The Tax and Spend Party

Coming to power amid a fanfare of public support, the Labour government was gifted a growing economy with falling unemployment, a budget surplus and low inflation. No party had ever come to power in such good economic times, and they had only done so by accepting the Conservative economic plans and their neo-liberal economic theories. For a few years, all seemed to go well, prudence was the keyword, used as often as possible and shown wherever possible. However, as is now clear, Labour soon returned to a “spend” government, and soon will have the “tax” prefix.

To see how much has changed, the first few years must be noted. During this time the party spent less than even the Conservatives planned to, gave independence to the Bank of England, enjoyed a budget surplus using it to repay national debt, and even cut income tax by 1%. It would be hard to have been further from “tax and spend” if you tried. But the true test of a government is not during inherited prosperous times, but as the first economic wobbles shook at the turn of the Millennium, a change in gear occurred. Here comes the “spend”.

At the start of the 21^st Century, the pound rode high in the currency markets, a stable and trusted currency amid a sea of untried and untested new Euros. Exports slumped, growth stalled, and unemployment started to climb. The Bank of England predicted a housing crash, whilst recession was prophesised by all. With the election just a year away, panic set in. Weathering the storm was not an option for new Labour. Suddenly, but quietly, it borrowed a lead from old Labour, create artificial employment. The first argument that Labour has reverted to its old big spending ways is through government jobs. Previously, the number of civil service posts had dropped 816,000 from 1992 to 1998 and continued to fall, including before that period. However, since 1998 the figure has rose every year. Today 20.4%, or over 1 in 5 people, are government employees. The figure today is 680,000 higher than in 1998. Few of these jobs are beneficial, for instance the number of pen-pushers in the English schools has risen by 47% to 59,000 whilst the number of teachers increased by just 8.6%, the number of doctors increased by 30% whilst NHS managers have increased by 66%, police officers up by 11.4% but admin staff up by 34%. The vast unproductive bureaucracy grows further through quango agencies and local government agencies, and the many contractors employed for unnecessary jobs.

Labour has moved from publicly creating artificial employment through inefficient nationalised industry to creating artificial employment through a vast, ever increasing and all interfering bureaucracy. The words of government do not match the actions. As Gordon Brown promises 80,000 job cuts, thousands more are employed. Even these cuts are not cuts, most are relocations to the North of England and Scotland, the others job redefinitions.

Meanwhile, whilst employing a city the size of Canterbury to manage hospitals, the government has enjoyed other spending sprees as well. Is children’s day care a government job? Apparently, and that’s £1.5 billion a year from the Treasury just for Sure Start. Money has been ploughed into departments, but has much improved? The major works are funded through the PFI (Private Finance Initiative) and are effectively paid for on credit, so this isn’t the big drain. Billions have however, and are still being, wasted through bureaucracy, poor management, and on services which should not be part of the government mandate.

Public sector net borrowing is predicted to be £32bln in 2005/2006, and these figures rely heavily on high growth of around 4%, which hasn’t been forthcoming, and have been understated for each and every one of Gordon Brown’s annual budgets. Current projections are for 1.5% growth instead. Net debt as percentage of GDP has increased from 30% in 2002 to 35% today, with the trend very visibly upwards. Compare this to Australia, where national debt will be eliminated by 2006, or the three years before, when net debt dropped by 9% of GDP. The Golden Rule, of maintaining budgetary balance over the economic cycle except for investment, has been missed and fudged, first with reclassifying certain running costs as investment, then later extending the cycle. Even the golden rule is more bronze, since debt for investment is still debt with interest, and still costs. A true golden rule, and a prudent government, would maintain budget balance including all costs over the cycle, or even on each budget, preferably with a surplus to repay debt. With figures like these, Labour has clearly become a big spending government, mostly on bureaucracy.

And to a very great extent Labour has already returned to its “tax” ethos. By freezing the income tax bands, more and more people find themselves in higher bands due to increased earnings and inflation. This “fiscal drag” has raised many billions for the Treasury. In addition, rising council tax bills, due to decreased government grants and increased demands of local councils, has seen council tax bills double since its introduction. Stamp duty raised £5bln in 2005, again due to fiscal drag from house price rises, it having raised just £675m in 1997. Even the very much publicised rise in rates cut just £250m from the revenue and effected a tiny percentage of homes. Tax has in general risen sharply through fiscal drag, in 1997 the average standard rate payer earning £25,000 a year paid 36% of earnings in taxation, today they pay 41%. Higher rate payers earning £40,000 contributed 36% in 1997 and over 50% today. Since 1997 about 1.6 million have become higher rate tax payers due to fiscal drag. This year 200,000 people will be fiscally dragged into the higher rate, with 100,000 entering the lower rate by the same process. The higher rate band of £37,295 is only 60% above the average. The income tax revenue has increased from £69bln in 1997 to £123bln in 2005, inheritance tax from £1.6bln to £2.9bln and capital gains tax from £1.1bln to £2.3bln today. In total, the increased tax by Labour since 1997 is £1.5bln every week. All of this by stealth.

With this tax ethos and low interest rates, consumer debt has soared. Now with debts of over £1 trillion, the public are facing a bleak future. As consumer spending, which has propped the economy up since 2000 along with the government spending, hits the buffers, growth has halved and the deficit is estimated at £36bln. To meet his own damaged but publicly known golden rule, Gordon Brown must raise £11bln a year. Already clearly a tax and spend government, fiscal drag may have reached its end, and income tax will have to be raised by 3% to cover this shortfall, as spending cuts are unlikely.

Since 1997 a total of 66 stealth taxes have been introduced, and in 2005 the government covered up the Treasury’s report on flat rate income tax. The report, supporting the simple and effective replacement of income tax, had key areas blocked out as part of its release under the Freedom of Information Act. A separate report by the Adam Smith Institute backs a 22% flat rate tax and £12,000 personal allowance/exemption. Under this system the bottom 40% (around 10 million people) would save between 8.9% and 12.1% of their salaries, paying no income tax at all, those earning £11,500 being the best off group (12.1% saving). Only a very few huge earners would save more. The refusal by the government to look into the tax, which has transformed many countries and works well, is another sign of their high tax mentality. The cost of this tax change would be £12bln, less than half the enlarged civil service cost. A major boost to the economy, it is believed to be revenue neutral within 3 years, would end much of the benefits trap, stop the overtime not-worth-it trap, encourage work and help low and middle income families.

But Labour is fundamentally opposed to reforming tax in any way seen as non-progressive, even though the large allowance makes it certainly not regressive, and the spending spree continues. It could be said the first few years were just to build an image, although bureaucrat creation soon soared in 1998, but the first years seemed so prudent. But already a tax and spend party once more, soon taxes will be raised, and the image shattered.