Just how much more desperate can Rachel Reeves get? Giving an even heftier clue to Radio 5 listeners on Monday that she is going to break Labour’s manifesto promise and raise income tax, the Chancellor explained that this is necessary in order to raise Britain’s lousy productivity record. Sticking to the manifesto commitments, Reeves said:
Would require things like deep cuts to capital spending. The reason why our productivity and our growth has been so poor these last few years is because governments have always taken the easy option to cut investment in rail and road projects, in energy projects, in digital infrastructure. As a result, we’ve never managed to get our productivity back to where it was before the financial crisis.
It isn’t hard to spot the great big hole at the centre of the Chancellor’s argument
It isn’t hard to spot the great big hole at the centre of the Chancellor’s argument: what about cutting current spending instead? What about tackling the ballooning welfare bill – as indeed Reeves tried to do before her backbenchers stopped her doing so? Or how about holding down public sector wages, which have been royally increased since Labour came to power? Or cutting the number of civil servants? All these could obviate the need for tax rises, yet they don’t seem to have entered the Chancellor’s calculations at all.
Moreover, if Reeves really thinks that the failure to press ahead with road and rail projects are the cause of Britain’s low productivity, then why did she cancel the Stonehenge tunnel soon after taking office last year? That means the south-west of England is still without a direct dual carriageway link to London, 66 years after the beginning of the motorway age.
In her comments, Reeves reveals a philosophy that seems to have become almost universal on the Left: a belief that only state spending can invigorate the economy. Take money away from state spending – a policy Labour people call ‘austerity’ – and you doom the economy to slow growth or even decline. Take money out of people’s pockets through tax rises, on the other hand? No, that is no problem. That doesn’t harm the economy at all.
But of course it does. Ratcheting up income tax is going to mean less money for people to spend in the shops, in restaurants and other leisure facilities. It will make them less likely to buy a new car or move to a larger house – all of which will depress economic activity and so compromise the amount of extra tax revenue which Reeves hopes to gain. Higher taxes on business, meanwhile, stunt investment.
If you want to increase UK productivity, the logical thing to do would be to transfer resources from that part of the economy where productivity growth is most feeble and direct them to the part of the economy which has managed to increase productivity in recent years. In other words, spend less money in the public sector – where productivity is only just above where it was in 1997 – and let businesses and individuals keep more of their own money to spend and invest.
Instead, we are caught in a feedback loop of more state spending, higher taxes and less economic growth, resulting in the government increasing taxes and spending in the forlorn hope of getting growth moving – and so on. In the unlikely event of Reeves politically surviving the fallout from ditching one of Labour’s central election promises, it is a safe bet that she will be back for a third revenue-raising budget, employing even more pathetic excuses, next year.
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