Making social science accessible

04 Jun 2017

Politics and Society

It has become conventional wisdom that while EU membership and globalisation and the trade, labour market flexibility and openness to immigration that accompanied them, have benefited the UK economy as a whole, those benefits have not been evenly distributed; and that the Brexit vote represented a reaction against this.

This thesis is not entirely convincing – after all, if any section of UK society has done well over the last 20 years, it is pensioners, who voted overwhelmingly for Brexit. But it has certainly been taken on board by the main parties – and will doubtless be trotted out by each candidate in turn during the BBC’s election debate tonight.

Compare this:

“Britain’s economy is unbalanced. There are stark contrasts between regions, between old and young, and between the successful and those left behind… There is much to be done to create an economy that ensures that the whole population benefits from the technological advances ahead.”

…with this…

“In Britain today, there is a division between those people and places that have benefited from a changed global market, where opportunity is displayed in affluence and a good quality of life; and those people and places that have experienced a struggling economy, where opportunity has receded and people worry about their children’s futures. This is not right. So we will forge an economy that works for everyone in every part of this country.”

…and then contrast this…

“Britain is the only major developed economy where earnings have fallen even as growth has returned after the financial crisis. Most working people in Britain today are earning less, after inflation, than they did 10 years ago. Too many of us are in low-paid and insecure work. Too many of us fear our children will not enjoy the same opportunities that we have. We will turn this around. We will upgrade our economy, breaking down the barriers that hold too many of us back.”

That’s Liberal Democrats, Conservatives, and Labour, in that order. The similarity is remarkable. The Conservative Party manifesto is the most statist and interventionist produced by a governing party in living memory; Labour has made an even sharper break with its own recent past, proposing a massive expansion of state control of the economy, direct and indirect, including the reversal of several of the major Thatcher-era privatisations.

To begin with the similarities, each manifesto argues strongly that the UK suffers from a longstanding lack of investment, public and private, and that state intervention is required to address this.

Equally, all parties are committed to a “modern” industrial strategy that is not about “picking winners” but supports “strategic” sectors; and to not just preserving current levels of labour market regulation after Brexit, but to expanding them in some respects.

The Conservatives’ plans are the most modest, with little new money, but are still ambitious: for example, they set a target of matching the OECD average for R&D spend (public and private) of 2.4 per cent of GDP. There will be a £23 billion National Productivity Investment Fund (largely a rebadging of existing commitments) and new sovereign wealth funds – “Future Britain” funds – which “will hold in trust the investments of the British people”. Political historians will wish to note the similarities with the Labour Party constitution before Tony Blair got his hands on it.

Meanwhile, the Liberal Democrats commit to £100 billion extra infrastructure spending over the Parliament, while Labour’s National Transformation Fund will have somewhat more – £250 billion over ten years. Moreover, Labour’s National Investment Bank will “bring in private capital finance to deliver £250 billion of lending power”.

What, then, are the differences?

Most eye-catching are Labour’s proposals to renationalise rail, water, Royal Mail and (in part) electricity supply; but there is precious little detail on precisely how nationalisation would either solve the current problems of these industries, or avoid the failures of public-sector management that led to privatisation in the first place.

Meanwhile, on immigration, it is the Conservatives who are proposing a radical expansion of state control, with the end of free movement, an increase in the “skills charge”, and the possibility of various sectoral visa schemes – a move to a much more regulated and planned labour market.

But the biggest differences surround tax and spending.

The Conservatives promise “a balanced budget by the middle of the next decade”. Both Labour and the Liberal Democrats would aim to balance the current budget (the former by 2022 the latter by 2020) rather than achieve overall surplus. But, frankly, given the long list of missed and changed deficit targets under the Conservatives, it is not clear either that anyone cares, or that they should.

Of course, the future path of the public finances will be determined largely by economic growth. While the economy has so far held up well, the OBR and international institutions have already reduced their forecasts for growth over the medium term as a result of Brexit.

Analysis in our report Red, Yellow and Blue Brexit: the manifestos uncovered, on trade and migration, suggest this pessimism is well-founded. And the most recent available data, on both growth and migration, suggest the economy is already slowing. But the OBR’s current projections assume a relatively “soft” Brexit; if a hard Brexit, or still worse a disorderly one, becomes likely, deficits are likely to continue indefinitely at a relatively high level by historical standards, whoever is in power.

But while the dividing lines on the deficit are much more blurred, the differences on taxing and spending are nevertheless stark.

Labour have outlined a long list of tax rises, focusing particularly on corporation tax and the higher paid, and spending increases, on the NHS, the abolition of tuition fees, public sector pay and much else besides. This would return tax revenues to their postwar highs as a proportion of GDP, and stabilise public spending, in contrast with the large further cuts implied by Conservative plans.

The Liberal Democrats would increase income tax by 1p to boost NHS spending; they also note that avoiding a “hard Brexit” might ease some of the pressure on the public finances.

Do the sums add up? Labour’s probably don’t – the estimates of extra tax revenue look somewhere between optimistic and Panglossian.

But the level of detail contrasts sharply with the Conservatives’ refusal to even attempt to cost their policies: essentially, they are telling both voters and markets that they neither need nor are entitled to know what’s going to happen to tax and spending. “Trust us” is the message. And both strategies risk disappointing voters, particularly those who voted to Leave.

Brexit will make it hard enough for the UK to compete for inward investment and highly skilled migrants without the much higher personal and corporate taxes promised by Labour. And, far from offering £350 million a week for the NHS, the Conservatives are promising a level of funding which more or less guarantees continued deterioration in services at best, with even more stringent cuts elsewhere in the public sector.

So the 2017 election offers consensus on some things – efforts to boost investment, more government intervention in the economy, and increased regulation. Free-market liberals will have to make the best of a very bad job.

At the same time, there’s a clear choice between higher taxes and public spending on the one hand, and lower overall taxes and a continued severe squeeze on public services on the other.

By Professor Jonathan Portes, senior fellow at The UK in a Changing Europe. This piece originally featured on CapX

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