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.
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.
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.
Chart via Trident Commission