Freedom of Speech and Media Regulation

 

In two recent blog posts I returned to the issue of lack of media regulation, and the way lack of regulation is helping right wing populism to grow. We saw it with Trump, and we are seeing it with Reform and the rightward drift of the Conservative party in the UK. We are seeing it in many other countries.

Whenever I write about this, I get comments about freedom of speech, and why better media regulation puts freedom of speech at risk. Freedom of speech, like freedom itself, is something that everyone agrees is a good thing, until you get into the details. Partly as a result, the concept is often weaponised by the right, who use it as a rallying cry against giving the state any power. This post is about freedom of speech or otherwise for media organisations, not individuals

The idea that freedom is always a good thing comes unstuck when that freedom impinges on others. With very few exceptions, most agree that people should be free to do what they like if it doesn’t involve or affect another person. But as humans are very social animals, a lot of the things we do have an impact on others. People are generally not free to inflict harm on others.

Freedom of speech almost by definition involves others. So immediately we can see that freedom of speech can never be an unqualified right. Like freedom itself, the obvious examples where it needs to be qualified involve harming others. I don’t have a right to demand money through threats, for example.

Media regulation can be justified through this route. A media outlet that gave extensive and uncontested time to those who said all vaccination was dangerous could be rightly accused of harming others. But the idea of speech or words that create harm can be extended to lesser evils. A media outlet that persistently said that crime was rising, for example, when all the evidence was that crime was falling, could be accused of creating unnecessary worry among the media’s users.

We could generalise this by talking about another right besides the right to free speech, and that is the right not to be misled or lied to. Most media users rightly expect not to be misled or lied to by their media provider, and this is a very reasonable wish. Once we think about the right not to be misled, then we inevitably have to involve the concept of truth and facts. A media outlet that is knowingly distorting the truth in the material that it provides its users is misleading them and therefore harming them.

But who decides whether a media outlet is doing this? The standard argument of those that place the right of free speech above the right not to be harmed or misled is that the only external body that can referee the media is the state, and we should not give the state the power to decide what is true and what isn’t. That is what happens in totalitarian regimes which suppress free speech to protect the regime.

In rebutting that argument it is important to note that a media regulator, like OFCOM in the UK, is not the government. Regulators like OFCOM are designed to be independent of government, and a government that told OFCOM what to do in specific terms would be rightly accused of overstepping its democratic mandate. In the UK the government is in theory able to appoint the head of OFCOM, but when Johnson wanted to put Paul Dacre in that role, an independent interview panel is said to have reported that he was totally unsuited, and Johnson or Dacre eventually backed down. The degree of independence a regulator has, and how it is held accountable, are very important issues, but this example shows that independence need not be a sham.

Of course any government determined to use a regulator like OFCOM as a way of influencing the media for its own political ends will do so, but a government so determined doesn’t need a pre-existing regulator to do that. For that reason media regulators are hardly the beginning of an inevitable slide to totalitarianism. Far more likely, in fact, is that a potential totalitarian would use deals with private media owners to achieve that end. (See Trump and Musk.)

Oddly, I haven’t seen those critical of media regulation worrying about other regulators that tell organisations what they can say and what they can’t. The example in the UK that I think is very useful is the Food Standards Agency (FSA), which among other things stops companies making false claims about their products on its packaging. This is a clear restriction of the right of free speech for those companies and those who work in them.

We don’t think about the FSA in this way because who wants to be given false information by companies. But media organisations are companies, so why are we happy to see them give out false information?

Is this because what a product contains is or can be an established scientific fact, whereas media companies deal with political issues that are contested? No, because media regulation is not about telling media companies to take a particular position on policy issues or values. What it should be about is ensuring that its customers are not misled by its contents, much as governments through regulators try to ensure product packaging does not mislead potential customers. In my view that should have two components: being truthful, and where the truth is unclear presenting both sides of any debate.

An example of the first I have already mentioned is vaccines. When an employee of GBNews used official statistics incorrectly to suggest vaccines were harmful OFCOM found that the company had breached its rules. To make judgements like this the regulator has to rely on expertise (statistical and medical), which is as it should be. The fact that some people believe vaccines are harmful is irrelevant here: some people may believe the earth is flat.

I think much the same applies to man-made climate change, and the BBC concluded the same (in theory, although not always in practice). The only issue here arises because some parts of the political right encourage climate change denial, so this truth is politically contested. But within science it is not, with only a tiny minority of climate scientists disputing the accepted science. (Whenever powerful monied interests are involved, it is not too surprising that a few scientists might take views that are helpful to those interests.) Science has to trump politics and ‘balance’ in such cases.

Of course that doesn’t mean contrarian views should never be aired. But if occasionally they are, it should always be made clear just how contrarian they are, and why the consensus is different from the one being put forward. The broadcasters favoured format of two-sided debate doesn’t do this, however good any debate moderator might be. I know that defining the difference between a consensus view and an issue where experts are divided is difficult, but scientific bodies should be the reference point on this. So, for example, the consensus view among economists during the Brexit referendum was that the economic effects would be negative, and media organisations should have made that clear every time the economic impact of Brexit was discussed.

Free speech advocates sometimes say that this involves censorship, and it’s better to allow all views to be expressed so the public can make up their own mind. Once again, the analogy with product regulation is useful. We don’t want to have to judge between competing claims every time we buy a product. Equally everytime we watch or read news media or someone on the media making a case we don’t want to spend time reading around to judge for ourselves whether the facts being stated are true or not. That is the job of media organisations, and we need media regulators ro make sure they do that job.

It isn’t a paradox that some of those that shout loudest about the need to preserve free speech are also those that spread the most lies and disinformation. It also shouldn’t come as a surprise that they can also be those most likely to curtail free speech when that involves telling truths they don’t like. Free speech may be a rallying cry against tyranny, but freedom from being misled can help stop voters inadvertently creating tyranny.

How could they vote for him?

 

By now you will have probably read thousands of words about Trump’s sweeping election victory, so what can I hope to add? The biggest puzzle for me, and I suspect many others both inside and outside the US, has always been to understand Trump’s appeal to voters. After all, unlike 2016, this time they must have known what they were voting for.

In Europe we sometimes pretend that someone who is so obviously unsuited to run anything, let alone the country with the most powerful military in the world, could never get elected in our country. Past crimes, past behaviour in office, lack of respect for democracy or the truth, obvious narcissism: so many things that would disqualify him as even a contender in any election in Western Europe.

Except in the UK voters chose Boris Johnson as Prime Minister. Sure there were particular reasons at the time, but there always are, and you will have read plenty of examples with the US election (Biden’s late withdrawal etc etc). There are some factors that are important in the US that don’t apply so much elsewhere, like the religious vote or race, but these are not sufficient to argue that the US is peculiar in its ability to choose someone like Trump, just perhaps more likely to do so. 39% of UK voters in a very recent poll were not unhappy to see Trump elected, and that number rose to a majority among Conservative and Reform voters combined.

This post will start with the main reasons why so many voters switched from voting for Democratic to Republican candidates last week. But that leaves the question posed by the title of this post unanswered. The second part talks about the absence of Trump aversion for so many voters. Both discussions place lack of information at their centre, and a final section looks at why most voters don’t get good information about politics.

Understanding the swing

The Democrats did very badly across the board last week, so it is reasonable to treat this as a vote against the incumbent regime. Most voters use elections to cast judgement on the incumbent rather than their opponents. This in part reflects lack of knowledge about opposition parties, but it also reflects a desire that many have to use their vote to punish actions by governments they dislike. This can lead to perverse results, particularly in voting systems where preferences among opposition parties are ignored.

To understand the swing to the Republicans and Trump there is no point in looking at factors that are pretty constant across elections, like race or socially conservative attitudes. There is no point talking to people attending Trump speeches, because they will always vote for Trump. Those who voted for Trump gave the economy as their number one concern. The reason for this is not mysterious, as the chart below shows.

Voters looking over the entire four years of Biden’s presidency will have seen little or no real income growth, compared to strong income growth in the previous four years under Trump.

The reason is very simple: all the major economies suffered from rising energy and food prices, which doesn’t directly impact real GDP growth but does hit real incomes. This also helps explain why the voters who really turned from Biden to Trump were those on middle and lower incomes, who would have felt most strongly the impact of higher food and energy prices. This is a key reason why this has been a terrible time for incumbent parties in elections in so many countries. Compared to other incumbents Harris did relatively well.

To respond to this by saying that Biden and the Democrats ‘failed the working class’ is dangerously misleading. Economies can get hit by negative external shocks, and these are likely to happen increasingly often because of climate change, foolish dictators and so on. No government has the power to stop all these events impacting negatively on their citizens.

But while real income growth under Biden may not have matched its growth under Trump, there are plenty of other things to say about the economy that are positive. As an economist I also know that the US has dealt with post-pandemic problems far better than other countries. US GDP growth has far exceeded growth in the major European economies or Japan. This has in part been due to better economic policies, as I argued here. As an economist I also know that some of Trump’s policies will be very bad for the US economy (and the rest of the world). Yet most voters are not economists. What voters know about is their income.

Yet you do not need to be an economist to know that the problems experienced by the US economy have nothing to do with Democrat politicians, that the US pandemic recovery is the envy of the world and that Trump’s policy proposals will be disastrous. Those who have the time and who want to find out can do so. They could look at what winners of the Nobel prize for economics say, for example. Why didn’t this happen?

Unfortunately in the UK we know about this. Exactly the same happened during the Brexit referendum. For every argument an economist can make for why Biden has actually done pretty well with the situation he found himself in, and Trump’s policies would be a disaster, Republicans can find counter arguments that to many will sound equally plausible. As the Brexit referendum showed, good economics can easily be drowned out by those with a partisan agenda and the power and ability to get their message across. While the experience of falling real wages allowed Trump’s negative message on Biden’s handling of the economy to gain traction, it was amplified by plenty of misinformation as well. Trump voters believed Trump’s campaign rhetoric, and as a result were badly informed compared to Harris voters. They also tended to get their information from social media rather than traditional media sources.

Politicians being blamed for events beyond their control is a familiar story. As Prime Minister Gordon Brown handled the Global Financial Crisis pretty well, but that doesn’t mean that most voters gave him much credit for that. Instead many blamed him for the recession that followed. Biden deserves a lot of credit for the policy measures he managed to enact during and after the recovery from the pandemic, but he will only get that credit from those who know about it.

Trump aversion and attraction

But surely stagnant real incomes cannot excuse voting for someone like Trump? To start answering the question posed by the title of this post, the first thing to do is to forget almost everything you know. I would never have voted for Trump because I know too much about him, but most US voters do not know nearly so much, just as many UK voters knew very little of the obvious failings that would and did make Johnson a terrible PM.

One reason for that is that most voters are not that interested in politics, or just don’t have the time or resources to find things out. But that alone is insufficient. I’m not very interested in the mechanics of how a car works, but when I need to buy a car I know where to look to find out if particular cars are reliable, cheap to run and so on. I don’t need to know a lot about cars to find these things out.

Now imagine that instead of a few well known trusted sources for information on cars there were in fact dozens, some genuinely providing knowledge and some there to push particular brands. Without prior knowledge, to find out which guides could be trusted and which could not I would need to do a lot more work. I might even have to find out a bit about how cars worked. That is more like the situation with both politics and economics during an election.

With lack of good information come various attitudes that dilute distaste for Trump. All politicians are regarded as ‘in it for themselves’ and part of a system that works against ‘ordinary people’. To some who are not political but hate Washington politicians and think the system works against them an outsider like Trump can be seen as refreshing. They actively want a bull to shake up the Washington China shop, and Trump certainly has the qualifications to be such a bull. The lack of respect for a pluralist democracy that many find so off-putting and dangerous about Trump becomes a virtue if you see those institutions as acting against rather than for you.

An example is the law. While those who respect legal institutions (at least most of the time) will find Trump’s felonies pretty damning, those with less respect are more easily convinced that these institutions can be manipulated to punish an outsider for political gain. All this is encouraged by a partisan media. Is Trump accused of crimes because he is guilty or because Democrat politicians want to discredit him? Aren’t all politicians selfish and don’t they all lie a lot of the time?

What about the cruelty? A core part of any populist/dictatorial/fascist platform is to focus on an other/outsider group and dehumanise them. However much we may dislike it, this form of cruelty is part of human nature. Yet despite voting for Trump, many States (including Republican ones) passed abortion rights initiatives. Demonisation of and cruelty to others also relies on lack of information, or the spread of disinformation. The more people see ‘the other’ as human beings much like themselves (which they are), the more difficult it is to pretend otherwise.

On top and perhaps beyond all is something that Trump has for many Americans, like so many populists in many different countries, which is charisma. Charisma can be like Marmite: some of the very things I find so unattractive about Trump others find appealing. But charisma fits into the information problem as well. In a complex environment without trusted sources of information and with a high volume of information noise, what you believe can easily depend on who you believe. When it comes to key election facts and issues, far too many voters were inclined to believe Trump because they liked Trump, or erroneously thought Trump liked them.

Democracy and information

Democracy has a great weakness, which is that nothing stops voters electing a leader or party that is prepared to dismantle democracy. Once democracy ends, it is very difficult and costly to get it back. If the re-election of Trump shows us one thing (which history has already shown), it is that sometimes voters will let this happen. For some voters that is because they have lost faith in democracy, and for others it is because they do not believe what they are doing will have that effect.

That weakness is inherent in democracy, and all we can do is reduce the risk of it happening. To understand what the greatest risks are we only need to look at the priorities of the enemies of pluralistic democracy. Invariably this involves controlling sources of information for voters, be it newspapers or television channels or social media platforms. With ownership of the media comes the power to manipulate information. The enemies of democracies along with most democratic politicians have always understood the importance of this power.

Yet there is also a strong segment of opinion, which unsurprisingly is given plenty of space in the media, that says we shouldn’t worry about this because it doesn’t matter that much. This is nonsense. Academic work tells us the media does matter, as do the actions of those that want power to preserve privilege. Another argument is that there is nothing we can do about it without giving the state too much power, and we just have to live with the way things are. To say that the cure might possibly be worse than the disease because it could give the state too much power just means that you prefer the certainty of that power being in the hands of individual oligarchs. The election of people like Trump and Johnson are the result of that attitude.

Others who like to call themselves centrists bemoan what they call the increasingly partisan nature of politics and the media, but that misunderstands what is going on. The issue is not that the media has become more polarised, but instead that a large part of the media (invariably on the right of the political spectrum) is promoting propaganda and disinformation. As I argue here, propaganda in favour of a particular political side is very different from manufacturing consent for the status quo.

Consider climate change. Trump calls it a scam, but we know it is both real and an existential threat. Why can Trump say that and still get elected? In one poll 22% of those surveyed in the US didn’t believe in man-made climate change. In the UK that number was only 11%, despite the fact that right wing newspapers have increasingly been giving space to climate change deniers. The much lower number in the UK could reflect many things, but I suspect a big factor is that the main broadcasters, including and especially the BBC, do not regard this issue as one where they have to stay neutral (to be unbiased), and instead provide in a variety of ways good information on the issue. (There are lapses, and they could do more, of course.) In the US there is no similar media outlet that most people see or read that does the same.

More generally, the dominance of non-partisan organisations providing TV news and current affairs in the UK may help explain why conspiracy theories have less traction in the UK compared to the US. It is why individuals from the political right are so keen to try and create the equivalent of Fox News in the UK. Their success in beginning this process (in part because of the timidity of OFCOM), coupled with factors ranging from the success of Farage in this year’s elections to the dramatic rise in the number of cases of whooping cough, suggest that the UK is following a path set by the US. In the US Trump has said he will consider a ban on vaccines, and may put an anti-vaccine campaigner in charge of Health.

To understand is not to condone. US voters were both wrong and foolish to elect Trump, and anyone voting Republican today puts lives and the planet at risk. In the US and UK, and in many other countries, the political right is embracing policies that are not only authoritarian and cruel, but are also foolish and dangerous. To promote those policies they need to either remove sources of knowledge, or make enough voters distrust those sources. To this end new media outlets have been created, or what were once media outlets that were just partisan have been turned into propaganda outlets and sometimes promoters of conspiracy theories or dangerous misinformation.

Yet despite the evidence staring them in the face, those on the other political side are doing almost nothing to stop this happening. It is no good thinking that good government will be enough to end populism. I wrote this well before Trump was elected, but his victory rather proves my point. In terms of domestic policy Biden and the Democrats governed well in difficult circumstances, but it didn’t win his party votes in large part because voters were badly informed or misinformed. If you hand your opponent a megaphone while you have only your voice, don’t expect your voice to be heard. When those with the megaphone have the clear intention of making people doubt knowledge and expertise, and when that involves among other things letting the planet burn, doing nothing about that megaphone is just crazy.

The Markets, the Budget, the Media and electing a Fascist

 

Our readers are too stupid to understand financial arbitrage and very basic macroeconomics, so we will pretend financial markets are like economic oracles or jealous gods. This seems to be the attitude of much of the media when it comes to events like the Budget.

Let me start with a brief summary of what actually happened after the Budget. For those who want a more detailed account and can read the FT, this from Toby Nangle is (of course) very good and very clear. The Budget was what macroeconomists call expansionary, which means that it had the effect of increasing the total demand for UK produced goods and services. This was because government spending was increased by more than taxes, with the balance made up with higher borrowing. An expansionary budget tends to raise output in the short term compared to what it otherwise would have been, which puts upward pressure on inflation. This in turn will mean that interest rates set by the Bank of England are likely to be higher than they otherwise would have been in the short term as a result of the Budget.

The financial markets, like most commentators including myself, had been expecting a Budget like this, but the degree of expansion was a bit more than average market expectations. As a result, these markets revised up a little their expectations of near term rates set by the Bank, which because of financial arbitrage meant that interest rates on financial assets with a longer term duration, like government debt (‘gilts’), increased slightly after the Budget.

How this was portrayed in the media depended on politics. Among the propaganda media in particular there were clearly some who wanted to make this into Labour’s Truss event. It has to be said that excited talk of this kind was not limited to this section of the media, and I was reminded of this. But elsewhere we mostly got the personification of markets. To take just one example, consider these opening two paragraphs from an article in the Guardian.

“Rachel Reeves has been warned an extra £9bn of tax rises may be required to avoid a fresh austerity drive in key public services as her record tax-raising budget sent tremors through the financial markets.

Threatening to undermine the chancellor’s claim that her budget would restore economic stability to Britain, government borrowing costs rose sharply in the City on Thursday as traders turned on Reeves’s tax and spending measures.”

To say that the “record tax-raising budget sent tremors through the financial markets” is doubly misleading. The use of hyperbole with the earthquake analogy I’ve grown used to from the black hole nonsense. What is worse is the implication that what surprised markets was the high amount of taxes being raised, whereas the opposite was true. What surprised the markets was that the tax increases were smaller than expected given the Budget’s spending projections.

In the second paragraph, in what world is mildly higher longer term interest rates a threat to what the Chancellor means by stability? I doubt that if the Bank cuts interest rates this week anyone will write that this threatens Reeves’s stability claims. Indeed the Bank moving interest rates up and down is designed to give us economic stability! So when interest rates on government debt move slightly because of expectations of the Bank doing their job in the future, how does that undermine economic stability? But what is really bad is the idea that “traders turned on Reeves’s tax and spending measures”.

Financial traders are trying to predict future decisions by the Bank of England. Their individual or collective views about the Budget measures are neither here nor there. Suppose the budget had raised the top rates of income tax paid by market traders, and had also been unexpectedly contractionary, leading to lower interest rates. It would be silly to write about the latter as ‘traders welcoming the budget’s measures’. It is equally silly to use that language here.

If you get beyond the first two paragraphs, then it becomes clear that the authors do understand what is actually going on in the markets, although they do their best to suggest different views when all their quotes they give are consistent with each other and with what actually happened. It is as if a sub-editor had taken a factual piece and said ‘this is dull: here are a couple of opening paragraphs to spice it up a bit, and make sure you mention Truss at every opportunity’.

Why does this kind of thing bother me so much? (I wrote something similar just before the budget.) The answer is that I believe it matters a lot, and is an example of something very dangerous. It matters because this budget is all about beginning the process of extracting us from the disaster of 2010 austerity, a disaster which at the time the media thought was great economics, in part because they believed and wrote nonsense about imminent disaster in financial markets using the same type of language as I flagged above.

The media got 2010 austerity so wrong because they chose to believe their own stories, and the stories of the politically motivated, over the knowledge that every first year undergraduate student in economics is taught. Most journalists are overworked and have little time to think, let alone consult experts. In the case of economics, representative bodies make little attempt to provide information about consensus views to journalists. Ironically for something that is supposed to be about reality, journalism is a self-referential system in which speed and novelty is valued more than being informative. It is therefore possible for the media to present readers or viewers with a completely distorted view of reality, and for most journalists to be almost unaware that this is happening or that it is a problem.

We see the aversion or inability to provide information and knowledge most clearly in political journalism. Policy differences are rarely discussed in any depth, while endless time is given to surveys of popularity, horse races, insider information and other trivia. In part this comes from an obsession with balance, even though in practice balance often seems to be just an excuse for making life easier for those that run media organisations. Providing knowledge may often be incompatible with preserving political balance, particularly when one side routinely lies and distorts the truth.

This is one reason why the potential disconnect between the media and expertise is magnified when one half of the media are doing simple propaganda, but the rest of the media act as if this wasn’t happening. So the right wing press sets the agenda for the BBC. So, when Joe Biden mumbles something that was wilfully misinterpreted by his opponents as being disparaging about Republican voters it is headline news, while when Trump routinely describes Democrats as the enemy within it is not, perhaps because he does it all the time.

It was in large part because the media thought austerity was good economics that we got Cameron re-elected in 2015, which led to the Brexit referendum. One side lied constantly and called consensus views about the economic and other consequences of leaving ‘Project Fear’. The propaganda media amplified those lies. Yet the other half of the media said our job is to be balanced rather than to convey knowledge. In these circumstances is it any wonder that UK voters chose narrowly to commit one of the most obvious acts of collective self harm in recent history.

In countries like the UK and US where half the media is promoting political propaganda, what the rest of the media need to do above all else is not to provide balance but to provide good information and expose misinformation. When the propaganda media want to pretend that the market reaction to Reeves’s first budget is like what happened under Truss, writing that “traders turned on Reeves’s tax and spending measures” promotes misinformation rather than knowledge. When the propaganda media want to claim that Biden insulted all Republicans, calling it a gaffe and saying it is a problem for Harris is promoting misinformation rather than knowledge.

We will see very shortly whether that kind of journalism will help US voters commit perhaps their biggest act of self harm in recent history.

A budget that points the way but doesn’t get us very far

 

Did Rachel Reeves set Labour on a path to ending austerity, and making up for the lack of public investment over the last fourteen years? In this post I will follow the format of my pre-budget post, splitting the discussion into three sections: public investment, current public spending and taxes. I’ve also added an extra, rather annoyed section on fiscal rules, and a summary.

Public investment

The chart below compares the net public investment plans Reeves inherited from the last government, with her Budget plans she gave to the OBR.

Under the Conservatives public investment as a share of GDP was projected to fall steadily from current levels of around 2.5% to 1.7%. The assumptions that Reeves has given the OBR imply, to the first approximation, public investment staying flat at 2.5% of GDP. That is an improvement, but a relatively modest one, given the lack of public investment over the last fourteen years.

Current public spending

Current spending is everything that isn’t gross public investment. The chart below compares pre and post-Budget assumptions given to the OBR.

Here we have a similar story. The Conservatives had pencilled in further cuts to the public sector compared to current (23/4) levels, while Reeves has assumed the share of public spending in GDP will be, to the first approximation, pretty flat through the next five years at around the current level of 40%. So no additional austerity compared to where we are now, but no attempt to return spending to the levels needed to restore the public services to the state they were in just before austerity began in 2010. In particular, with health services around the world absorbing an ever growing share of GDP, flat in overall terms means most departments will see a falling share of spending in GDP.

If that seems a little disappointing, it is worth remembering two points. The first is the extent of additional austerity implied by the inheritance Reeves received, all to enable unsustainable tax cuts. Avoiding that required the budget undertake substantial tax rises and considerable additional borrowing. As the OBR sets out in the chart below, most but not all of the additional current spending is matched by higher taxes, with some covered by additional borrowing thanks to revised fiscal rules.

The second point to remember is that this is just one budget. My overall impression is that, compared to the potential tax changes I went through in last week’s post, Reeves has in most cases been relatively modest in the increases implemented this time. That leaves scope for further increases in spending matched by higher taxes, if necessary, in later budgets.

Taxation

In my last post I looked at areas of taxation where I thought significant amounts of money could be raised (or, if you prefer talking about resources, where a significant amount of resources could be released to allow for additional public spending), without violating the pre-election pledges not to raise income tax, employees NIC, VAT or corporation tax.

1. Employers National Insurance Contributions

Raising employers NICs can be thought of as partially undoing the reckless (in terms of unsustainable) cuts to employees NICs made by the last government. In fact employers contributions are slightly more progressive than employees, because there is no upper earnings limit on employers contributions. (As I noted in that earlier post, removing the upper earnings limit on employee contributions would raise a significant amount of money in a very progressive way, but was presumably precluded by pre-election pledges.)

This change in employers' NICs accounts for more than half of the additional revenue raised in the budget (£26 billion out of £42 billion by the end of the decade).

2. Other tax increases

As expected, both Capital Gains Tax and the Inheritance Tax regime have been changed to increase revenues, but the scale of the former in particular is modest compared to some of the possible changes I outlined last week. In that sense, this is not so much a ‘soaking the rich’ budget, but a ‘mildly inconveniencing the rich’ budget. As I noted then, there is a strong case for gradualism with taxes that few pay and where behavioural changes are potentially important, so this may not be the last time these taxes are increased.

3. Fuel duty

In last week’s post I noted some tax increases that the Conservatives had pencilled in which Reeves could cancel, but doing so would only make her job harder. Fuel duty was one of those, and here Reeves has not only decided to not increase the duty yet again (on a day after floods generated by climate change killed dozens in Spain), but is in danger of continuing the Conservative practice of planning future Fuel Tax increases but never implementing them. Depressing.

Fiscal rules

Yes, counting government financial assets as well as liabilities makes more sense than just counting liabilities, and this change to the fiscal debt rule allows more public investment which is good. However counting financial assets but ignoring physical assets still makes little economic sense, so the new debt rule run alongside the golden rule still has no purpose other than to suppress public investment.

More unexpected was the gradual move to a three year rolling target for the fiscal rules rather than a five year rolling target. This is simply a mistake. The rationale for a five year ahead target is that forecasts over this time frame exclude cyclical effects. This is clearly not the case for three year ahead forecasts. The Treasury document says that moving to three years ahead will ‘enhance fiscal discipline’, but so would balancing the budget each year! Designing good fiscal rules tries to combine fiscal discipline with good fiscal policy, and good fiscal policy should be counter cyclical not pro-cyclical. This change will do almost nothing to improve fiscal discipline but will make good fiscal policy more difficult. (On fiscal discipline, see also Fuel Duty above!)

The reality is, unfortunately, that the design of fiscal rules is increasingly a political exercise where good analysis is regarded as far less important than short term expediency, the thoughts of Krugman’s ‘Very Serious People’ or political journalists (mediamacro). This is a problem because, as I always say, bad fiscal rules are worse than no rules at all.

Summary

As most of the media will attack this budget for increasing taxes to ‘record highs’, without appearing to give a moment’s thought to why taxes are rising to record levels in most countries, it is natural to be defensive of it. It is, after all, much better to travel in the right direction, albeit slowly, than to keep on going the wrong way.

However, the political danger of moving gradually, in part because one hand is tied behind your back (no tax rises on working people), is that you disappoint those who are naturally impatient to see improvements in public services across the board. A political environment where voters know taxes are rising but where problems in public service provision (including child poverty) continue to fill the headlines is not a comfortable one for any government, because it raises issues of competence in voters’ minds (where is the money going?). Equally risky is continuing to try and flatter the marginal voter (or petrol user!) when you are in danger of losing your political base. I suspect, once the immediate and rather predictable political controversy is over, this budget will be seen as the minimum that could have been done, and that something bolder might have been less risky in the longer term.

October Budget 7: Soaking the rich?

 

This, my final post on the forthcoming budget, is designed to provide a guide to how to read what Reeves announces (or doesn’t announce) in a way that goes rather deeper than the normal media commentary. My perspective, along with a large part of the UK population, is how much does the budget get us on a path designed to end public service austerity. (See here for what I mean by that.) As I argued here, a budget that focuses on filling black holes rather than restoring public services will be a political failure. So I will start with current public spending, go on to talk about what taxes might be raised to match that spending, and finally talk about public investment.

Public spending

As I outlined in an earlier post, the share of public spending in GDP needs to rise substantially to get back to an acceptable level of provision. Below are the headline numbers for total current spending (excluding gross investment) and taxes from the OBR’s databank. We see the share of public spending in GDP rise under the last Labour government and fall under the Conservatives. The pandemic (with a little earlier help from the Johnson government) provided a sharp increase, but the plans Reeves inherited suggest a resumed decline.

A critical point that I made in that earlier post, which is routinely ignored in most analyses, is that this GDP share needs to rise over time because, in the UK and most other countries, the share of health spending in GDP has historically been on an upward trend for well known reasons. In that post I estimated that, compared to levels today, current public spending needed to rise by 3% of GDP to return to 2010 levels of public service. However a better point of focus is the end point of the OBR’s projections, and because of the decline in spending Reeves has inherited the increase in spending has to be over 4% of GDP by that date.

Although a spending review for that period is yet to take place, Reeves will have to give the OBR some indicative numbers, and these are what we need to focus on. I don’t expect to see the share of current spending rise from its 2023/4 level of 40% to 43% by the end of this decade, if only because restoring public services to 2010 levels is a ten rather than five year project. The key question is how far will Reeves go, which in turn will depend in part on how much she can raise in tax, and in part on the forecast the OBR gives her. As I noted in my first post on the budget, economic growth does not give you much in the way of additional resources for public spending as a share of GDP, unless it is accompanied by public sector productivity gains.

The OBR publishes revised numbers for current public spending immediately after the budget. There is always a risk that there will be an element of Treasury/Cabinet game playing in the numbers Reeves gives the OBR, However I would have thought anything less than a projected real term increase in departmental spending, after allowing for much more for the NHS, would be politically disastrous for the government. In addition it will be very difficult (and wrong!) for Reeves not to at least begin rolling back child poverty, and in particular abolishing the two child limit and benefits cap. (See this from the IFS on the impact of these policy options on poverty.)

Tax increases

For tax increases the numbers you will see in budget commentary will be in £ billion (or £ million), so to give you an idea of scale raising public spending by 1% of GDP in today’s prices will cost around £30 billion by the end of the decade, and after adding in inflation more than £33 billion.

The tax rises in Labour’s manifesto are small in comparison. VAT on private school fees, a higher windfall tax on energy, closing non-dom loopholes and ending the carried interest tax exemption raise about £4 billion. Labour also hopes to raise £6 billion by spending more on tax collection, but the OBR will need to make a judgement about how realistic that is.

There are some tax increases due to come in that were scheduled by the last government, most notably the freezing rather than indexing of tax allowances. In addition Covid business tax relief is due to end, fuel duty is due to rise (ending a temporary cut and adding in uprating which the last government routinely assumed but never did), and lowering the stamp duty threshold. Reeves could reverse any of these, but that would only add to the taxes she needs to find elsewhere.

So where are large tax increases going to come from? Reeves has pledged that they should not come from ‘working people’, but in practice that seems to mean not from income tax, personal NIC contributions and VAT. Labour has also pledged not to raise the rate of corporation tax. What is left that would yield large amounts of money?

1. Employers National Insurance Contributions

Raising the contribution rate by 1% for employers would raise about £5 billion net. (Beware larger numbers quoted in the media that include contributions paid by the public sector.) Another possibility is to extend national insurance payments to employers’ pension contributions, which could raise £12 billion (net of the public sector). Finally she could remove the NIC higher earnings cap, which could raise over £12 billion. Strangely (not really!) this possibility is hardly ever discussed in the media. It is one of the steps needed to make national insurance contributions more like income tax, with perhaps the eventual integration of the two taxes on income from employment, but Reeves may feel it is precluded by Labour’s pre-election promises.

2. Capital Gains Tax (CGT)

At present, capital gains are taxed at a much lower rate than incomes, which if nothing else leads to a lot of tax avoidance. The details of what Reeves could do quickly get quite complex, as are estimates of how much the tax increase would raise. The key uncertainty is how much owners will (initially at least) hold on to assets to avoid paying the higher tax, hoping for a change of government. The OBR will have to take a view on this. Equalisation is also not straightforward, because it could involve just income tax, or it could involve all taxes on income from employment including National Insurance. A recent study suggested that equalisation with income tax (with rates of 20%, 40% and 45%) plus a system of allowances and other changes could raise £14 billion. Leaks to the Guardian suggest Reeves is looking at increases in the CGT rate from 20% (for most) to between 33% to 39%.

3. Investment income

Reeves could raise the tax rate on rental and dividend income. These are currently taxed at similar rates to earned income, but they could be taxed at higher rates. More radically, she could extend National Insurance Contributions to investment income, which Advani estimates could raise £11 billion.

4. Inheritance tax

Raising this from 40% to 45% would only raise a billion according to the IFS ready reckoner. (I would advocate a much bigger rise - sorry kids! - on equity grounds.) There is probably more scope to raise money by removing various exemptions (e.g. business and agricultural reliefs are worth 2 billion), and Reeves could be more radical still and replace it with a gifts tax. I don’t expect it, but Reeves could also introduce a wealth tax. Advani suggests a 1% annual tax would raise £13 billion.

5. Extending the freeze on tax thresholds

These are currently frozen until April 2028. Reeves could extend these over the full OBR forecast period, raising around £8 billion, but this really is an income tax increase. Budget leaks suggest she intends to do this, and perhaps she thinks this is politically safe as the Conservatives will find it difficult to condemn her for continuing what they started.

There are a lot of detailed changes that Reeves could make, which tend to be small in revenue terms but can add up. For those who want to get into the nitty gritty of all that and the above, there are plenty of good resources around from, among others, the IFS (their ready reckoner and Green Budget), the Resolution Foundation, Centax, the Financial Times and Dan Neidle.

The numbers above indicate that there is clear scope for substantial increases in taxes, even within the limits Labour has imposed on itself (with help from the Conservatives). Whether they amount to enough to bring public services back to 2010 levels is more doubtful. Most, but not all, of the proposals mentioned above will mainly hit individuals who are well off. Unfortunately the obvious redistributive tax change, raising taxes on very high earned income, is probably ruled out by Labour's pre-election pledges.  

Two final points. The first is to look out for tax increases that could be extended further in later years. In many cases gradualism makes economic and/or political sense, and also see the point about Cabinet game playing above. The second is to see if Reeves makes any initial moves to introduce new taxes, such as road pricing for example.

Public investment

There has been plenty of discussion in the media of how she could amend the ‘falling debt to GDP’ fiscal rule to allow more borrowing for investment, and almost no discussion of my own preferred option of getting rid of the rule completely. This makes perfect sense as the rule is designed to appease mediamacro rather than economists or the markets!

Whatever she decides to do, the key issue is how much extra public investment she plans for by the end of the OBR’s forecast period. On present plans net public investment is set to fall from 2.5% of GDP currently to 1.7% by 2028/9. In my view this decline needs to be turned into a substantial rise if we are going to catch up with all the investment lost under the Conservatives.

As the budget is on Wednesday next week, I will not do the usual post of Tuesday, but instead delay it until Thursday or Friday to give my own reactions to the budget.