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Labour is planning the most radical tax and spending reforms in over 70 years

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The important thing to understand about the Labour manifesto last year, and the speech by John McDonnell, the shadow chancellor, last week, was that they were not about offering an alternative to austerity. They were offering something much, much more dramatic than that — an alternative to the form of market capitalism practised in this country for at least the past 40 years.

The time seems ripe for such an alternative. The economy has had a truly dismal decade. You know the story. Record lows in earnings growth, productivity growth and interest rates. Big drops in the number of young people getting on the housing ladder. Record government deficits leading to the biggest ever set of spending cuts. No wonder it feels like time for something completely different, be that Brexit or Labour’s economic policy, or both.

This statement of the travails of the past decade is easy. Some other context is important, though. Household incomes are at their highest level ever, a third higher than they were 20 years ago, twice as high as they were in the early 1980s and three times what they were when I was born in the 1960s. Employment is at record highs. Pensioner poverty has dropped like a stone, while participation in higher education has risen and risen. Income inequality has been declining. We spend more than twice as much on the NHS as we did only 20 years ago.

My point is not that all is well. It manifestly is not. My point is that when we look to fix the problems that do exist, we need to be rather careful not to do too much damage to the economic motor that has driven rising living standards for decades. Brexit will cause damage, for sure. The single market and customs union were part of that economic motor.

So what about Mr McDonnell’s proposals? Part one, laid out in Labour’s 2017 manifesto, is a big increase in tax and spending. Taken at face value, that manifesto would have increased spending by over £70 billion a year. That’s an additional 3.5 per cent of national income. Because it was mostly devoted to new promises on investment and tuition fees and childcare, there was little in that £70 billion to undo the effects of austerity as usually understood. The amount apparently available for health was paltry, much less than the extra £20 billion now promised by the present government. There was equally little promised in terms of undoing welfare cuts. Assuming that a Labour government would want to implement what was in its manifesto, and to be more generous on health and welfare, and implement additional promises as set out at last week’s conference, then the scale of increased public spending would be higher still.

With extra spending comes extra tax. The pretence in 2017 was that all this could come from the rich and from big companies. It can’t. I don’t say that as a judgment about what is desirable, I say it as a judgment about what is possible. Of course, there could be some rebalancing in that direction, but where countries have much higher levels of spending than we do, they have higher taxes for the many, not just the few.

And many continental European countries do have much higher levels of tax and spending than we do. It is perfectly possible. Carefully delivered spending rises would improve public services. Broad-based tax rises can be carefully designed to minimise economic costs. The result could be a more equitable and prosperous country. Or it could be the reverse. It would all depend on the effectiveness of government. What we need from Labour in the period between now and the next election is more convincing detail that they know how to achieve the former and avoid the latter.

These are the most radical tax and spending plans placed before the electorate by one of the main parties in more than 70 years. Nevertheless, among Labour’s economic plans they arguably represent the least dramatic break from the status quo. Nationalisation of water, gas and electricity would represent a more remarkable turnaround. At a cost of well over £100 billion, perhaps twice that, you’d want to have a well-thought-through plan of action and to be very sure of the efficacy of such action. The details will matter. Regulatory structures, distance from political interference and providing the right incentives matter more than ownership per se. Nationalisation should be seen as a means to an end, not an end in itself.

Then there’s the really big changes. Jeremy Corbyn has said that a third of seats on company boards should be elected by workers. There is a case for such changes to corporate governance, but you couldn’t do this to multinationals, which are so crucial to the UK economy. Again, I mean couldn’t, not shouldn’t. Mr McDonnell also has said that 10 per cent of company shares for all with 250 or more employees should be placed in an “inclusive ownership fund”, with some dividends going to workers, the rest going to government. Employee engagement would be a great thing, but this looks close to a nationalisation of 10 per cent of private companies without compensation for their owners — largely you and me through our savings and pensions. Again, details matter. With such a regime in place, it is hard to see why any company would move from 249 to 250 employees.

Alongside proposals for much greater regulation of the labour market and on top of Brexit, there is no doubting the scale of change envisaged here. Some change is needed. The hope is that these changes would shock the British economy into greater efficiency and inclusiveness. Get them wrong and the risk must be that they would bring it to a grinding halt.

This article was originally published in The Times and is reproduced here with full permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist.


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