I was interviewed yesterday by a journalist who wanted to know what I thought Rachel Reeves might do with regard to business taxation, and corporation tax in particular, when she becomes chancellor (assuming that happens). I admit my answer to that question was ‘not a lot' given recent changes to corporation tax by the Tories that, given her comments to the media, Reeves seems unlikely to want to undo or change.
As a result we moved on to discuss how Reeves might manage the economy given that she appears to be unwilling to raise taxation. Nailed down in this way, I was forced to think about this issue afresh, and three very obvious ideas came to me.
Firstly, just as Rachel Reeves seems incredibly unwilling to change tax rates, I also think that she will be just as unwilling to increase personal and other tax allowances from those levels to which the Tories are committed, which are supposedly fixed until 2028. We know that the impact of this decision, taken in 2021 before the onset of a bout of inflation, has now imposed a substantial cost on households and businesses in the UK and proportionately increased tax revenues despite the poor UK economy in recent years. Office fir Budget Responsibility (OBR) forecasts (such as they are) are based upon the assumption that these allowances will not change, and I am quite confident that Rachel Reeves has no intention of doing any such thing.
Secondly, I strongly suspect the Rachel Reeves believes that inflation will fall significantly over the next few years, probably to levels lower than that currently knowledged by the Bank of England, and even significantly below their 2% target. Given the way in which supposed interest charges on index linked bonds have been calculated by the ONS this means that there will be a substantial reduction in these charges over coming years, giving Reeves a potential budget for spending of maybe £30 to £40 billion a year.
Thirdly, because inflation will fall significantly, I strongly suspect that Labour will put pressure on the Bank of England to also significantly reduce interest rates. This demand will be hard for the Bank to resist given the size of their likely House of Commons majority. If rates fall to maybe 2%, as would be appropriate at most, central bank reserve account interest will also fall dramatically, from in excess of £40 billion a year to less than £20 billion a year, providing a further boost to Rachel Reeves spending capacity.
That same reduction will also mean that the Bank of England will have no further reason to pursue quantitative tightening, because it will not be trying to maintain interest rates at above market levels. As a result, the cost of new borrowing government borrowing will also full significantly, reducing pressure on Rachel Reeves.
Being precise about the combined impact of these issues not necessary, or even possible. What is appropriate to note is that most of these reductions in the cost of borrowing are not likely at present to be reflected in OBR estimates given the current mood music emanating from the Bank of England, which wants rates to remain high. The OBR has to reflect the Bank's view.
Now will the OBR be able to reflect these changes in the forecasts that they will issue in March.
However, matters may look very different by the time that Rachel Reeves comes to make her first budget statement in March 2025. By then she will, using the meaningless jargon adopted by neoliberal forecasters, have substantial ‘fiscal headroom' within her budget as consequence of rapidly falling interest costs. It will be this reduction rather than sums raised by extra tax revenues that she will use as the foundation for Labour spending plans.
I could, of course, be entirely wrong about this, but Reeves must have some reasons for optimism with regard to spending, and these are the only ones that I can find.
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I doubt we will have to wait until March 2025, unless the election is in January 2025. I’d be surprised if there is not some sort of “fiscal event” within a few weeks of an election.
That said, it is not entirely clear what if anything a Labour chancellor might actually do. Perhaps they are keeping their powder dry. Perhaps they just have few ideas.
And the relatively benign fiscal conditions you forecast could easily be blow off course by events. Widening conflict in the Middle East, say. Invasion of Taiwan. Collapse of Antarctic ice sheets and catastrophic sea level rises. The election of Donald Trump leading to the US withdrawing from NATO and other overseas commitments.
All the last points you make are true.
But that is a might big contingency, all the same.
“Widening conflict in the Middle East, say. Invasion of Taiwan.”…..and not forgetting Russia’s unfinished ‘operation’ in Ukraine.
All these events can quickly escalate, forcing up energy, resource & material costs and hence inflation.
Until we have stopped relying on oil, gas & resources from foreign ‘despots’ we are hostages to rapidly changing fortune, completely outside of our control (And the BoE’s) !
Ideally Reeves would print & issue gilts and perhaps abolish the OBR (the name is Orwellian and its output is only aimed at keeping the neoliberal slo-mo disaster on the road).
None of this will happen and by 2026/2027 buyers regret wrt the Uk population will have kicked in. Labour will get torn to pieces by political tidal forces. (The mental health disaster in Norwich is but the tip of a very large iceberg – there will be lots more & fingers will point at Labour “wot yer gonna do about it”? – answer from LINO – there will be none – because there is no answer in the neoliberal playbook that LINO seems to use).
The treatment of Index linked gilts (although wrong) will certainly mean a fall in “interest” costs; interest paid on reserves will only fall if the BoE plays ball…. or the issue of “interest paid on reserves” is tackled!
Of course, none of this is necessary – a programme of spending does not rely on this “headroom” – but I guess we take what we can when we can. I just hope she doesn’t start talking about debt reduction or tax cuts and focuses on what we really need.
“I guess we take what we can when we can”.
The problem is the government is spinning a tale in order to use what they can take out of it; in order to justify reducing taxes for the ‘undeserving rich’ in the Budget (I just thought I would demonstrate – anybody could play this kind of cheap game). What “we” will ever see out of it remains an ambitiously improbable moot point.
The payment of interest on reserves is not going to be debated; it suits the bankers, and the neoliberal politicians that even in current circumstances they can exploit it politically. All the neoliberal boxes are ticked.
As an ex-bank of England employee, Rachel Reeves is very unlikely to reduce interest rates as she is pro banker and banks will lose their nice little earners they have now from the reserves they hold and the interest they get from mortgages and loans. Also if Labour wants to ape the Tory nonsense of bringing down the so-called national debt she will welcome any excuse not to take advantage of having more “fiscal headroom”..
To properly understand what Labour will or will not do you have to get to the heart of the way the leadership thinks and I think Abby Innes in her book “Late Soviet Britain” provides it (see page 107 in Chapter 4). Her key argument is two fold.
Firstly, life is uncertain followed by death.
Secondly, human beings don’t want to accept this and create utopian ideologies or doctrines such as religious beliefs, communism and market fundamentalism.
Thirdly, because of the first two inescapable factors uncertainty and death these doctrines can only hold up or retain credibility if there is “organised forgetting.”
To illustrate this in regard to Market Fundamentalism or Neoliberalism she says because people find it hard to foresee their future health and income they tend to under-insure in regard to private healthcare. This results in a need for the state to step in but the Neoliberals conveniently for their doctrine “organise” their brains to “forget” this flaw in their utopian doctrine.
It’s therefore possible to say these doctrines are “SAD” meaning suffering from Selective Amnesia Disorder. SAD of course can also refer to such a utopian way of thinking as a Selective Amnesia Doctrine.
Neat
I am not that far into it as yet
I’ve just ordered it-maybe a two week wait, but it looks to be a very interesting read.
It would be nice to have someone from the Labour ranks that knows wtf they are talking about and is dedicated to making things better for all of us. Right now, fat chance.
Well if you take Abby Innes’s point and extend it then all the UK’s political parties are SAD ones completely unaware that the core doctrines they hold suffer from a Selective Amnesia Disorder. It’s a disorder because ultimately there’s a failure to recognise human beings cannot hold “certain” utopian doctrines because of the presence of uncertainty in the universe where life is involved (when did a priest ever, for example, describe in any detail the form Heaven would take? To experience Heaven requires the exercise of consciousness when you’re there just like on Earth. The one we operate on Earth requires constant selection, separating good from bad, negative from positive).
Uncertainty, therefore, means there’s always a role the state can play to mitigate the effects of uncertainty and to do this politicians have to understand how a country’s monetary system works in order for the state to act (often promptly 2008 GFC and Covid pandemic) by creating and spending money.
If you hold a doctrine that permits/insists you be amnesiac and not investigate the need for a country to fully mitigate uncertainty through being in a position to create and spend money then this undoubtedly is a human disorder albeit born of our craving for utopian assurance.
Innes sounds as though she is riffing of Tim Snyder’s ‘The Road to Unfreedom’ – particularly on the idea that life is short and brutal.
Is such expansion necessary on these issues?
I thought it was quite simple.
In order to be able to cope and plan for life, you have to have security and income/money is necessary to do this and forms of insurance – made affordable – is one way that can be done.
What tends to be forgotten is that people need money to contribute to the future – jobs, decent pay and that the state as an organising principle though pure volume is an ideal provider of such services as pensions, healthcare etc.
In other words, it is the acceptance of inequality, austerity and privatisations based on faulty crowding out theories that makes people forget about the future and live hand to mouth.
This is what was supposed to separate us from other animals – these elements of ‘society’ which are just an extension of mankind’s ability to organise and protect – something the Neo-libs completely contest with no evidence at all.
I’m all for high-minded intellectual discourse on the state we are in – but this ‘craving’ is just a real organising principle of mankind that has made us so successful as a species and I reject the idea that it is utopian.
It is crap politics that has undermined society. I don’t thing society has forgotten anything; nor have the politicians, They are trying to get away from the recent past because the rich have bought them and are using politics to make a world they want.
That is now the problem – think about why and how political funding rules are changing.
From what you have written, Abby Innes seems to have taken the psychological diagnosis of malignant narcissism and widened it from the individual to include the social collective.
Narcissists lack any self awareness and are aggressively resistant to taking advice however well rooted in responses to ongoing visceral disasters.
Accordingly, they can only operate socially through either being the Boots or the Doormat. Victors or Victims.
So neo liberalism could be seen as the religious ideology of narcissists.
Our entire society is literally mentally ill?
No
But its leadership might be
It is riddled with loathing for everyone else
“The problems we face today are there because the people who work for a living are now outnumbered by those who vote for a living.” Anon
To expand on my point above – I get really nervous when I hear people talking about ‘utopianism’ – especially in the vein (perhaps) that Innes is. I agree that fear of death is at the root of it but also making life easier is also at the root of it too. It is about surviving for as long as possible and surviving well – flourishing in fact.
Having read Michael Hudson and spend/spending lots of the time with the late/great David Graeber, it is a historical fact that early societies organized themselves internally along the lines of co-operative methods and not competitive ones (but may have competed with other societies/nations). You also have the ancient Chinese and their way of rule (the Guanzi) which was an interventionist methodology to prevent economic disadvantage and retain the goodwill of the people and help to maintain some form of co-operation between state and individual.
So, I contend that none of this was ever utopian – it was PRACTICAL. It was practical from even the first proto human beings that they stuck together and helped each other out. How an earth could a puny homo sapien survive in a world of big predators and compete with bigger animals than him/herself for space? By ganging up with other homo sapiens. It’s simple. Lets get rid of the utopian element in progressive thinking once and for all.
What Neo-liberalism has done is essentially internalise competition within society as well as negate man’s cooperative nature. Von Hayek is on record as not even considering self sacrifice or kindness when considering the order of human priorities – not just a negation of but a rewriting of human history that is actually unacceptable.
It is those who went to the Mont Pelerin meetings; the Chicago School ‘economists’ and Ayn Rand who are the utopians – not Karl Marx or Jesus.
Their utopianism is that everyone just has work toward their own needs and no-one else’s in order for the world to be perfect.
Well, a lot of people are looking after their own needs right now.
And look at the state of us?
We are living in a Neo-liberal utopia right now and this is what it looks like. It is utopian however only to the elite club who as Frédéric Bastiat said:
‘When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.’
Fact.
BTW – I originally had a typo above in Neo-liberalism.
I’d put ‘No-liberalism’ instead. But it seems still an accurate way of describing the ideology because that is where it is going. So in my view, ‘No-liberalism’ in not even a typo. It is the the road to unfreedom.
Oh my, what a brilliant comment. Thank you for gifting me academic references (necessary proofs for institutional acceptance) for the conclusions about our present truly illiberal dystopia that have been hard-won by me purely through brutal personal experiences. I could not agree more with everything you have written here. True societal pragmatism is always rooted first and foremost in placing kindness and empathy for others above purely personal desires.