UK General Election issues
3 - the Economy
Opinion polls suggest that most voters think the economy is the most important issue in this election. If it was this issue alone, it would be a difficult choice, as the main parties are constrained by self-inflicted fiscal rules which limit what they are capable of delivering. Key amongst these is a target, shared by both Conservatives and Labour, for public debt as a proportion of GDP (Gross Domestic Product) to fall over the next 5 years.
The language of fiscal rules seems designed to confuse. Fiscal rules are political choices, and not necessarily the right ones. The rule requiring public debt to fall as a proportion of GDP reduces the amount of public investment that can be financed by borrowing. It’s this fiscal rule that has watered down the Labour Party’s original plan to spend £28 billion a year decarbonising the economy. An arbitrary fiscal target was allowed to take precedence over a plan to meet the climate target of Net Zero by 2050.
Framing - the Institute For Fiscal Studies
Much discussion of economic policy in the UK reflects the framing of an independent think tank, the Institute for Fiscal Studies (IFS). Its analysis provides a useful antidote to some of the most outrageous claims made by political parties. The IFS is good at scrutinising assessments of policy costings, and assessing how political parties’ spending plans match their tax plans,. The fact that almost every day during an election campaign the media turn to Paul Johnson, the IFS Director, for comment ensures that parties are more careful than they would otherwise be making claims that can’t be substantiated.
“Our primary social media channel is Twitter, where we have over 59,200 followers…. We had over 1.4 million video views across all platforms in 2023 … IFS staff regularly engage with journalists from print, online and broadcast media. Our research, analysis and reactive commentary earned us over 35,707 `UK media mentions in 2023.”
The IFS obsession with making sure that party manifesto promises are ‘fully costed’ puts the focus on ‘how will they pay for it’. Its recommendations spring from a neoliberal belief that markets know best, and that state ‘interference’ should be kept to a minimum. This takes attention away from the social purposes that spending is intended to achieve. Economic policy is about more, or should be about more, than balancing the books. Desirable policy initiatives that cannot be funded without increases in taxation, like the Liberal Democrats’ focus on the need for improved social care, become all too rare when the focus is on what will it cost rather than who will benefit.
The IFS bean counting approach plays down macroeconomic considerations, so that insufficient account is taken of how the behaviour of economies differs from that of individuals or households or firms. This difference takes a number of different forms, the most significant of which relate to debt finance, multiplier effects., and money creation. They would be included in any realistic assessment of the feasibility and desirability of a policy initiative, but, thanks to the influence of the IFS, they are largely ignored.
Debt finance
Pubic debt is not like personal debt. Personal debt has to be repaid, often within a short space of time, and always within the person’s life time. And if it is allowed to grow too fast, it can bring about financial collapse, as happened in 2008. Public debt does not have to be repaid, it can simply be rolled over. All that has to be paid is interest on the overall amount. Much of what is called public debt would be better termed national savings - it’s a secure home for the savings of private individuals and pension funds,
When the IFS warns that government spend and tax plans will increase public debt, it assumes that the increased interest rates that may be needed to sell the debt will be a burden. Whether or not they are a burden depends on the desirability of the investment that the borrowing enables.
Multiplier effects
When governments spend money, it goes to individuals or organisations. Some of what is received will be saved, some will be taxed, and some will be spent on imports.. What remains will be passed on to another person or organisation within the domestic economy. And the process continues until there is nothing left to pass on. The total income generated will be a multiple of the original expenditure, and some of that income will return to the government as tax.
How much national income increases as a result of a given amount of expenditure will depend on where it is spent. Expenditure on new Trident missiles, for example, goes to the USA, and there is no domestic multiplier effect, and no return of tax revenue. Expenditure on improved home insulation, in contrast, is passed on to domestic suppliers and installers, and the domestic multiplier effect, and returned tax, is considerable.
The IFS does not take account of multiplier impacts when it pronounces on the costing of government policy, which has the effect of constraining public expenditure on essential services to a greater extent than economic circumstances require.
Money creation
With fiat currencies like the £ (not tied to precious metals or to another currency), central banks are able, either directly or via licensed commercial banks, to create money. They cannot do this without limit, as there will be inflationary consequences if created money is not taken back as tax. But if there are spare resources in an economy, and government spending is focused on those spare resources, the inflationary consequences will be minimal.
The IFS does not assess opportunities for government’s to finance investment by money creation. This, again, underestimates the state’s ability to finance desirable public projects.
The tax ‘burden’
The two main parties are responding to current concerns about the cost of living by arguing over who will do most to reduce the tax burden on households. The framing of tax as a burden is one that is constantly promoted by the IFS. Tax certainly is a burden for low-income households. But it is not a burden for high-income individuals, and certainly not for high-wealth individuals.. Neither is it a burden for society as a whole, when it makes possible expenditure on essential public services.
The IFS usefully draws attention to the fact that if Labour and the Conservatives claim they won’t raise income tax, national insurance, or VAT, and they stick to their fiscal rules that limit borrowing, something has to give. That something is either spending on public services, particularly on those public services without protected budgets, or taxes other than income tax, national insurance, or VAT. What the IFS doesn’t point out is that maybe in these circumstances sticking to a fiscal rule that national debt should fall as a proportion of GDP is not such a good idea.
The Conservative manifesto promises £19 billion of tax cuts, to be paid for largely by a £12 billion cut in the welfare budget. This they intend to achieve mainly by reducing the numbers of people claiming disability benefits. No doubt there are some people with disabilities who can be found suitable work, so they no longer need to claim benefits. But that would demand sensitivity from a government department noted for its bureaucracy and cruelty. The likely reality is that severely ill people will be bullied into jobs they are unable to do, or deprived of benefits they need in order to survive. I know from previous experience as a carer how terrifying assessments by the Department of Work and Pensions can be for vulnerable claimants. If this cut were to go ahead, to anything like £12 billion, the monetary saving target would inevitably take precedence over the realistic assessment of need. Rishi Sunak, in his speech launching the Conservative election manifesto, gave the game away when he boasted that “We will ensure that we have lower welfare so we can deliver lower taxes.”
The.reduced tax ‘burden’ claimed in Reform UK’s Contract is simply laughable. The IFS initial assessment of its costings spells it out - “Spending reductions would save less than stated, and the tax cuts would cost more than stated, by a margin of tens of billions of pounds per year.” Reform UK intends to scrap all policies related to Net Zero. Its estimates of supposed financial savings from this are classic misinformation. The financial costs of the policies are exaggerated, and the financial benefits are ignored, as are the long term implications, both economic and existential, of total failure to address the climate crisis. There is one measure proposed in the Reform UK Contract that has a lot of merit, though - cutting the interest which the Bank of England pays to commercial banks on the reserves they hold. Reform UK’s claim that this could raise £35 billion a year is a huge exaggeration, but at least half of this would be a realistic possibility, more if interest rates were cut. Lower interest rates, as tax expert Richard Murphy has argued, would cut the cost of servicing government debt as well.
The Green Party uniquely departs from the tax as burden narrative. It spells out how measures to combat climate change, such as improved home insulation, can reduce energy bills for low-income families. It avoids arbitrary constraints on debt finance, recognising that “investing in protecting our climate now will save vast costs in the future.” It starts from a vision of what public sector renewal is needed, and spells out the tax changes that can fund this, without harming the living standards of low and middle income households. Tax increases are concentrated on those with high incomes, and particularly on those with high levels of wealth. Green Party tax and spend policies would reduce inequality while providing the investment needed to decarbonise the economy and improve housing, health, and social care.
Resource constraints would probably prevent full achievement of the Green Party programme, but its shifting of the debate away from tax to the public services it funds is refreshing:
“Greens will not allow our country to be held back by fiscal rules that don’t serve us all - we’re prepared to tax wealth and carbon emissions and prepared to borrow to invest in a fairer future. We do however acknowledge that public expenditure can only be expanded as far as the economy has the capacity to absorb it without triggering dangerous levels pf inflation. This would be our overriding fiscal rule.”
(Real Hope, Real Change, Green Party, 2024)
Brexit and Immigration
It is ironic that Labour, the Conservatives, Reform UK, and UKIP all have economic policies aimed at boosting growth yet they want to retain trade barriers with the EU and to institute tighter controls on immigration. These are policy choices that result in slower growth. Reform UK and UKIP remain committed to a hard Brexit. The Conservatives dare not reopen Brexit, for fear it would split the party. Labour feels that withdrawal from the EU cannot be reversed so soon after the referendum, and doesn’t want to imply that Leave voters may have made a wrong choice. But this does not explain why they avoid joining the Customs Union or Single Market. Favouring trade with markets thousands of miles away over trade with neighbours in Europe makes neither economic nor environmental sense.
The Liberal Democrats favour joining the Single Market, and the Greens the Customs Union, as steps toward rejoining the EU, though neither of them has made this a campaign priority.
One of the main consequences of Brexit has been a change in patterns of inward migration. Free movement from the EU has ended. In its place, there has been an increase in migrants from outside the EU, many of whom have relieved shortages of labour in the NHS and care sector. Additional demand for public services has, on the whole, been outweighed by increased output, so that the net impact on both GDP and GDP per head has been positive. It may be that if workers in, for example, the care sector were paid more and treated better there would be less demand for migrant workers, but (except for the Liberal Democrats and Greens) that seems to be off limit.
Migration’s contribution to GDP has been ignored in most of the current political debate, which has focused instead on which policy would be most successful in bringing down the headline numbers. Reform UK’s is the most extreme, with a target of Net Zero migration (numbers coming in equal to the numbers going out). But the other parties are also determined to bring inward migration down, irrespective of the impact on GDP. The one exception is the Green Party, whose approach is more relaxed. Alone along the parties, it addresses the relationship between migration and climate breakdown.
“As the climate crisis worsens and the impacts on people in marginalised communities become more severe, more people may be forced to leave their homes … we will ensure that those who are forced to leave can do so safely and with dignity, without fear or intimidation.”
(Real Hope, Real Change, Green Party, 2024)
Economic growth and natural limits
Labour insists that it can borrow to finance decarbonisation and remain within its fiscal rules by pursuing economic growth. “Growth is our core business,” Keir Starmer said at Labour’s manifesto launch. Labour’s target is for sustained growth in the UK to be the highest in the G7. It proposes to achieve this by measures such as relaxing planning restraints on infrastructure development, and calculates that so long as GDP grows faster than public borrowing, borrowing as a proportion of GDP will fall. Its plans rely on faster growth to produce the finance that is needed for its green infrastructure investment plan.
The growth obsession is what is driving climate change, resource depletion, and biodiversity loss. Labour’s acceptance of a strict debt rule makes it reliant on achieving unusually high rates of economic growth, Yet this growth exacerbates the climate problems it says it wants to solve, and it makes its decarbonisation targets harder to achieve.
Alone among the parties fighting this general election, only the Green Party comes close to recognising how the growth obsession undermines wellbeing - “We can no longer continue to exploit oil, gas, forests and oceans for economic growth - their overuse is already threatening our future survival as well as the future of our economy and society.”
Continued economic growth can only intensify climate breakdown and ecological breakdown, particularly if it is encouraged, as Labour intends, by relaxation of planning controls. Growth is a major part of the problem. It can’t be the solution.
At some point, we’re going to have to develop an economic system that meets basic needs while respecting nature’s limits. The longer we leave it, the harsher will be the conditions under which we’ll eventually be condemned to live.