Plucking Geese & Shearing Sheep

The Economist recently invited applications for a UK Economics correspondent. No previous experience as a writer or an economist was a prerequisite, but they were clearly looking for something other than this, as I wasn’t shortlisted…

After six months in office, an initial assessment of Rachel Reeves’ stewardship of the worsening UK economy can be characterised as one of hope over expectation. Working frantically to wield the levers of growth and taxation, Ms Reeves has all but ignored the one labelled “Short Term Impact”: Spending.

Settlement of the doctors’ strike could be justified as necessary to provide taxpayers with the service they are paying for—rather than the more tenuous claim that a healthy workforce is a precursor to increased productivity. But the dispute with train drivers, on the premise that a more reliable railway stimulates economic growth, is unlikely to yield any gains beyond those for a select group of already well-remunerated trade union members.

It is also indicative of the ideological conflict that bedevils all Labour Chancellors: that the most effective measures—significant cuts in public spending and a radical simplification of taxation away from earned to unearned income—are off the menu.

So instead, Ms Reeves has busied herself with growth initiatives. Supporting a third runway at Heathrow will generate payback, assuming the project goes ahead, but only after this government is long forgotten. And other than a boost to the construction industry—which may in turn suck in low-cost foreign labour—short-term gains are negligible. Similarly, tinkering with planning controls is eye-catching, but ascribing growth beyond the construction sector is a stretch. Piffling wins, like the £100 million investment (0.0045% of UK GDP) from a recent boondoggle junket to China, will not move the needle on an economy that has flatlined over the last decade.

The record on taxation is equally unimpressive. The hike on employers’ National Insurance contributions may appeal to workers as a tax on business owners, but the unintended consequence is that fewer workers will be hired. Likewise, the Institute for Fiscal Studies warned that increases to Capital Gains Tax (CGT) would reduce receipts by £400 million this year and £1.6 billion next year. These warnings went unheeded and proved popular only with people who generally don’t pay CGT and fail to realise that it is largely optional for those who do: the wealthy, who have the option to hang on to their assets rather than see them unfairly (in their view) targeted.

Meanwhile, the UK’s £9.1 trillion of residential housing stock—much of it the result of the rampant house price inflation over the last 40 years that underpins baby boomers’ wealth—remains lightly taxed, while work itself is disincentivised. Fiscal drag pulls ever more taxpayers into higher-rate bands, while causing many (often the aforesaid boomers) to give up work early and thus reduce or cease their contributions to the Exchequer.

Other potentially fruitful areas have been ignored completely. The underfunded social care gap (estimated by the Health & Social Care Committee at £7 billion) could be plugged by treating all inheritances over £10,000 as unearned capital gains. The total probated value of such estates is estimated at £80 billion annually. If subject to 20% CGT, this would raise £16 billion a year compared to the £4.5 billion raised currently. However, it would be unpopular with those expecting modest bequests (traditional Labour voters and working-class Tories), despite the inherent equity of funding this deficit from the estates of the many who have recently benefited from improved old-age care.

Instead, IHT reforms have been limited to measures that have swept up small farms along with the intended target of billionaires’ IHT planning—characterised by Sir James Dyson, who owns a rumoured 33,000 acres of agricultural land—as a wheeze against this hated tax. Justifying the policy on the basis that it affects very few farms displays a lack of political nous, as the unintended consequence has been to galvanise large swathes of the electorate in an almost Gallic show of solidarity with beleaguered farmers.

Rather than heed the maxim of Jean-Baptiste Colbert, Finance Minister to Louis XIV—“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”—Ms Reeves appears determined to pick tax policies that achieve the opposite.

Which just leaves spending. Faced with a benefits bill that has risen threefold to £300 billion since 2010, and a seemingly inevitable increase in defence spending to 5% of GDP (£100 billion or more), the options are bleak and narrow. It is now the flock of 22 million UK benefit recipients that needs to be shorn.

Not a task that Labour Chancellors are naturally predisposed to.