Labour and tax. How does one accurately prospect the blood which can be squeezed from a stone?

Another day, another fiscal black hole. This time, the (diameter, area, depth? What dimension of the black hole does the sum measure?) has apparently grown to £50 billion, according to NIESR:

“Slowing economic growth, a weak jobs market and the cost of Labour’s about-turns on welfare spending have combined to plunge government finances deeper into the red, the National Institute of Economic and Social Research (Niesr) warned.

“The Chancellor is now on course to miss her borrowing targets by £41.2bn, the think tank predicted. If she wants to restore the £9.9bn of headroom maintained since last year’s Budget, Ms Reeves must therefore raise taxes or cut spending by £51.1bn.”

It’s a very familiar story and so we’re not going to rehash it again. What I want to consider is what the Chancellor’s scope for seriously raising taxes actually is.

Of course the answer, on paper, is ‘a lot’, especially if and when she finally decides to really let go of Labour’s various pre-election promises and start raising the big revenue-raisers such as income tax, VAT, or national insurance. To some on the left, this offers a much more palatable way out of the Government’s latest fiscal gravity well than its various efforts to cut spending. As the New Statesman put it on a recent cover: ‘Just raise tax’.

There are plenty of interesting proposals in there, especially around tax reform and the abolition of NI. But the critical section I want to highlight is this:

“Many of those closest to Starmer and Reeves believe tax is at the core of the enragement of ordinary voters. As they see it, middle-income workers have seen their living standards squeezed for close to two decades, as their pay has failed to keep up with inflation and taxes have slowly risen to pay for the old, young, sick and unemployed. In this telling, the middle earner has become the cart-horse of Britain, paying out ever greater sums in tax to live in a country in which the schools are falling down and a GP appointment is harder to come by than a Glastonbury ticket.”

Followed by this, which is presented as a rebuttal:

“There is some truth in this account, but it is far from a complete picture. The “tax burden” on the whole economy is high, but taxes on many “working people” are at a multi-decade low. Economists measure the “tax wedge” – the percentage of labour costs that become taxes of any sort – and for an average single worker in the UK, this is among the lowest in the developed world: below the US, Japan, Ireland and Canada.”

Having isolated them, you will perhaps have noticed that the second point doesn’t actually, at least necessarily, repudiate the first one. The implication of the idea that Britain is not actually a high-tax country (except for “workers with good jobs”) is that there is plenty of scope for raising taxes; the Government’s assessment is based on a vaguer but much more holistic assessment of what we might call people’s ‘taxable capacity’.

What do I mean by ‘taxable capacity’? Basically, that a straight comparison of how much the average British worker pays in tax versus their counterparts in other countries offers only a very incomplete basis for assessing how much more taxation a government could reasonably squeeze out of them, because it does not factor in differences either in real income levels or cost-of-living pressures in those countries versus the UK.

There are potentially a lot of the latter, so making a proper calculation of ‘taxable capacity’ would probably be complicated business. But consider a single one: housing. Britain, or at least the most productive parts of it, has an acute housing crisis; as far back as 2016, Londoners were spending a record share of their post-tax income on housing. That’s a more-or-less unavoidable cost for millions.

Say that a given worker in London is paying a lower share of their income in tax than a counterpart in France or Germany. Any assessment that there was more blood to be squeezed from that stone would be obviously faulty if it didn’t look at housing costs in those countries. ‘How much disposable income do workers have and how far does it go’ is a more useful metric than merely ‘how much does do workers pay’.

This would also sharpen attention on the potential drawbacks of ‘just raising tax’. Too often, debate in government circles about taxation seems to treat it a bit like a video-game resource, where not raising tax is merely and purely a forgoing of available resources. But of course in real life, workers – and especially workers, rather than asset-rich older people who tend to be less economically active – spend their income in the economy.

A good example of this, about which I have written on previous occasions, is the precipitous decline of nightlife, especially in the capital. The causes of this are multifactorial, and the active hostility of council licencing regimes plays a big part.

But so too does the fact that the crushing of Londoners’ disposable incomes simply leaves many unable to afford to go out the way we used to. Anthony Breach of Centre for Cities has described the impact of this on regional trade: if workers in the South had more disposable income, they could and would spend some of it on ‘exports’ from the North of England. But they spend it on housing costs instead.

Will Dunn, author of the NS piece, claims that by allowing themselves to be boxed in on tax by Jeremy Hunt, Sir Keir Starmer and Rachel Reeves “effectively agreed to maintain Britain’s long-term political and economic malaise”. But the implied argument – that raising taxes offers a way out of it – is not actually proven, or convincingly argued. Lots of the proposed reforms to taxes are sensible, but that isn’t quite the same thing.

(I’m using the NS as my focus here because it’s a respectable left-wing publication which has made the case at considerable length; it is obviously not just some strange idea of theirs and you can find plenty of leftists making the basic ‘just raise tax’ argument on X etc.)

One could make the argument if it were about raising tax for capital investment, of which the British State has been starved for too long. But that isn’t really what just raising tax would do, except at the margins. Instead, it would be about propping up runaway revenue expenditures which, as I have written before, are eating the state from the inside out. As Karl Williams of the CPS wrote on this site a couple of years ago:

“The best estimates suggest that a combination of pensions, adult social care, and NHS spending on the elderly will more than double from roughly 10 per cent to 21 per cent of GDP over the next 50 years – even as the economy doubles in size! So annual spending on the elderly is set to quadruple in real terms, reaching almost £1 trillion in today’s money.

“Tax receipts already amount to around 36 per cent of GDP, the highest level since 1951. If by 2072 we were to meet the increase in elderly spending entirely from tax, then receipts would need to rise by almost a third, to over 46 per cent of GDP. This is equivalent to more than doubling the share of GDP harvested by income tax, or tripling the corporation tax take.”

“The truth is that middle earners are not being taxed enough for the kind of state we want”, writes Dunn. That position seems to assume a happy world where everything is simply a question of political choices. But what if the truth is much less palatable: that we simply don’t have the economy for the kind of state we want? If not, how is sucking more and more money out of it going to set the country on a different trajectory – rather than tighten the arc of the doom spiral we’re currently in?