I have this morning suggested that the questions that the Labour manifesto poses are threefold. The first is whether their diagnosis of the current state of the economy is right. I have already addressed this issue and suggested that Labour's analysis is right: our economy is in need of radical reform. The second question is whether their prescription is right. And the third is whether it will work. Let me now turn to the second and third questions.
I am going to stand back to answer these questions. There is a great deal of detail in the manifesto, of course. I have no problem with detail. But it's fair to say that what Labour is offering is a macro view of change, and therefore the proposals have to be viewed at this level.
Three really big ideas prevail. The first is that climate change is a massive threat and we need to address it. £400 billion of investment, funded by borrowing, is targeted at this issue. Fundamentally the issue is seen as needing to be addressed through radical change in infrastructure rather than changes in current spending at this moment. And I have no doubt that this is right. The plan is also appropriately targeted at new housing, insulation of existing property, new energy sources and transport. There are some quibbles in the latter: I think the focus in geeen cars a mistake. But overall this prescription is spot on.
The second theme is tackling the state of public services. Health and social care, education and many other critical services have been reduced to a state of near paralysis by funding cuts and are subject to proposals. Again, details can be chewed over, but we are in need of this massive injection of new funding. UK public services are failing. This is indisputable. And there is only one way to address that failing, which is to spend to remedy the defects.
And paying staff more is part of that necessary spending. Public sector employees have done very badly over the last decade and have seen their real pay fall significantly. You cannot supply decent public services on the back of underpaid and demotivated staff directed by politicians who continually tell them they are not worth what they're paid when the public very clearly disagrees with that view.
Third, Labour suggests the private sector is not delivering and has been over-subsidised to do so. Whether that be in decent wages, where an increase in the minimum wage is required, or investment, where private sector performance has been very weak despite the considerable tax incentives thrown in its direction that were meant to adress this issue, or on continuing to concentrate on largely unproductive and socially useless economic activity in financial services in the south east of England which have had massive income and wealth distributional consequences for the rest of the U.K., business has failed. And it has failed desire being given massive tax cuts in corporation tax, capital gains tax, income tax and inheritance tax that were meant to promote the sector according to tax cutting advocates but which have clearly done nothing of the sort as I could, and did, predict throughout the time they have taken place. So Labour is not being anti-business in taking these reliefs away. Far from it in fact: business will still be the largest part of the economy by some way under Labour. Nothing changes that. But what Labour is saying is business should not expect hand outs and support that it clearly does not need because it has not invested as a result. Instead it should make a fair contribution to the society it operates in.
Does that stack as a strategy? I suggest it does. Investment is directed towards the biggest challenge we face. Spending is going to meet real demand. And subsidies that have not worked are being removed. It's plan that could address the problems the UK faces. If being realistic is being radical, so be it. The UK needs this type of radicalism in that case.
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As somebody who does run a small company I can say that what is required is good market for your products and services. If your stuff is selling and sales are growing then it is not a problem to fund investment. In our case (maps) we have had 10 years of steadily falling sales so no amount of cuts in tax or investment allowances etc will lead to us spending on new equipment, etc. In fact we have had to do the opposite which is to cut everything back to the absolute minimum, including no longer having space for me in the office so I now mostly work from home 10 minutes down the road. It is a bit the same thing with something like bank lending. Cheap money is all very well but business won’t borrow whatever the interest rate if they don’t see any opportunity for investment. It was the same problem in the 1930s. Changes in the interest rate largely does not work as a regulator of economic activity. In any case the actual interest rate paid by small business is much higher than any headline Bank of England rate. We have a £9,000 overdraft facility and the APR works out at 30% when you consider everything.
You nail it Tim
And £183 billion of extra demand is precisely why business will stay here
I don’t think it was from you, but there was another figure I heard the other day which is that only 5% of the World’s billionaires live in a country other than the one in which they were born. People just don’t up and move because of a tax change (unless you are Philip Green!). Moving your assets is of course another thing, but generally folk live where they do because it has the right type of house, schools, friends and relatives nearby, climate, etc. Unless the tax rate gets extreme and seriously threatens the lifestyle then they are simply not going to move just because of tax. Any migration is a combination of push and pull factors and these change with stage of life. The 22 year (especially male 22 year old) is quite likely to seek opportunity especially if they don’t see it where they currently live, for example the young Somali trying to get to Europe or the young Scot heading for London. Those with families are generally highly resistant to moving and nothing being proposed on the UK tax front would change that. Retiral brings another change where family ties are suddenly less and warm lazy climates become attractive. Tax might come in at that stage at the margins. We are all forgetting that the marginal income tax rate in the 1970s was 90%. If you earn £5m, though, that still means you are ‘barely scraping by’ on £500,000 a year.
I also noted that one of the questioners on Question Time last night (just from the reports as I don’t watch TV) was adamant that the £80,000 a year of his earnings was nowhere near being in the ‘Top 5%’. In fact he thought he was barely in the top 50%. There was a study done with a sample of folk earning £200,000 a year who were asked if their salaries were below average, average or above average. Almost without exception they picked average. This is because in deciding these things people look at their friends and work colleagues and only ever look upwards. You note a colleague getting more and want that yourself. You never take any notice of somebody earning less! We do end up with all sorts of peculiar delusional attitudes as a result.
You are right about people not moving
The evidence in the USA is people will not move more than about 20 miles across a state border to gain a significant tax advantage by doing so
And the delusion about not being well off on £80,000 is commonplace, but only amongst those well off
I agree wholeheartedly with all of this that is for sure.
Can we use “earn” instead of earn when discussing ridiculous salaries please.
The big issue regarding pay in local government in my opinion (I’m manager in local government) is those ‘job evaluation toolkits’ imposed on service managers by HR departments.
This sets a rate of pay in comparison to all other roles.
So if the toolkit spits out a pay rate for a particular role that is below market rate (often the case for skilled work), then you don’t get many applicants for advertised positions. I know of roles which have been vacant for years for this reason, despite regular re-advertisement.
The work then gets done by interims at higher rates that reflect market forces. The money is there – just not paid to people who are ’employees’.
If you have a solution to free us from this toolkit, please let me know.
I fear not
Typo above desire instead of despite