Labour and the fiscal charter

Has John McDonnell really committed Labour to supporting George Osborne’s fiscal charter? A report in the Guardian at the weekend said:

To the possible surprise of some on the left, McDonnell will announce that Labour MPs will be expected later this autumn to vote for the chancellor’s fiscal charter unveiled in the budget in July.

It quotes the shadow chancellor:

“We will support the charter. We will support the charter on the basis we are going to want to balance the book, we do want to live within our means and we will tackle the deficit.”

Confusingly, the Guardian reports also says that Labour would borrow to invest, which suggests something similar to Ed Miliband’s policy of eliminating the current spending deficit while still borrowing for capital expenditure. That would give the government more leeway but it would still require cuts or tax increases. It was the policy condemned as austerity-lite by the left and it would be ruled out under the Charter for Budget Responsibility.

If John McDonnell signs up to the charter, he will be asking the Labour Party to back the chancellor’s plan to eliminate the deficit entirely by 2019-20.  

The Guardian piece goes on to say:

But McDonnell makes clear that he takes a radically different approach to the austerity measures of the Tories, whose deficit reduction plan is achieved mainly through spending cuts, as he says that Labour would ease the burden on low- and middle-income earners.

But you can’t get rid of the deficit without spending cuts and/or taxes on middle-earners.

According to the OBR, the government plans to take £17.9 billion in real terms from day-to-day public service spending by 2019-20.

Screen Shot 2015-09-27 at 13.13.42

On top of this it is aiming for £12 billion worth of social security cuts. If that target is missed (which I think it will be) then the balance will have to be taken by more cuts to public service spending. Whatever the mix, though, this amounts to around £30 billion in cuts.

To prevent that happening, taxes would have to rise by a similar amount. The trouble is, raising £30 billion a year without hitting middle earners is damned near impossible.

HMRC figures show that the amount of revenue that would be raised just by taxing the rich isn’t very much. Increasing top rates of income tax or stamp duty on posh houses would hardly make a difference. Governments can only raise serious money by taxing the masses.

Tax revenues Jul 2015

Finding an extra £30 billion without increasing basic rate income tax, NI or VAT would be extremely difficult.

Ah but what about the tax dodgers?

Estimates of the UK’s uncollected tax range from HMRC’s £34 billion to Jeremy Corbyn’s £120 billion but, as Colin Talbot says, whatever the true figure, the problem is actually getting hold of the money.

It would be great if, by bringing a few Moriarty tax dodgers to book, the government could rake in billions of pounds. Unfortunately, most of the shortfall in tax revenues is not due to a small number of big-time evaders and avoiders. It’s the other way round. Much of the tax gap is made up of a very large number of very small amounts. Around 20 percent of it is due to error and carelessness. Digging into the HMRC figures it quickly becomes clear that there is no low hanging fruit, just a lot of small berries up a very tall tree.

As Colin points out, the situation is not that different in other European countries and so far, no-one has managed to do much about it.

Schneider’s latest estimates for the sizes of shadow economies illustrate the nature of the problem (see page 23).

On 2007 the UK shadow economy is put at 10.6% of GDP. In the same year he estimates the figure for Greece was 25.1%, Italy 22.3%, Spain 19.3% and Portugal 19.2. No real surprises there. But Germany was 14.6% and famously tax compliant Sweden was estimated to be 15.6% (other Scandinavian countries were at similar levels).

History also suggests this is an ingrained problem: for the UK the figure in 1980/90 was 9.6%; but for Germany it 11.8% and Sweden 15.8%. In the 21 countries Schneider analyses not one of them significantly reduced the size of the shadow economy in the almost two decades his figures cover.

Soaking the rich and catching the tax dodgers, then, will not be enough to ensure that the UK eliminates its deficit and “lives within its means” by the end of the decade. If John McDonnell really is signing up to George Osborne’s fiscal charter he must either be supporting the government’s proposed spending cuts or advocating higher taxes on middle earners. That’s the dilemma of the next five years. Either raise taxes, cut spending or extend the deficit reduction timetable. Anyone who says they can avoid all three is living in La La Land.


I forgot to mention Trident. The much-quoted £100 billion cost of replacing Trident is not £100 billion a year. It’s £100 billion spread over many years. It is likely that most of that spending will be in the next decade. Even if we were to scrap Trident tomorrow it wouldn’t make much difference to the deficit in 2019-20.

Screen Shot 2015-09-28 at 10.14.44

Chart via Trident Commission


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21 Responses to Labour and the fiscal charter

  1. John says:

    You are forgetting one spending commitment: the Tories £100 billion Trident upgrade.
    Labour could say they will keep the existing Trident system without upgrading it.
    The saved £100 billion could then be used to reduce UK debt substantially.

    • Rick says:

      That’s not £100bn a year though. It’s £100bn spread over many years, much of it in the next decade.

      Even if we scrapped it, it wouldn’t make much difference to the 2019-20 deficit.

      • John says:

        Take your point, though it still remains true presumably that that would mean £100 billion less public sector borrowing requirement (PSBR) in the medium-term, which should also ensure that interest or debt servicing costs would be correspondingly kept low, which ought to appeal to the international debt rating agencies. A simple case of cutting one’s coat according to one’s cloth. A major problem for Corbyn is that senior trades unions leaders support upgrading Trident, not necessarily on military grounds but on largely economic grounds. Crazy, eh?

        • Jim says:

          Don’t forget if you scrap Trident and use the savings to reduce the budget deficit, then all the people who are currently employed on Trident would be out of a job, and no new government expenditure would be creating new jobs to replace them. There would be a net loss of employment as the result of that decision.

  2. Greg Wood says:

    “Growing” the economy?

  3. Florence says:

    The only taxation discussed here is personal taxation, and individual tax dodgers. How about corporate taxation, curently the lowest in the western economies, and corporate tax dodging? These are sources for large sums. Plus there is no recognition of the Tobin Rax. This again raises many small amounts. The insistence on considering personal taxation is proof that the neocon ideology has penetrated deep,deep, into the economist thinking patterns. To solve the problems of massive inequality and to prime the economy for expansion will take a different approach to the tax/ spend argument is a narrow subset of the economy. And while the “small amounts” derided here are “not enough”, tell that to the ILF members, where the scheme costs were nugatory in the greater econmy. Also the alleged amounts saved by the bedroom tax (illusory, but apparently in this discussion one must follow Tory claims, apparently) are gain small, but have massive impacts on people lives. I think the argument has been framed by the Osborne idelogy, deliberately or not, and not to find a new solution to the massive problems in the UK economy. TINA is no longer to e allowed when tackling the neocon ideology.

    • Rick says:

      Corporation Tax is on the chart above. A 1% increase would raise £1.8bn. Corporation Tax gap reckoned at £4bn. Nowhere near enough, even if you could get it all back. You can go on about “neocon ideology” all you like but saying you can’t get £30bn a year without taxing those on middle incomes has nothing to do with ideology. It’s just basic maths.

      • Florence says:

        1% is underwhelming, admittedly, but not for the amount it would raise but the lack of ambition in that rate. How about raising it to 20% and then 1% per annum to 25%? It would still be among the lowest, and would raise (after 5 years) £12 billion (ish). As one of those affected by the cuts that will “save” the same amount, I certainly don’t feel that is insignificant, and a £12 billion boost to the economy would have a multiplier of at least 1.5 and possibly up to 7 that all govt spend creates. I stand by my initial observation, that the penetration of neocon ideology has been so complete, it is still framing the questions and answers, even if not doing so consciously. Even on TV news we can have mere news readers challenging economists with the neocon certitudes – “well that won’t work, you can’t spend your way out of a recession” etc, even challenging world class economists. Looking at the table you refer to, I can see there has been a choice to use the revenue streams included, and then another choice limited to this 1%, someone else could have chosen different streams and different uplift to frame the discussion. IHT? CGT? All could go up by more than 1%, having been brought down by much more in the last couple of budgets. But the others included in this table shows the amount raised by raising Income Tax by 1%, and similar that would actually take money out the the economy directly, ie will be deflationary. The possible amounts raised by a Tobin tax are not mentioned anywhere, or even the effect of the economy picking up by 1%, or increased incomes/ wages / employed to raise such that the Treasury take on NI would go up by 1%. Hence the futile debate about “what to tax to be able to spend”. It was the unnecessary constraints on public borrowing that has lead to the use of PFI – to “keep it off the books”, rather than just admit that the spending must be done. All I’m suggesting is that Osborne’s orthodoxy is no longer used in setting the agenda.

        • Jim says:

          Have you never heard of second order effects? If you raise some tax by 1% you can reasonably expect to get £X in revenue back. Raise it by 5% and you won’t get 5X, as people will find ways to not pay it, and thus your revenue might be 3.5X in the first year, and probably less in subsequent years. Taxation is not static – people react to the tax rates going up by arranging their affairs in ways that mean they can (legally) avoid paying them.

  4. thenextwavefutures says:

    I wonder if there is some high risk game theory going on here.
    Let’s imagine that McDonnell’s advisers are convinced that there’s going to be a recession, and that the Biudget Charter nonsense won’t survive the impact of this. So Osborne has to abandon it to keep the economy working.
    At which point Labour abandons it too but is able to paint Osborne as having been the incompetent one.
    As I say: high risk.

  5. Alex says:

    Yeah, you didn’t mention the obvious alternative they’re probably thinking of – getting the economy growing at a faster pace through investment and strategic policies from BIS, such that the deficit comes down of its own accord due to recovering tax revenues.

    • Rick says:

      I didn’t mention it because it’s not obvious. If you commit to no borrowing, how do you raise the money to invest to grow the economy unless you increase taxes?

      • thenextwavefutures says:

        Investment bonds? Create a new long-term savings vehicle for all those stakeholder pension funds?

        • Nautical Nick says:

          So why condemn all stakeholder pensioners to crap returns? And what is the difference between “investment bonds” and ordinary government bonds? Higher cost, to provide money to invest in areas which the private sector thins won’t produce an economic return. So it won’t produce the balanced budget.

  6. John says:

    Right now and over at least the last 7 years, saver rates have been appallingly low.
    If decent saving rates were to be offered to pensioners then large amounts of investment cash would be forthcoming at reasonable cost. That would remove the need for tax increases.
    There is also the use of Public QE funding as an alternative to that of bankster QE funding.

  7. SK says:

    Sorry no mention for removal of GCT allowances for prime residence? That is going to be a vote winner as the % of tenants increases.

    And no mention of LVT?

    • Rick says:

      How much would removal of CGT allowances bring in?

      As for LVT, that will hit middle earners too, unless you restrict it to very expensive properties (as in the mansion tax proposal) in which case it will raise very little.

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