pandemic and food crisis has created another 600 billionaires over the last two years including the CEO’s of the big pharma companies and the Cargill group of companies that have a monopoly on key agricultural products.
    Oxfam advocate taxing wealth to fund health, food poverty and social protection solutions Oxfam

    A group called Patriotic Millionares UK is calling for a wealth tax on UK millionaires patriotic millionaires uk
    These calls are supported by the Tax Justice Network and International Centre for Tax Development

  • Peter Martin 2nd Jun '22 - 4:36pm

    @ Joe,

    Have you switched to spruiking a general wealth tax rather than a LVT? I’m not against either, but I’d make the point that taxes only have a counter inflationary/ deflationary effect if they act on flows of money rather than stocks of money or wealth. It is this that creates the fiscal space for Governments to spend without causing inflation. So VAT has a significant deflationary effect but the seizure of Abramovich’s assets probably doesn’t when compared on a £ for £ basis.

    This is not to say that we shouldn’t seize his assets, and impose significant wealth and Land Value taxes but the macroeconomic effect isn’t just about how much is raised in total. Oxfam might well advocate taxing wealth to fund health, food poverty and social protection solutions. But maybe they are mixing up their flows and stocks too?

  • Barry Lofty 2nd Jun '22 - 4:37pm

    Joe Bourke @ That would be a great start!!

  • Peter Martin,

    Most tangible or financial wealth is based on the capitalised value of income flows from land, natural resources and intellectual property rights or brand values.

    LVT is focused on flows of these economic rents defined as excess profits/income in excess of costs of production including the cost of capital (i.e. a normal return in investment). As such LVT would target rents from land; revenues from natural resources in excess of costs of extraction; windfall profits and excess capital gains; interest earnings in excess of costs of capital inclusive of risk premiums and administrative costs; royalties from intellectual capital in excess of normal returns on development costs etc.

    Effective redistribution of incomes and wealth focuses more spending on the basic goods and services that are needed by the great majority of people, incentiving increased supply of such goods. Increased supply of basic goods and services acts to counter inflationary pressures while reducing excessive hoarding of wealth.

    Countries like Sri Lanka and Lebanon have no fiscal space and are experiencing hyper-inflation. They cannot create more domestic currency without further stoking inflation and are forced to raise taxes at a time of acute shortages of food, medicines and other essentials.

  • James Baillie,

    Not only our party leadership, but sent to everyone on the Federal Policy and Federal Conference Committees and our staff who support these bodies and are involved in policy making.

    Brad Barrows,

    Indeed, it is higher rates of taxation which are unpopular. However, within the party there are many in positions of power who don’t think we should have policies of not only higher rates of taxation but even high levels of public spending. The question is how do we either get them to change their opinions or remove them from positions of power.

    Paul Baker,

    We don’t want the economic policies of Germany. We need to embrace the idea that having unemployment levels higher than 3% are not acceptable and we need to do more to help the nearly two million people who are disabled or have long term health issues find employment suitable to them. And even when we have unemployment rates lower than 3% nationally we need to target government investment in the areas with rates higher than 3%.

    Graham Evans,

    Yes we do need to dispel the myth that government borrowing is bad because it loads up debts for future generations. But how do we do it? On Newsnight recently there was an economist who said that higher rates of borrowing don’t even mean the government needs to spend more on servicing the debt each year.

  • James Fowler,

    Do you really think the UK was confident and outward looking during the Coalition years of austerity, spending and benefits cuts and the increased use of food banks? There is more to ‘go round now’ than there was in 2010. The UK GDP is larger now than in 2010.

    According to the Joseph Rowntree Foundation 2022 poverty report 2.1 million pensioners – nearly a fifth, live in poverty.

    Peter Martin,

    As you say taxing flows of money is counter inflationary / deflationary. Therefore taxing wealth to finance extra government spending would be economic stimuli. And therefore face constraints so the economy doesn’t over heat.

    Joe Bourke,

    “Effective redistribution of incomes and wealth focuses more spending on the basic goods and services that are needed by the great majority of people, incentiving increased supply of such goods.”

    You are saying that increased demand will lead to increased production. It is good to see you now accepting this.

  • Michael BG,

    effective redistribution can increase the supply of basic goods such as food where the capacity to increase supply exists, while reducing the supply of goods that are typically the subject of discretionary spending. The capacity to increase the area of land available for housing development where land is in high demand does not generally exist in the short-term.
    Redistribution does not of itself increase overall spending or production in the economy. To increase the total supply of goods and services in the economy (i.e. grow the economy overall) the factors of production and/or the efficiency of production need to increase.
    That is why social welfare is referred to as redistribution rather than stimulus. As Hudson et al show in their paper, stimulus to grow the economy overall can come from shifting the tax burden from productive activity to non-productive elements of the economy i.e. onto rent seeking activities.

  • David Evans 6th Jun '22 - 2:17pm

    It’s interesting to see how several Lib Dems here are willing to believe that even with the Conservatives having increased government spending and borrowing to astonishing levels, and as a result inflation having taken off, they still seem to believe that substantially increasing debt is feasible and indeed justifiable.

    We have a climate emergency, necessitating a massive shift in resources into Green initiatives. We have a massive shortage of labour in the UK, with many older people deciding to stop work post Covid, so less people generating the wealth. We have an economy ridiculously dependent on services, particularly Financial Services, so we produce very little of the physical necessities of modern life. And now we have a major war in Europe, which is increasing shortages, increasing costs and we are now funding to a significant extent.

    However, still we look to the chimera of ever increasing spending growth to allow us to allow us to ignore these problems and put off yet again making difficult decisions as a nation.

    William is right in his basic premise, and in setting out how difficult it will be to change the national narrative, but it will be even more difficult to change the national direction of travel, from financial services which is focussed on making a quick buck and then hiding it (by any means possible) for rich people, and instead to making and distributing necessities to those who need them.

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