Winner of the New Statesman SPERI Prize in Political Economy 2016


Tuesday 23 July 2024

More power to the OBR?


The new bill to ensure that a UK government obtains the OBR’s analysis for any fiscal event is largely symbolic, because the reaction to the Truss fiscal event will be enough to ensure that happens anyway. However there does seem to be a more general concern that the OBR’s analysis has come to dominate fiscal policy making. In this post I want to explore this concern in more detail.


Before the OBR was established, the Treasury published its own forecasts of what the consequences of any budget would be for the public finances and the UK economy as a whole. The obvious problem with that arrangement was that politicians may lean on Treasury forecasters, and secrecy ensures we will probably not know if this has happened. It clearly makes sense that fiscal decisions are made on the basis of an independent forecast rather than the forecast politicians would like to see.


Why does it often appear as if the OBR’s forecast is determining fiscal decisions? The reason is the fiscal rules chosen by politicians to constrain what they can do. If, for example, a Chancellor wants to cut taxes by as much as possible while staying within their own fiscal rules, then the OBR forecast will determine by how much taxes can be cut. Exactly the same would happen if the Treasury rather than the OBR did the forecast, with the only difference being that politicians could lean on the Treasury to produce a biased forecast.


Is some of the concern about the OBR’s role really a concern about fiscal rules? I have written a great deal about fiscal rules, but I think it is important to remember the underlying principle behind them. The principle is that fiscal decisions should be sustainable, by which we mean that tax or spending decisions described as permanent today do not have to be reversed at some point because the path of the public finances or the economy is unsustainable, and that this lack of sustainability is clear given the information we have today.


Fiscal rules, like an independent budget forecast, are designed to protect the public from being misled by politicians trying to gain political advantage. Fiscal rules make it harder for politicians to cut taxes or raise public spending just before an election, only for whoever wins that election to have to raise taxes or cut spending to restore sustainability.


When some talk about the OBR having a veto on fiscal decisions, in reality they may simply have a complaint about how well fiscal rules capture the idea of sustainability. Suppose, for example, that you thought tax cuts would, over a decade, generate sufficient extra growth to help pay for themselves. These tax cuts would be sustainable in terms of the public finances, but fiscal rules that only looked five years ahead might suggest that they were not sustainable. The same argument could be used for some public investment projects, for example. In both cases the problem is not the OBR, but the fiscal rules that governments have chosen.


A more interesting case is where politicians have a particular view about how the economy works, which is not shared by the OBR. For example politicians might believe in a Laffer curve where tax cuts pay for themselves because they incentivise people to work more (generating higher tax receipts). The OBR, drawing on the evidence and the consensus view of economists, might think these incentive effects are much weaker, and so in their forecast tax cuts would not pay for themselves.


Does the OBR have a veto in that case? No, because it is open to the politicians to ignore the OBR’s forecast and go ahead with their tax cuts. All the OBR forecast forces them to do is be explicit about why they are ignoring that forecast. This is surely a good thing, because it allows voters to eventually judge who was correct. Of course politicians might not be prepared to put their beliefs on the line, which is why this option has never been used since the OBR was established.


For these reasons, saying that the OBR has a veto on fiscal decisions, or that the OBR reduces democracy, is just wrong. Indeed the opposite is the case, because by making judgements more transparent the OBR increases democratic accountability.


However I do think there is a legitimate concern that recent budgets have become rather mechanical, and that this has over-emphasised the role of the OBR’s forecast. Here I think the fault is with the politicians and to some extent the media rather than the OBR. The biggest and most important fiscal issues involve the structure of taxation and spending. Have we got the right balance between direct (e.g. income tax) and indirect (e.g. VAT) taxation? Are we right to exempt so many goods from paying VAT? How does the income tax schedule influence incentives, and is it fair? Should the rich be paying more tax? How do cuts in some areas of public spending increase public spending elsewhere? How much should the biggest area of welfare spending, pensions, be provided by the state? The list of such issues is endless, and these questions are usually much more interesting than a discussion of how much room the latest OBR forecast leaves for tax cuts.


Unfortunately in recent years such questions have played a rather minor role in budget analysis. In part this is because politicians have focused on the distributional aspects of fiscal measures, and whether these might win them votes among those groups they want to attract. This can lead to an overall tax system which is badly distorted, with costs to society as a whole.


The second most important issue in fiscal policy involves the size of the state. How much more spending do we need on the NHS, education, defence etc, and what taxes need to be raised as a consequence. The idea that the OBR forecast determines the scope for tax cuts is only true if you treat spending as given, and similarly the notion that the OBR forecast tells you how much more can be given to the NHS is only true if you think you cannot raise taxes. In recent budgets there has been little discussion of this because the Conservatives adopted spending projections which were already implausibly low, so tax cuts depended entirely on the OBR forecast.


The media may also be partly responsible for the focus on the arithmetic of budget decisions (and therefore the OBR forecasts), rather than these other issues. Any journalist can ask whether a budget adds up in terms of meeting fiscal rules, while it requires a bit of knowledge or prior research to ask about some of these more interesting questions. It means that all too often IFS and other expertise is underused by the media.


All this suggests that the OBR as it currently stands has very little influence over the budget beyond providing an independent forecast, and certainly has no veto power over politicians. The new bill ensures that the OBR, rather than the government, decides whether a new OBR forecast is warranted after a big fiscal event, which also makes sense.


Going beyond this new legislation, there remain areas where the independence of the OBR’s forecast could be improved by allowing them not to take government projections of their spending totals or policy decisions as given when past evidence suggests they are highly unrealistic.


The most obvious example of this for the last government was their repeated freezing of fuel duty, while continuing to pretend that in the future they would raise fuel duty. The legislation setting up the OBR forced it to take the last government’s word on future fuel duty, even though it broke its word continuously. This could easily be changed, and it should be.


I would go further, and give the OBR discretion to look at scenarios based on alternative projections for government spending and taxes. The latest review of the Bank of England’s forecast said it should look at more scenarios, but at present the OBR is not allowed in its budget forecast to look at any scenario that involves an alternative path for government spending and taxes (‘policy simulations’).


Ending this restriction would allow the OBR to avoid being saddled with unrealistic assumptions about government spending, like those bequeathed by the last government. But more generally doing policy simulations alongside its forecast would give the OBR the opportunity to enrich the fiscal debate. The most obvious example was the Coalition’s austerity policy. Indeed I suspect the reason the OBR is not allowed to do policy simulations alongside its forecast is because Osborne did not want the impact of austerity on output exposed in this way.


Such a change to the legislation governing the OBR would give it a tiny bit of political power, because it could choose whether to do policy simulations and what these simulations would be. Experience suggests that it would use that power responsibly, generally reflecting the policy debates in parliament. It could help make the OBR a tool for parliament as a whole, rather than just an instrument of government. The OBR would still have a lot less power than some other fiscal councils around the world, which operate more as fiscal watchdogs directly criticising government policy.


More generally, I normally find complaints by politicians and others about ‘rule by technocrats’ unconvincing and often self-serving. If the choice is between on the one hand having technical work done by civil servants under the direction of politicians, work that may or may not become public, or on the other hand having this work done by independent institutions that always publish their analysis, I prefer the latter. The key is to ensure that these independent institutions are accountable to parliament, as the OBR is to the Treasury Select Committee.


Tuesday 16 July 2024

Two myths about the future of the Conservative party

 

In my last post I berated those in the media who hyped the threat of right wing populism represented by the votes won by Farage’s Reform party when the main story was the defeat of a right wing populist Conservative government. In this short post I want to look at what I believe are two additional myths about politics on the right in the UK.


The first myth is that a consequence of the election is that the Conservative party will be forced to come to some kind of agreement with Farage. Perhaps some kind of merger of the two parties, or instead allowing Farage to become a Conservative party member with some shadow cabinet post and perhaps even to become leader. (In practice there is little difference between these two options, as Reform is just a company run by Farage.)


This is a myth because the success of Reform in the last election was largely due to the unpopularity of the Conservative government, and in particular their failure to stop small boats full of refugees crossing the Channel or to reduce overall immigration numbers. The only other time Farage obtained similar vote numbers in a general election was in 2015, again reflecting the failure of a Conservative government to reduce immigration. [1]


Since 1997 the Conservative party in opposition has championed socially conservative policies and has therefore captured most of those voting on these issues. The Conservative party will continue to focus on these issues in opposition. As a result past evidence suggests that Farage or any other right wing populist outside the Conservative party is unlikely to gain anything like the number of votes that Farage obtained in 2024 as long as the Conservative party is the main opposition party.


Could past evidence be a bad guide in this case? Is the fact that Farage has finally become an MP likely to make much difference? This seems unlikely. The mainstream media has in the past been obsessed with Farage, as his coverage during the recent election shows, so the fact that he is now an MP is unlikely to make much difference. If anything, the party in the media is likely to be more critical of Farage in the future if he is seen as a threat to Conservatives. 


Of course it is still possible that enough people in the Conservative party believe in this myth, or find it politically advantageous to pretend to believe in it, to attempt making some kind of deal with Farage. (Another possibility is some kind of implicit agreement to divide up some constituencies between the two parties, in much the same way as Labour and the LibDems did in the last election.) What seems most likely is that the main impact of Farage will continue to be his influence on the internal dynamics of the Conservative party.  


The second myth is that the forthcoming Conservative party leadership battle will be between the right wingers and so called moderates in the Conservative party. It is a myth if you take moderate to mean near the centre on economic and social policies. Instead the split is better seen as between those who are happy to embrace populism, and those who would prefer to farm out populism to the party in the media. (I describe what I mean by populism in last week’s post.) It is the division between Cameron/May style Conservatives and those who prefer the populism of Johnson or Sunak.


In economic terms, both right wingers and moderates embrace policies well to the right. Tax cuts are prioritised over public spending even when many areas of public spending are in crisis. Private water companies are free to exploit their natural monopoly even if that means polluting rivers and beaches. Energy companies enjoying record profits because of the invasion of Ukraine are made to pay additional tax with great reluctance, and with loopholes designed to increase global warning.


On social policies, pretty well all Conservative MPs now support Brexit, and all MPs supported the cruel and ludicrous Rwanda policy. If there is a division here, it is between right and far right. The division is instead about presentation rather than substance. By farming out populism, ‘one nation’ Tories can pretend to oppose the social divisions inherent in populism, yet happily adopt most of the policies advocated by right wing populists to gain votes. Another possible division between moderates and right wingers, once power is achieved, involves priorities. Moderates may not be prepared to significantly harm the economy by pursuing socially conservative policies, whereas right wingers are.


The idea that a defeat as large as the last election might lead a significant number of Conservative MPs to return to anything like a version of pre-Thatcher conservatism (i.e centre right on both the economic and social dimensions) is for the birds. I have discussed the reasons for this before. First, the party in the media will not support such a move. This is a symptom of a more general problem, which is that the party is increasingly set up to defend the interests and dominant ideology of a proportion of the top 0.1%. Second, the membership is likely to support leadership candidates that are to the right in both dimensions, and has the final say on who the leader is.


Counteracting these pressures is the difficulty that a party with policies nearer the extreme than the centre will find getting support from voters. However this is not viewed by Conservative MPs, newspaper owners or party members as a critical concern at the moment for three reasons. First, governments rather than oppositions tend to win or lose elections, and even good governments can become unpopular for reasons largely outside their control. Second, after a time voters tend to want change. Third, the media tends to focus on personalities rather than policies, and because of the dominant right wing press [2] right wing parties in particular are able to disguise how right wing their intentions actually are. For all these reasons a Conservative opposition will get elected to government at some point, even though their positions on most policies remain well to the right.   



[1] In 2017 and 2019 the UKIP/Brexit party/Reform vote was lower because the Conservative party stood on a platform to implement Brexit. The success of Farage in the 2019 Euro elections was because of a failure of May to enact Brexit.

[2] This is the key reason why the Labour party leaders generally feel they need to move to the centre to win power, while the Conservative party does not. The right wing press will highlight Labour policy positions if they think doing so will be harmful to Labour, and if the right wing press is being honest the mainstream media will follow their lead. 

Monday 8 July 2024

What the Conservative rout tells us about the popularity of a right wing populist government

 

It is jarring to see many journalists on election night fret about the Reform vote and talk about the rise of right wing populism when the main story of the night was the total electoral failure of a right wing populist government. The 2024 UK election isn’t a warning about the rise of right wing populism, but an example of how such populism can completely fail at the ballot box. It didn’t fail by quite as much as I hoped but never quite expected (the LibDems and Greens did well, but Labour’s vote share wasn’t enough to keep the Conservative seat total in double figures), but the overwhelming story was about the unpopularity of the government in all parts of the country and across political preferences.


What do I mean by ‘right wing’ and ‘populism’? The right wing populist gets votes by focusing on nationalism and immigration rather than privatisation and tax cuts. It is right wing in the sense of being socially conservative rather than to the right in terms of economics, although it can be both. Thatcher was not a right wing populist.


The Conservative party has always been socially conservative to varying degrees, although its MPs tend to be more liberal in their own views than party members or what Tim Bale calls the party in the media. What is the difference between being a politician favouring socially conservative policies and being a right wing populist politician? Typically a populist will do two things with any division on social issues.


The first is to elevate concern about change into fear of change and concern about difference into fear of difference. In the case of minorities or outsiders, politicians that want to profit from fear need to suggest that these minorities or outsiders are not just different, but represent a threat to the national majority. The second thing a populist does is to pretend that rather than there being a range of views on social issues in any country, instead there is a ‘silent majority’ of social conservatives whose views have been suppressed or ignored by a ‘liberal elite’. The populist becomes the embodiment of this silent majority, and this enables the ‘will of the people’ to override elements of a pluralist democracy (the courts, the media etc) that get in the populist’s way. This, together with attacking the human rights of minorities and opponents, makes right wing populism to varying degrees authoritarian as well as being socially divisive. The fact that populist’s claims are mostly untrue means that populists tend to lie much of the time.


Here is a conversation between Jonathan Miller and Enoch Powell (see from 5 minutes in until around 9 minutes), where Miller expresses the first difference between populists and simple social conservatives very well. Edward Health famously sacked Powell as a minister after his ‘rivers of blood’ speech, and for a long time I can remember all the mainstream political parties in the UK making a point about putting the language and policies of far right groups well outside the Overton window of acceptable political discourse.


In opposition under New Labour, leading Conservatives made much more of socially conservative issues like immigration, but they largely farmed out any populism to the party in the media, who talked about ‘waves of immigrants’ coming to the UK. This continued under the Coalition government, where Cameron and Osborne were mainly interested in pursuing the right wing economic agenda of a smaller state. (But this didn’t stop Osborne talking about the “closed blinds of their next-door neighbour sleeping off a life on benefits”.) As others have shown, the impact of austerity and the excuses made for it helped sow the seeds of what was to come.


So the Brexit referendum was not the start of populism within the Conservative party, but it began the process of making it complete. Crucial to making it complete was the threat from an archetypal populist, Nigel Farage. It was the threat of UKIP that made Cameron grant a referendum in the first place, and it was May’s heavy defeat in the EU elections that persuaded enough Conservative MPs that the only way they were going to survive Brexit was to give in to the hardliners and have their own populist leader, Johnson. It is often the actions of mainstream centre or right wing political parties that paves the way for right wing populism, just as cooperation between centre and left wing parties can keep populists out of power.


Brexit was right wing populism because it centred on fear of immigration and fear of sharing a bit of national sovereignty through international cooperation. Johnson’s success at the end of 2019 involved a classic right wing populist offer. Nostalgic nationalism and anti-immigrant through Brexit, combined with promises of levelling up and an end of austerity that were designed to appeal to socially conservative voters who were nevertheless on the left in economic terms. In France the recent advances of National Rally (RN) involve a very similar combination. On a more individual level it involved convincing voters that someone who didn’t appear to take himself or politics too seriously actually had voters’ interests at heart and was going to make a good Prime Minister.


A compliant broadcast media was crucial throughout the 2010s. Journalists overwhelmingly thought austerity was necessary, and largely ignored the growing majority of experts who thought otherwise. As a result they thought the Coalition government had been an economic success before the 2015 election, whereas all the normal indicators suggested the opposite. Brexit lies mostly went unchallenged, and the overwhelming majority of economists were given equal airtime to the few who promoted Brexit. All the abundant evidence [1] that Johnson was not fit to be a Prime Minister was largely ignored during the 2019 election, while the previous two years the media had feasted on Corbyn’s failings.[2]


Partygate burst that last bubble, in a way that the mainstream media could no longer ignore. A politician cannot represent the will of the people when they ignore painful restrictions on the people imposed for their own safety in a pandemic. It also became apparent that the Conservative party itself was not prepared to go along with the attractive economic offer that Johnson had put before the electorate. Instead of an end to austerity most MPs wanted tax cuts, but still wanted to be known as the party of fiscal responsibility. A more capable populist leader, more in control of their party, might have been able to set fiscal responsibility to one side (as Trump and the Republicans had done before). The party instead of ‘levelling up’ preferred giving money to friends or more resources to those who already had plenty.


Towards the end of the 14 years the problems with right wing economics became much more evident: stagnant productivity and therefore real wages, privatisation without adequate regulation, and growing government corruption intensified by the move to populism. Any remaining myth of economic competence created by the media was destroyed by the Truss fiscal event. The economic problems with populist nationalism also began to be felt. To top it all, a cost of living crisis generated by world wide increases in energy and food prices ensured that a majority of voter’s minds were on economic rather than social issues.


Yet even on the key issue of immigration the government hit problems. As in the early 2010s, it realised that reducing net immigration numbers would cause immediate economic damage, so it put in place an immigration regime that allowed skilled labour from outside the EU to replace EU workers. Together with additional factors this led to record immigration numbers. In addition the government was unable to stop potential asylum seekers crossing the Channel. This gave Farage the ammunition he needed to attack the government from the right. While Johnson could compete with Farage as a populist figurehead, Sunak could not.


It was a perfect storm, much of which was of the government’s own making. If there are general lessons here that extend beyond the particular time and place of the UK in 2024, I would highlight two. First, grafting right wing populism onto a government that more than anything wants to pursue right wing economic policies creates electoral problems. Promises to improve public services or reduce regional inequality will not be met. In addition, socially conservative policies themselves are often costly in economic terms (e.g. Brexit), but promising to enact these policies without doing so (e.g. not cutting immigration) can invite attacks from other right wing populists, leading to internal divisions and the government fighting elections on two fronts.

Second, populist leaders are particularly subject to hubris, often amplified by devoted media outlets or uncritical advisors. They therefore become vulnerable if acts of hubris are exposed. Right wing populist governments that survive are likely to be those that all but eliminate any critical media. The Conservative attempts to do that with the BBC were never going to be enough to prevent voters finding out about partygate or the consequences of the Truss fiscal event.



Although I have been writing this blog for some time, it has been entirely under a Conservative government in the UK. One of the reasons I began it at the end of 2011 was because the Coalition government was persisting with a macroeconomic blunder that happened to involve my area of expertise, so I thought it made sense to share that expertise as widely as possible. It was a blunder that other countries were copying, so I was lucky enough to become part of a global effort by macroeconomists to debunk some of the myths that governments were busy creating. Although what we were writing about was pretty grim, I still remember those days with some affection, perhaps because at that point the threat of UK right wing populism was less apparent than it subsequently became.


Once the intellectual battle over austerity was won, I became interested in why austerity had happened and how the media had enabled it. Posts about the details of macroeconomic policy became less frequent because there are only so many ways you can say that government policy is either bad or mad. After 2016 I began writing more speculative (for me) pieces about the political economy of the last 50 odd years.


I hope that commenting on this Labour government’s macroeconomic and other economic policies will be more interesting. I’m sure I will often remain critical, but I will also try to recognise the real constraints that even the best governments face and give praise where it is due. I hope it will be very different from blogging under the Conservative government of the last 14 years. It almost has to be, because the government of 2010-24 has been uniquely awful in so many ways. Above all else, it is hard to imagine that Starmer’s Labour will ever be seriously described as a right wing populist government.



[1] Johnson months before the election illegally shut down parliament! How can we in the UK wonder how a man who tried to overturn an election result can appear to be winning a race to be POTUS again, when a man who illegally shut down parliament could be elected Prime Minister just months later?!


[2] The media is not entirely to blame for this. A significant part of the anti-Corbyn side of the Labour party was more than prepared to see a populist right wing government rather than Labour government, while the left of the Conservative party always put their party first and largely kept their criticism of Johnson to themselves until they voted him out.



Monday 1 July 2024

Why tactical voting in this election could change the nature of the UK’s political debate

 

If Labour are bound to win this week, is there any point to tactical voting? Some on the left have suggested voting for a more progressive candidate who has no hope of winning, even if this might contribute to electing a Conservative MP. The rationale is to ‘send a message to Labour’. The current Labour leadership have treated some on the left of the party very badly, and the anger at that is justified. However I remain at a loss to see quite how a few extra percentage points for left wing candidates will influence those running Labour, when they have just won a landslide victory so soon after the large 2019 defeat.


There remain sound reasons to vote tactically, even if a Labour government is assured. For example who your local MP is does matter to many people in a constituency, particularly those who often through misfortune need their MP’s help. In this particular election tactical voting could also do something quite unique, which is to prevent the Conservative party becoming the official opposition. This post is about why that outcome is one which would have a huge progressive influence on UK politics.


There is a natural tendency to focus either on the party in power, or for those who take an active interest in politics on the party closest to our own views. (Yes, I know there are exceptions). However which party is the official opposition matters in numerous ways, beyond the parliamentary mechanics and ‘short money’. As anyone from other political parties will tell you, the media debate tends to be hogged by the government and official opposition. Furthermore, the issues that the government or official opposition care about ends up being what our Westminster obsessed media talks about. This can be very frustrating when the government and opposition share a view which a majority of experts see as incorrect.


This tendency is reinforcing, because my impression is that what some voters tell pollsters are important issues are the subjects they have recently seen covered by the media, which in turn will be driven in part by the debate between government and opposition. So while the government always has the most power in defining the political media landscape, the official opposition plays an important role as well. Third parties rarely get a look in when it comes to influencing the media debate.


We can be fairly sure what a Conservative opposition will want to talk about most during the next four or five years, because we have seen what issues they have focused on during the election and the past year or so. On economics it will be all about how Labour are raising rather than cutting taxes, but otherwise it will be immigration, asylum seekers and any other issue that they think will be popular with socially conservative voters. As most voters want to see better public services rather than lower taxes, it will be these socially conservative issues that dominate the UK political debate. Plus ├ža change.


Is it possible that a heavy defeat will lead to a sea change in the politics of the Conservative party? Almost certainly not, particularly as the party will be immediately thrown into a leadership battle where the views of the membership and the right wing press will be decisive. The party will not move towards the centre on economic issues because these groups and party donors do not want it to, and so pushing socially conservative views and attacking social liberals is all it has left.


If you need any further evidence, just look at what happened after 1997. After that overwhelming defeat, the Conservative party didn’t rethink their policy stance to be more in line with the views of voters. They certainly didn’t ask what had gone wrong with Thatcher’s neoliberal project. Instead they courted socially conservative voters by attacking Labour on immigration. It was the start of a journey that would lead to Brexit, embrace right wing populism and end with widespread corruption and the absurd Rwanda plan.


The Conservative party is now well to the right on social issues compared to 1997. In addition, it will have to deal with Farage, and all the evidence we have is that this will involve accommodation rather than hostility. Most Conservatives will tell themselves that the main reason the party lost so badly in 2024 was because the right wing vote was split, and that this split has to end. Whatever accommodation is reached, it is not going to make the Conservative party more socially liberal!


So if you hoped that a Labour government would mean that we would stop talking endlessly about immigration, or ‘illegal’ asylum seekers, or whether greening the economy is going too fast, you will be disappointed if the Conservative party remains the official opposition. The Conservative party as the official opposition will have at least two important negative impacts. First, it will influence to some extent what the Labour government does and what its policy positions are. Second, on many issues the views of socially liberal and economically left wing voters will be largely ignored by the media.


Perhaps one of the more important examples of this is Brexit. The Conservatives will pounce on anything they can claim involves the Labour government undoing or betraying Brexit, and that may make Labour overcautious in how quickly it decides to take major steps back towards the EU. As a result, it may delay rejoining the Customs Union or Single Market well beyond the tipping point among voters that I discussed here. That in turn will damage the economy, and for that reason the government’s own chance of survival.


The final, obvious point to make is that official oppositions tend to be the party that forms a new government if and when the party in power is voted out. A Conservative party well to the right on social and economic issues will find that hard to do, but as I have stressed recently governments can get unlucky, sometimes through no fault of their own (or faults which the opposition more than share). Even if that doesn’t happen, voters eventually get bored with the party in power, and become attracted by a leader of a Conservative opposition that has the sense to keep how right wing the party is as out of sight as possible. For this reason, a Conservative opposition will eventually become a Conservative government. Once again, the evidence we have from 1997 onwards is that a future Conservative government will quickly undo most of the good things the previous Labour government managed to do, and then go further to add additional layers of destruction on top. As I argued here, socially conservative policies also tend to screw up the economy.


Now imagine if on Friday we learn that the Liberal Democrats have just beaten the Conservatives to get second place in terms of seat numbers, and so will become the official opposition to a Labour government. What the overall dividing lines between a Labour government and Liberal Democrat opposition will be are difficult to predict, but this in itself will make the UK political debate more interesting and probably more informed.


Neither a LibDem opposition or Labour government will attempt to push the very illiberal positions currently promoted by the Conservatives. The Libems will not because they are social liberals, and the Labour government will not because they will (initially at least) still regard the Conservatives as their main enemies and will not want to play into their hands. (See what happened to the Tories with Reform at this election.) Indeed it seems more likely that both Labour and the LibDem opposition will attempt to portray current Conservative positions on asylum seekers for example as well outside the Overton Window of acceptable political discourse.


If that seems too good to be true, recall that this was once the norm in the UK. The positions of some Conservatives and Farage are not very different from those pushed by far right groups like the BNP in the past, yet these far right groups, and the occasional Tory like Enoch Powell who took similar positions, were ostracised by the political mainstream. It would be to the political advantage of a Labour government and LibDem opposition to do the same again.


Becoming a third party would also pose more serious problems for the internal cohesion of the Conservative party. One nation Conservatives have so far rather meekly gone along with the illiberal rhetoric of their party, even though they themselves have very different social views. Having access to power or the possibility of power is a powerful adhesive keeping the Conservative party together. But if the possibility of power seems remote, that may be enough to push the few remaining one nation Tories to switch parties after any Farage accommodation.


Because the Conservatives are deeply unpopular, and in addition are losing votes to Farage, this election is an almost unique opportunity. Some recent polls put the LibDems within reach of the Conservatives in terms of seat numbers (see also here), and one has the Tories in third place. The eventual result will depend entirely on the extent and efficiency of tactical voting. As I pointed out here, there appear to be only around a dozen seats where the Conservatives are reasonably safe from tactical voting. Every other Conservative seat can be won as long as voters know which candidate is most likely to beat the incumbent.


In an appendix I have listed those seats where it makes sense for tactical voters to vote either Green or LibDem. In all other seats a tactical vote should be for Labour. Tactical voting for Labour in normally safe Conservatives seats where Labour are the main challenger remains vital. The LibDem total of seats is certain not to exceed 100, so it needs people who would otherwise vote LibDem or Green to vote Labour in numerous and previously safe Conservative seats to keep the Tory seat total down.


Appendix


This only covers seats in England and Wales.


There are two seats where tactical voting should be for Greens, as local polls show they are the strongest challenger


North Herefordshire, Waveney Valley


The Greens are also likely to win in Brighton Pavilion and Bristol Central, but the Conservatives are very unlikely to win so if you prefer Labour or the LibDems, vote for them.


Seats where tactical voting should be for LibDems


Bicester & Woodstock - local poll has LD = Lab, but majority of MRP and all TVs for LD

Brecon - most MRPs have LD as main challenger and all TVs suggest LD

Carshalton - all MRPs have LD as clear challenger

Cheadle - Lib Dem constituency from 1997 to 2015, all MRPs have LD as main challenger

Chelmsford - almost all MRPs have LD as main challenger, all TVs suggest LD

Cheltenham - all MRPs have LD as clear challenger, all TVs suggest LD, was LD seat

Chichester - almost all MRPs have LD as clear challenger, all TVs suggest LD

Chippenham - all MRPs have LD as clear challenger, all TVs suggest LD

Didcot & Wantage - most MRPs have LD as main challenger, all TVs suggest LD

Dorking - all MRPs have LD as clear challenger, all TVs suggest LD

East Hampshire - most MRPs have LD as main challenger, all TVs suggest LD

Eastbourne - LD twice won in recent history, always clear 2nd. MRP + TV clear LD choice

Eastleigh - LD MPs in recent history, MRP + TV clear LD choice

Ely - most MRPs have LD as main challenger and all TVs suggest LD

Epsom - most MRPs have LD as main challenger and most TVs suggest LD

Esher - all MRPs have LD as clear challenger, all TVs suggest LD

Farnham - all MRPs have LD as clear challenger, all TVs suggest LD

Glastonbury - all MRPs have LD as clear challenger, all TVs suggest LD

Godalming - all MRPs have LD as clear challenger, all TVs suggest LD. Hunt’s seat.

Guildford - all MRPs have LD as clear challenger, all TVs suggest LD

Harpenden & Berkhamsted - almost all MRPs suggest LD, all TVs suggest LD, LD target.

Harrogate - past elections, all MRPs and all TVs suggest LD as clear challenger.

Hazel Grove - recent LD MPs. All MRPs and all TVs suggest LD as clear challenger.

Henley - All MRPs and all TVs suggest LD as clear challenger.

Honiton - New constituency. Almost all MRPs and all TVs suggest LD as clear challenger.

Horsham - Almost all MRPs and all TVs suggest LD as clear challenger.

Lewes - LD MPs in past. All MRPs and all TVs suggest LD as clear challenger.

Maidenhead - Most MRPs and all TVs suggest LD. May’s old seat.

Melksham & Devizes - All MRPs and all TVs suggest LD is clear challenger.

Mid Dorset - LD have won in past. All MRPs and all TVs suggest LD is clear challenger.

Mid Sussex - Most MRPs and TVs suggest LD.

Newbury - All MRPs and all TVs suggest LD as clear challenger.

North Cornwall - LD MP in recent past. All MRPs and TVs suggest LD.

North Devon - LD MP 2010. All MRPs and TVs suggest LD.

North Dorset - Majority of MRPs and all TVs suggest LD as main challenger.

North East Hampshire - Most MRPs and all TVs suggest LD.

North Norfolk - Was a LD seat until 2019. All MRPs and TVs suggest LD.

Romsey - LD came close in 2010. All MRPs and TVs suggest LD.

South Cambridgeshire - LD came close in 2019. All MRPs and TVs suggest LD.

South Cotswolds - New constituency. All MRPs and TVs suggest LD.

South Devon - All MRPs and TVs suggest LD.

St Ives - has been LD seat recently. All MRPs and TVs suggest LD.

St Neots - most MRPs and all TVs suggest LDs are main challengers

Stratford-on-Avon - most MRPs and all TVs suggest LDs are main challengers

Surrey Heath - All MRPs and TVs suggest LD as main challenger.

Sutton Cheam - has been LD seat recently. Almost all MRPs and all TVs suggest LD.

Taunton - has been LD seat recently. All MRPs and all TVs suggest LD.

Thornbury - All MRPs and all TVs suggest LDs as main challenger

Tiverton - Almost all MRPs and all TVs suggest LDs as main challenger

Torbay - Almost all MRPs and all TVs suggest LDs as main challenger

Tunbridge Wells - Almost all MRPs and all TVs suggest LDs as main challenger

Wells - All MRPs and all TVs suggest LDs as main challenger

West Dorset - LD have always been the main challenger, and all MRPs and TVs agree.

Wimbledon - All MRPs and all TVs suggest LDs as main challenger

Winchester - LD very close in 2019. All MRPs and all TVs suggest LDs as main challenger

Witney - All MRPs and all TVs suggest LDs as main challenger

Woking - Near all MRPs and all TVs suggest LDs as main challenger

Wokingham - Near all MRPs and all TVs suggest LDs as main challenger

Yeovil - LD seat in recent past. All MRPs and all TVs suggest LDs as main challenger


Seats with a LibDem MP:


Bath - fairly safe LibDem seat

Chesham and Amersham - was a safe Tory seat but won by LD in 2021 by-election.

Frome - LD in 2023 by-election but boundary changes. Most MRPs and TVs suggest LD

Kingston and Surbiton - Ed Davey’s seat. All MRPs suggest he should win.

North Shropshire – by-election win in 2021. Needs TV for LD.

Oxford West - Layla Moran’s seat.

Richmond Park - Sarah Olney won in 2019.

St Albans - pretty safe LD seat

Tewkesbury - majority of MRPs and all TV sites suggest LDs have best chance here.

Twickenham - pretty safe LD seat

Westmorland - Tim Farron, new boundaries suggest Con would have won in 2019.


Toss-up three way seats


The following are seats where MRP polls or TV sites are almost equally divided on whether Labour or the LibDems are the main challenger. Here local knowledge matters, but if the goal of tactical voting is to replace a Conservative with a LibDem opposition, then a LibDem MP rather than a Tory MP counts double a Labour MP rather than a Tory MP.


Beaconsfield – Majority of MRPs prefer Lab, but only TV site to call suggests LD.

East Grinstead & Uckfield - New constituency. MRPs divided. One TV site for Lab

East Surrey - Normally very safe Tory seat. MRPs divided. One TV site for Lab.

Hamble Valley - New constituency. MRPs and TV sites are divided.

Newton Abbot - LD close in 2010, but vote dwindled since. MRPs and TVs equally divided.

North Cotswolds – Nearly all MRPs have Lab>LD, but two TV sites call this for LD.

Runnymede - MRPs and TV sites are divided.

Sevenoaks – Majority of MRPs have Lab>LD, TVs divided.

Added 02/07/24

South Shropshire - Most MRPs suggest Lab>LD, and only TV to call suggests Lab, but LD challenger was MP from 2001-5.


In all other seats tactical voting where necessary should be for Labour.










Thursday 27 June 2024

UK Election Special: The Conservatives could lose almost every seat to efficient tactical voting

 

Of course MRP polls could be wrong. However while looking at many of these polls (using this very useful site from Peter Inglesby), the following observation struck me. There were only 17 seats where all the MRP polls agreed the Conservatives would win. That is 17 out of 631.


Maybe that is a result of one or two rogue MRP polls. So I looked at the most recent (on 26/06) MRP by WeThink. That has national vote shares typical of recent non-MRP polls and with the Conservatives firmly in second place above Reform. The MRP modelling translates that into only 76 Conservative seats with the Liberal Democrats close behind on 52 seats. All 76 seats are in England and Wales, with the Conservatives projected to lose all their seats in Scotland. What struck me was that in these 76 seats, the projected winning Conservative percentage vote share was normally between 30% and 40%. Even with a significant Reform percentage, that would seem to give efficient tactical voting among 'progressive' (Labour, Liberal Democrat and Green) voters a strong chance of overtaking that Conservative vote share.


It therefore seemed worth spending a bit of time not watching football, but instead doing a few calculations. In each of the seats WeThink have the Conservatives winning in, I calculated the combined Labour, Liberal and Green percentage of the total vote. If I got this right there are only two seats (Castle Point in Essex and Clacton) where the Conservative vote (just) exceeds the combined progressive vote. More importantly, in all but 12 seats the progressive vote total exceeded the Conservative vote by 10% of the expected vote or more.


Which means if progressive voters are determined to get rid of their Conservative MPs, in all but a handful of seats they could. That would be a Canada 1993 style event, where the Canadian Conservative party, in power in Canada for 9 years, went from 167 seats to just 2. This is made possible, of course, by the right wing vote being split and assuming there is little appetite from Reform voters to vote tactically to defend a Conservative MP.


One of the reasons this result may not happen is that in many of these seats it is very difficult for voters to know which progressive party they should coordinate on. In one of these seats, Waveney Valley, WeThink have the Green party clearly ahead of the other two progressive parties, and there has been some constituency polling backing up the view that they are the main challenger there. In the other seats it is between Labour and the Liberal Democrats. In only three seats are the Liberal Democrats 10 or more percentage points (of the total vote) ahead of Labour. In forty seats Labour are ahead of the Liberal Democrats by 10 or more points, which leaves about 35 seats where WeThink calculate that Labour and the Liberal Democrats are within 9 points of each other.


Of course this uncertainty over who to tactically vote for is increased if you also look at MRP polls by other organisations. This suggests two things. First, it is a great shame that there have not been constituency polls in any of these seats. Second, it shows the costs of lack of formal cooperation between Labour and the Liberal Democrats. The problem in both cases is that it is difficult to predict before the election which the critical seats will be.


Does this matter, as Labour seem likely to win by a landslide? Towards the end of this post I argued that the goal of making the Liberal Democrats the official opposition was well worth striving for. My post next week will amplify this argument, as well as giving some suggestions on these problem seats. To this end, here is a list of seats where I think it is not completely clear whether tactical votes should focus on Labour or the Liberal Democrats, based on looking across MRP polls. Do let me know via social media if I have missed any evidence besides the MRP polls and the advice from tactical voting sites.


List of seats in England and Wales where MRP polls predict the Conservatives may win but differ on whether Labour or the Liberal Democrats are the main challengers to the Conservatives:


Aylesbury, Beaconsfield, Bicester & Woodstock, Brecon, Chelmsford, Chichester, Didcot, East Grinstead & Uckfield, East Hampshire, East Surrey, Ely, Epsom, Exmouth, Fareham, Frome, Hamble Valley, Harpenden & Berkhamsted, Honiton, Maidenhead, Mid Bucks, Mid Sussex, Newton Abbot, North Cotswolds, North Dorset, North East Hampshire, North West Essex, Reigate, Runnymede, Sevenoaks, South Shropshire, St Neots, Stratford-on-Avon, Sussex Weald, Tewkesbury, Tiverton, Torbay, West Worcestershire






Tuesday 25 June 2024

Why UK taxes should be higher

 

Discussion of taxation in the UK is bedevilled by two problems: one familiar and one less obvious. The familiar one is to imagine the level of taxation is separate from the level of public services and welfare. Most voters and much of the media understand the two are connected, which is why the Tory attack on Labour’s ‘tax bombshell’ is so misplaced. A majority want public services to improve, and know that requires higher taxes [1], so all the Conservatives are doing is reminding voters that Labour is more likely of the two parties to improve public services.


Yet this familiar point gets forgotten when we come to the less familiar problem, which is historical comparison. It is now well known that UK taxes as a share of GDP, as measured by the OBR, are currently higher than they have been since 1948 (see Ed Conway here for example). This sounds bad, until you remember the first problem, which is that it is pointless to discuss taxes without also discussing public services and welfare payments. The elephant in the room here is health spending. Below is OECD data on total health spending as a share of GDP in each of the G7 countries, with the UK in red.


Health spending as a share of GDP in the G7


Health spending as a share of GDP has been trending upwards in all the major economies since at least 1970, for familiar reasons like longer life expectancy and advances in what medicine can do. If health spending is mainly paid for through taxes, then unless some other large item of government spending is trending in the opposite direction, taxes are bound to be at historic highs. For some time in the UK there was such an item, defence spending, but once that peace dividend ended there has been nothing to take its place. Of course if health spending is not paid for by taxes citizens have to pay for it by some other means. The top line in the chart above is the US, where spending is so high in part because it is a very inefficient insurance based system.


I have heard journalists in the media say that UK taxes are at record levels countless times, but I have never heard them also say: ‘but of course this reflects the steady increase in health spending as a share of GDP’. The more general point is that talking about tax without discussing what it pays for is just uninformative. [2]


International comparisons of taxation are better, because advanced economies have similar structures to their public sectors. Here is the same chart as above for total tax as a share of GDP (source).


Total tax as a share of GDP in the G7


Note the definition used here is a little different from the national accounts total the OBR uses, so using this measure UK taxes in 2022 are similar as a share of GDP to taxes in the early 80s. France has the highest tax share in 2022, followed by Italy and then Germany. Indeed most major European countries have a higher tax share than the UK, as Ben Chu shows here. The UK share is similar to Canada and Japan, while the US has the lowest tax share. (Will Dunn shows an international comparison for taxes on wage income here.)


Although more informative than historical comparisons, looking at other countries has obvious pitfalls. The US tax share is so low mainly because most US citizens pay via their employers for health cover through insurance companies. It doesn’t mean that US citizens are better off because taxes are low, because their wages are lower so firms can afford to pay for health insurance. If we ignore the US for this reason, then the UK has amongst the lowest tax take among the G7, and also the lower than most major European countries.


While international comparisons of taxes are better than looking at historical trends, they are not ideal because - as the US shows - the structures of the public sectors are not identical. Partly for this reason, the OECD compiles an analysis of total public and private spending on what it calls “social expenditure”, which is mainly health and welfare. I discussed this data in this post. However, even if we restrict ourselves to total public spending on social expenditure, the OECD estimates that the UK has the lowest spending in the G7 (at 22% of GDP), even just below the US (at 23%). France tops the table at 32%, followed by Italy (30%), Germany (27%) with Japan and Canada both on 25%.


This suggests that public spending in the UK is unusually low compared to other major countries, and as a result taxes are unusually low. This should come as no surprise, because public spending excluding health has been cut back sharply since 2010, as this chart from the Resolution Foundation shows.



What international comparisons tell us is that these cuts in public spending have moved the UK to the bottom of the G7 in terms of spending and taxation. UK public services are in crisis not because they are unusually inefficient, but simply because the Conservative government has chosen to spend far too little on them in order to get taxes unusually low compared to other G7 and major European countries. The Conservatives are going to lose this election badly in part because they continue to prioritise tax cuts over improving public services.


Which means UK taxes are too low, and a Labour government is going to have to raise taxes to meet both its pledges and expectations about public spending. (The National Institute comes to similar conclusions here.) The question Rachel Reeves and the Treasury will have to answer is whether they can raise enough using the taxes left after you exclude those they have promised to keep at existing planned levels? If not, will they break these election pledges, or will the public sector remain underfunded and the UK remain under taxed?


Even if Labour can raise enough taxes without breaking its election pledges to get public spending to levels similar to other European countries, this may pose macroeconomic issues. Higher public spending matched by higher taxes on companies or the better off may end up increasing aggregate demand, because higher taxes will not be matched by lower private spending. Together with higher public investment, this will put upward pressure on interest rates. [3]


However this will be a price worth paying, in part because public spending at close to current levels is having a negative impact on economic performance. In particular ever growing NHS waiting lists are restricting labour supply and therefore UK output and incomes. If the Labour government is to be successful in ending a period of very weak growth in living standards, one of the things it will have to do is increase levels of public spending and taxes closer to other major European countries.




[1] To preempt the tweets from MMTers, even if you believe that the level of taxes is just what is required to keep inflation constant, that in turn will depend on the impact of the public sector on overall demand. For this to be roughly neutral over the medium term, what the public sector adds to demand with higher spending it needs to roughly subtract from demand with higher taxes, so spending and taxes will across countries and over time tend to move together.


[2] Discussing the composition of total tax, and how it has changed over time, is more interesting. The Resolution Foundation has an excellent account here.


[3] Whether this means higher interest rates, or just rates coming down more slowly than they otherwise would have done, will of course depend on other influences on aggregate demand.