Why raising taxes substantially is critical for the next Labour government to be sure of achieving its missions

 

My series of posts on detoxifying government debt was all about why Labour should not be afraid to increase public investment substantially. Public investment should be matched by borrowing because future generations benefit from individual investment projects. The same is not the case for most day to day (current) public spending. If the economy is not suffering from deficient aggregate demand, it makes sense to match increases in day to day spending with higher taxes. A fiscal rule that does this (often called the ‘golden rule’) makes sense.

That day to day public spending needs to increase substantially should not be in dispute. It is hard to think of any area of public spending that is not suffering badly after years of cuts, without any significant cut in what that spending is designed to achieve. The Institute for Government and CIPFA’s Performance Tracker shows that performance in most services is worse than before the pandemic, and much worse than it was in 2010. Our prisons are full, more people of working age are too ill to work, councils are going bankrupt, and poverty is increasing rapidly because benefits are too low or needlessly restricted. In addition many public sector workers have seen their relative pay squeezed over many years leading to either severe shortages or reliance on workers from overseas.

Additional public investment, together with some reforms, may ease these pressures a little, but they take time and will not be enough on their own to make a noticeable difference to public service provision over a five year period. It is also clear that the majority of voters want to see the next government achieve more in terms of improving public services than marginal increases in efficiency. Over the last six months the Conservative government has put cutting taxes at the centre of its economic offering to the public and their poll ratings continue to fall.

The idea that enough of the electorate will vote against any party proposing tax increases is a political myth, encouraged of course by a media dominated by a right wing press. As this paper by Rosa Hodgkin shows, historical evidence suggests that popular attitudes to personal taxes have not changed much since the late 1940s, and there is no new popular resistance to raising taxes regardless of circumstances. Gordon Brown was incredibly nervous about raising NIC to get more money into the NHS, but it turned out to be very popular. Most voters currently recognise the dire state of public services, and have grown tired of politicians that pretend this can all be fixed without spending additional money.

Yet the next election will be framed by the current government in a magical world where taxes can be continually cut and public services will do better with even less money than they currently receive. The government can pretend this because it knows it is very likely to lose, but thinks tax cuts shore up its core vote (and keeps its own party together) and creates problems for Labour. Labour’s response is to avoid those problems in opposition by accepting these tax cuts, but if they win that makes their problems in government that much harder.

All this means that in the real world the next government will have to raise taxes. The tax cuts announced so far, together with anything more to come before the next election, just satisfy the falling debt to GDP rule adopted by both main parties because projections are based on politically impossible assumptions about public spending. They imply cuts to prison spending when prisons are full so prisoners are having to be released early, and cuts to local authority spending when many councils are on the verge of bankruptcy.

Of course the next government could be lucky, either because growth exceeds the OBR’s projections or taxes are unexpectedly high compared to GDP [1], but they would have to be very lucky to avoid tax increases just to stop the currently terrible level of public service provision getting worse. However, no government should plan on the basis of being lucky. Indeed good governments should have plans that are robust to being unlucky in terms of how the economy progresses.

So if Labour wins the next election they will almost certainly have to raise taxes anyway, just to stand still in terms of public services. This is something Rachel Reeves must know. Any Chancellor who hopes something will turn up is destined to fail badly. There are two paths that Reeves could follow. The first is to hope she can find enough taxes to increase that she hasn’t already pledged not to raise, so she can say that she is not breaking any commitments made before the election. The second path is to break those commitments.

How feasible the first path is will depend on how much further Reeves is forced to go before the election. She has already ruled out raising income tax or personal NIC payments, as well as corporation tax. She has said she has no plans to raise taxes on capital gains, although ‘lack of plans’ is not quite the same as a commitment. We can expect the Conservatives to try very hard to extend the range of taxes which Labour commit to not raising during the election campaign, and may even try to steal more of the small number of small tax increases Labour are committed to, as they did in the last Budget.

The big danger of the first path is that it leaves too little room for Labour to make real progress on its five missions over a five year period, and in particular its mission to get the NHS back on its feet. If the OBR projections for the economy or government finances turn out to be too optimistic, there is a real danger that each Budget Reeves gives will be a scramble to find more tax increases just to stand still. It will seem to voters that taxes are going up, yet there is little to show for it. [2] As a result the first path is very risky in political terms.

In particular, the first path is not robust to uncertainty about growth in the economy. Despite all the detailed ideas and analysis in her recent Mais lecture, Reeves knows that while governments can positively influence economic growth it cannot control it [3]. Year to year growth is influenced by countless factors outside the government’s control. In addition projections of tax receipts for any given level of growth can easily be wrong, as Gordon Brown found out as Chancellor (see footnote [1]).

The second path has the immediate cost of breaking a pre-election commitment, as well as any unpopularity that comes from raising a tax paid by most people. However I expect both are already ‘priced in’ by voters to a considerable extent. However it is a more robust path than the first. It raises more tax, so is robust to a modest deterioration in the economy or public finances. The government still has a chance to achieve its missions and better public services even if growth in the short term is weak.

If economic growth is stronger than expected, as I noted in my last post, additional public investment is in danger of hitting resource constraints, and in particular a shortage of labour. To increase both current public spending (e.g. training more nurses, doctors and teachers) and public investment without hitting these resource constraints requires more modest growth in private consumption, which higher taxes will achieve.

This concern about overheating the economy is also the focus of a recent post by Chris Dillow. He argues that if the economy remains strong this is not the time to be running large fiscal deficits on day to day spending, and I agree. I also agree that in this situation raising taxes only on the rich [4], however desirable that may be on equity grounds, does not solve the macroeconomic problem because most of this money would come out of savings rather than consumption. This is why, if the economy remains strong, what I call the second path Reeves could follow needs to involve taxes on most people. However Chris also argues against the kind of simultaneous increase in spending and taxes that this second path involves.

He has two main objections. The first is that tax rises will go against what Labour have said before the election. But as I have already argued, some tax rises are inevitable after the election under any government, because the public spending assumptions behind recent tax cuts cannot be delivered. If Reeves is unlucky with the public finances in the first few years, she may have to break these commitments anyway. The second objection is that it takes time to shift resources between sectors. However what I call the second path need not involve radical dislocation. What it needs to do is set out a plan for a steady improvement in resources going into the public sector, but also paying public sector workers better, which involves no resource relocation. Labour under Blair/Brown did this for the NHS in the early 2000s when the economy was healthy, and Labour can do it again.

There are three major advantages in Labour choosing the second path, which involves increases in taxes on most voters. First, it is a robust policy, allowing key Labour missions to be completed whatever the state of the economy. Second, most voters will be expecting public service provision to noticeably improve under a new government. Third, better public services are not just desperately needed in their own right, but in the case of the NHS at least would have knock-on benefits for the economy as a whole.

Against these advantages, the cost of going back on commitments made in an election based on your opponent’s fantasy numbers seems small. In political terms, there is no reason why a failed and very unpopular outgoing Conservative administration should be able to saddle a Labour government with underfunded public services for five years. For the electorate at the election after next, few will remember a tax commitment broken five years earlier, but a failure to achieve its missions of restoring the NHS and reducing the child poverty that stifles opportunity will not be forgiven.

[1] The history of the first ten years of the last Labour government is a good example of the latter. During his first set of Budgets Gordon Brown found that tax receipts kept coming in higher than Treasury forecasts. In the remainder of his budgets the opposite was true.

[2] I have in mind here slow growth or low tax receipts given projected growth. In a recession an expansionary fiscal policy is required to support the economy.

[3] A government’s ability to negatively influence growth is much greater, unfortunately, as the UK experience over the last decade and a half shows.

[4] The same is true for ‘windfall taxes’ on specific companies. I have argued that when interest rates are high there is a very strong case  for a windfall tax on banks, but it will not have much impact on aggregate demand.

Detoxifying government debt, part 4. Labour’s inheritance

 

The Labour party has for a long time been fearful about high government borrowing to fund additional public investment. It didn’t start with 2010 austerity. Gordon Brown, probably the best Chancellor the UK has had over the last 50 years, used PFI mainly as a way of getting public investment done without additional public sector borrowing. It didn’t make economic sense at the time, as public borrowing is normally a far cheaper way of financing investment, but it happened because increasing government debt to finance worthwhile public investment was seen as toxic.

In parts 1-3 of this series we have outlined how none of this perceived toxicity stands up to economic scrutiny. It makes no sense to say that the country cannot afford to borrow to invest more, because government debt is also an asset for those who hold it (part 1). How much government borrowing costs depends on expectations of future short term interest rates, not on how much it is borrowing (part 2). The Eurozone crisis of 2010-2 has no relevance to the UK because we have a central bank that will in practice act as a buyer of last resort for government debt, just as it did after the Global Financial Crisis, at the start of the pandemic and in the latter stages of the Truss debacle.

Those who say that the Truss crisis shows that Labour needs to tread cautiously in raising borrowing to invest have to address why Truss provoked a crisis, but all the many other occasions that UK borrowing has risen didn’t. In part 3 we showed why the key mistake that Truss made was to leave open how she intended to cut public spending, at a time when further cuts to spending were politically incredible. But this raised borrowing costs not because markets thought the UK would default, but because it made future central bank decisions about interest rates much more difficult to forecast. [1] That is why increasing borrowing for worthwhile public investment rather than tax cuts is completely different.

But just as an economic analysis shows that Labour has nothing to fear from increased government borrowing to pay for additional investment, it also shows why this perceived toxicity persists. People, including political journalists in the media who have little knowledge of macroeconomics, look for simple analogies, and so think that government borrowing is like personal borrowing. The idea of arbitrage, and that the Truss crisis stemmed from uncertainty about central bank decisions, is seen as too complex, so it is much simpler to just say that Truss tried to borrow too much.

However ignorance is only one half of the story. The other is that this perceived toxicity suits the political agenda of those that dominate media discourse. Hardly anyone asks why it’s seen as good for the private sector to borrow to invest, but problematic for the public sector to do so, because those questions are not posed by journalists working for the right wing media. City economists are viewed as experts when, on average, they clearly have a right wing bias, as well as an incentive to mystify rather than explain. It is not an exaggeration to say that government debt is viewed as toxic because it suits the media to give that impression.

It is very hard for an opposition party to fight against a media narrative. Been there, tried that. On the other hand a newly elected government, particularly in the early honeymoon period, has immensely more power to set the agenda and terms of reference. To some extent whether they use that power depends on whether they see that it will be to their political advantage to use up their political capital in this way. The rest of this post is why it is essential for Labour to do just that, and detoxify borrowing to invest.

The case for substantially more public investment is overwhelming. As John Burn-Murdoch shows here, investment in the NHS collapsed shortly after 2010, and has stayed at a level well below that in peer countries ever since. NHS capital budgets are currently being cut further still. That is almost fifteen years of chronic under-investment that needs to be reversed. As well as basics like new buildings and beds, we also need to invest in resources for more preventative care and preparation for the next pandemic. The NHS is not unusual in this respect, and you can tell similar stories about under-investment in education, where capital spending for the three-year average up to 2023–24 is due to be about 26% lower in real terms than the three-year average in the late 2000s up to 2008–09. You can tell similar stories about the justice system, flood prevention, social housing and so on. The public sector as a whole has been starved of investment over the last fourteen years by design, and our economy has seriously suffered as a result.

In addition, an essential part of improving UK productivity growth and reducing regional inequality involves better transport links outside London. It is ridiculous that we seem almost alone in Europe in being unable to link our major cities with high speed rail, and thereby help relieve chronic congestion in the existing rail network. There seems like there is almost universal agreement among economists that the UK needs more public investment to end its current stagnation, and public investment can often provide a spur to investment more generally. UK public investment is about half the average for advanced OECD countries. On top of all this is the need to invest to mitigate the biggest existential crisis facing humanity, which is climate change.

However politicians often find it difficult to do the right thing if they think it will cause them electoral harm. So I also want to look at the case for immediate and large increases in public investment, financed through higher borrowing, on the very narrow grounds of Labour’s electoral interest.

In other circumstances, it might be tempting for a new Labour Chancellor to try and emulate Gordon Brown’s first few years as Chancellor, by sticking closely to existing (and falling) public investment plans as a signal of prudence and being an ‘Iron Chancellor’. To do that ‘for the markets’ is pointless, as the earlier posts in this series spell out, because interest rates on UK government debt are not determined by the amount a Chancellor borrows or how the markets feel about the Chancellor but by expectations of future central bank decisions. It might impress political commentators, but the electoral cost would be far too high for two reasons.

First, once elected, the public’s expectation that a Labour government will start reversing fourteen years of deliberate neglect will be immense. The example of the left in Germany is used here to suggest what could happen if these expectations are not met because of unwarranted fiscal caution. In 1997 it was just about possible to stick to existing spending plans because public services, although run down, were far from being in the critical state they are in today. Labour inherited a reasonably strong economy, rather than the economy today in which real wages have been stagnant for almost fifteen years.

Second, the whole point of investment is that it takes time before its benefits are perceived, so if a Labour government wants to get credit for additional investment by the time of the 2029 (or 2034) election they need to start increasing it immediately. Delaying that start for a few years in order to gain some media credibility will be pointless if voters don’t see a substantial improvement in public service provision and economic growth.

So Rachel Reeves should ignore claims that greatly increasing public investment will worry the financial markets, because such claims are bogus and because society and the economy desperately needs much higher levels of public investment. She needs to adopt new fiscal rules that are designed to never constrain public investment. Keeping such arbitrary and unjustified constraints in place, and just hoping that forecasts mean these constraints don’t bite, is foolhardy and a waste of the honeymoon period a new Chancellor will almost certainly enjoy.

What may be a more significant problem in substantially raising public investment is lack of real resources. Although the UK is in recession, and GDP per head has been steadily falling through last year, this is not a typical recession which involves lack of aggregate demand, but one caused by sharp cuts to real incomes following higher energy and food prices, as well as labour shortages caused in part by an increasingly sick workforce following Conservative mismanagement of the NHS and Covid pandemic. The labour market is not as tight as it was a year ago, but unemployment remains at levels that are lower than at any time in the last five decades.

This may change by the time the election comes around, but if it does not, then the Chancellor and the Treasury may be in the unusual position of having to prioritise between public investment projects by looking at where the investment comes from and pressure in particular labour markets. Periods of higher investment are often associated with shortages of labour in the construction industry, although the immigration system can be adapted to relieve those pressures, but the CT scanners the NHS desperately needs are likely to come from abroad so their construction puts no pressure on the UK economy. [2]

Labour will inherit an economy and a public sector in a worse state than at any time since WWII. The task they will have to turn things around is immense. It is therefore vital that Labour focus on these real problems, rather than imaginary worries that the media might throw at them. Probably the most effective way to start repairing the damage of the last 14 years is to substantially increase public investment, and the political longevity of the next Labour government may depend on how effectively they do that.

[1] An interesting question is why Hunt's last two fiscal events, which involved tax cuts 'financed' by totally unrealistic cuts to public spending, didn't have a similar effect in raising interest rates. One simple answer is context. Truss's fiscal event was at a time of high inflation and rising short term interest rates, whereas now the main question is how quickly interest rates might fall. Another is that the unrealistic spending cuts proposed by Hunt are sufficiently In the future that their impact on the Bank's decisions will be modest, while under Truss we had no idea when cuts to spending might be attempted.

[2] Chris Dillow uses the lack of spare capacity in the economy to make the case for Labour to keep a tight fiscal stance, but he also argues against the kind of increase in both spending and taxes that I propose here. I cannot do justice to his arguments in a footnote, but he doesn't tackle a key part to my argument, which is that the next government is going to have to break their current pledges of no tax increases at some point over the next five years anyway, and it would be politically better to do so sooner rather than later.

On maxing out credit cards and magic money trees

 

“When you repeat a lie, you spread it.

When you spread a lie, you strengthen it.

When you strengthen a lie, you become an accomplice to it.

In this disinformation age, we must do better.”

George Lakoff

Keir Starmer, in commenting on the recent Budget, said “Britain in recession, the national credit card maxed out, and despite the measures today, the highest tax burden for 70 years”. The analogy of maxing out the nation’s credit card has been repeated by other Shadow ministers. Rachel Reeves, Shadow Chancellor, has joined many Conservative ministers in saying there is no ‘magic money tree’.

Anyone who knows any macroeconomics understands that these analogies are false. The nation does not have a credit card with an externally imposed credit limit that it can ‘max out’, and the UK government does have a magic money tree because it can create money. But are those of us who do know some (or rather a lot) of macroeconomics getting a bit pedantic in worrying about politicians who use these phrases for rhetorical flourish? After all, analogies are usually inexact, and if using inexact analogies gets across points to a lay audience why worry about this inexactitude?

Imagine, for example, if we forced politicians to be more precise. Rather than claiming that the government had ‘run out of money’ and ‘maxed out its credit card’, they would instead have to say that the government had almost hit their self-imposed borrowing limits. Rather than saying you couldn’t promise to spend this or reduce that tax because there is no magic money tree, politicians instead would say need to say that the government could create more money or borrow more, but that would add to aggregate demand which would risk higher inflation and so force the Bank of England to raise interest rates. You can see why speech writers, and authors of lines to take, prefer talking about credit cards and money trees, things most people can relate to that don’t involve macroeconomics.

Now of course those who know some macroeconomics will say that these false analogies were used by a Conservative government to persuade first the media and then voters to embark on the ruinous policy commonly known as austerity that began in 2010. But surely today’s Labour politicians would argue that purpose matters, and if these false analogies can be used for good, to finally get the party that imposed austerity out of office, why not embrace it. Use the enemies’ weapons against them.

Indeed, those who complain about politicians using these false analogies are in danger of being hypocritical. After all, the word austerity was originally used to describe the post-WWII situation in the UK, where rationing continued and didn’t finally end until the mid-1950s. Wasn’t co-opting that term to describe some (any?) cuts in government spending just the kind of rhetorical inexactitude involved in talking about magic money trees and national credit cards? Doesn’t using the term austerity create all kinds of difficulties. For example, is cutting government spending during a boom ‘austerity’? Are tax increases in a recession an austerity policy?.

OK, enough of playing devil’s advocate. I want to set out here why I think it’s important for people in the public domain to avoid false analogies, and in particular the false analogies discussed above. Let me start with the money tree, which any government with its own central bank has. Furlough during the pandemic was to a considerable extent financed by the Bank of England creating money (by creating what are called bank reserves). More generally, if a government really wants to do something it can, by creating money or borrowing. That is why money was borrowed or created during the pandemic.

So why do politicians say there is no money tree at their disposal? Because they don’t like telling the truth, which is that they don’t want to break their fiscal rule, or they don’t want the additional spending or tax cut adding to aggregate demand and leading the central bank to raise interest rates. That is a trade-off where many voters might take a different view, so it is much easier for them to say there is no money. It is a way of disguising a political choice, and not being honest about these choices.

So ‘there is no magic money tree’ is normally said by Chancellors or Prime Ministers who want an easy excuse for not spending money or cutting taxes. It is a straightforward deception to give politicians an easier life, and therefore it is difficult to defend its use. The phrase ‘maxing out the nation’s credit card’ is more often used by politicians attacking the borrowing record of others. Yet it too suggests politicians have less choice than they actually have. In this case it perpetuates the idea that governments can only borrow so much, and that they are currently hitting that limit.

This is nonsense. There is a limit to how much UK governments can borrow, but it is way above levels of debt ever historically recorded. (Debt was 2.7 times GDP after WWII.) [1] But it sounds more dramatic to say a government has maxed out its credit card than to say it is leaving insufficient headroom to meet its own fiscal rules. In the case of 2010 austerity, talking about maxing out the nations cedit card was a way of frightening people into believing it was more important to cut the deficit than help a fragile economic recovery. So again we have politicians deliberately misleading for political gain.

It really shouldn’t matter whether the politicians in question are those you support or not, when what they are doing is just wrong. Saying it is for a good cause is a poor excuse. Would you support a politician lying if it was for a good cause? What about the claim of hypocrisy by those happy to use the term austerity? I have some sympathy with that, and where the meaning is ambiguous I try to be clear about what I mean by the term. But co-opting an old word for something new is not the same as using false analogies, and there is not a huge difference between restricting parts of private consumption (1940/50s rationing) and restricting the consumption of public goods.

The use of these false analogies probably wouldn’t matter too much if we had an informed and informing media that was quick to correct these attempts to mislead. Unfortunately the complete opposite is the case. Because much of the media views macroeconomics as too complex and boring for its viewers, it laps up these incorrect attempts to relate fiscal policy to household budgets. I have discussed this at length in my book and many posts over the last twelve years.

Sometimes this media environment gives politicians little choice but to follow. But that is not the case with phrases like ‘no magic money tree’ and ‘maxing out the nation’s credit card’. No one is forcing politicians to use these phrases. Instead it is their own choice to do so. If they know they are false analogies that just mislead the public they shouldn't use them. If they don’t know that they are false, I'm afraid that is even worse.

[1] People will stop lending to a government that can create its own money if they think that government will choose to default (or if they think the government will direct the central bank to substantially increase inflation). That in turn happens when the political cost of raising taxes to pay the interest on debt exceeds the considerable political cost of default. Some of these issues are discussed in a paper by Corsetti and Dedola that I discussed here

How 14 years have shown the impossibility of shrinking the UK state

 

The Budget was predictable, and predictably boring. Hunt cut taxes, but the tax burden is still rising because of the tax increases already programmed in. Furthermore, he was only able to make the tax cuts he did (i.e. reduce the extent of tax increases) because he had previously pencilled in assumptions about public spending that were fantastically low. You can either portray those assumptions as Austerity 2.0 or just silly - I did the latter here.

However, with (I hope) the not silly assumption that this will be the last Conservative budget [1] for a while, I thought it might be useful to look back on the previous 14+ such events since 2010 to see if there are any general lessons we can draw from them all. One in particular runs through most of them and really sticks out. From 2010 onwards Conservative Chancellors have attempted to cut what they like to call the 'tax burden' by reducing the size of the state without any major changes in what the state is meant to do, and as the chart below shows (which includes the impact of yesterday's Budget) they have completely failed to achieve this objective. 

The professed aim of Austerity 1.0 from 2010 onwards was to reduce the budget deficit, but it quickly became clear that was not the only aim, because Osborne started cutting taxes in his budgets as well as reducing spending. (The initial VAT increase was deliberately designed to give the impression it was all about the deficit.) Yet despite cuts to corporation tax and personal tax thresholds, all Osborne could do was to keep the tax share stable at around 33% of GDP.

Then came Brexit and Boris Johnson. Johnson understood that trying to make Brexit work while continuing to shrink the state was politically impossible, so he undertook a partial and limited (in scope) reversal of Austerity 1.0 by raising spending on the NHS, schools and the police. This would inevitably mean a large increase in taxes, undertaken by then Chancellor Sunak for reasons he clearly set out here. Even without the intervention of Covid it is unlikely the additional spending would have been enough to start bringing NHS waiting lists down, so the government got the worst of all worlds in political terms: public services were inadequately funded yet the tax share was going up significantly.

When Johnson was thrown out of office, what little political sense he had brought on the size of the state left too. It was replaced by fantasy and deception, in that order. The fantasy was of course Truss, who had bought the Laffer curve idea that all you needed to do to get more revenue was to cut taxes because strong economic growth would surely follow. Very few people believe this, in large part because it’s not true. The deception is Jeremy Hunt, who is pretending he can cut taxes by using make-believe numbers for future public spending (Austerity 2.0).

Almost 15 years of trying to reduce taxes, and complete failure. There are many reasons why, but one for me stands out because it doomed the project to shrink the state from the start. The chart below shows health spending as a share of GDP in the UK, France, Germany and Italy since 1980.

Don’t worry about the details, just note that all four series are trending upwards by substantial amounts. There are many reasons for this trend, like people living longer or discovering new ways to help them live longer, but as yet we have not found anything to counteract health absorbing a steadily increasing share of national income.

If governments try to keep the health share constant (aka 'protecting it'), as the chart clearly shows the UK government did from 2010 until just before the pandemic, then the quality of healthcare provided for most of the population will steadily deteriorate. To avoid that deterioration, which is not sustainable politically, you have to pay more of national income into healthcare. If you have the NHS, that means a rising share of taxes in GDP.

Decades ago this trend rise in health spending as a share of GDP was offset by the ‘peace dividend’, with defence spending falling because of the end of the cold war. Those days have long gone, with no obvious replacement in terms of a major area of public spending where less and less money is needed.

None of this was unknown in 2010. The shrinking the state project was doomed from the start, and anyone familiar with these numbers knew it was doomed from the start. So why didn’t Conservative politicians realise this, and why are they still in denial about it? I think in 2010 at least there was a view among Conservatives that everything in the public sector was inefficient, and the way to improve efficiency was to squeeze resources or introduce market mechanisms. [2] Again there were international comparisons that suggested this wasn’t true, for the NHS at least, but the story fitted too easily with a neoliberal viewpoint.

However you have to ask if any Conservative who had realised the futility of trying to shrink the state would have been successful as politicians? It was and continues to be a message that Conservative members, press barons or donors don't want to hear. Look at how Sunak’s position has changed from one recognising realities as Chancellor to a Prime Minister who has to pretend he can get something for nothing. The way politics is done in the media doesn’t help either, where basic numerical facts like an international trend rise in the share of health spending in GDP seems too much for many political journalists to remember.

So the chances of the Conservatives giving up their obsession with tax cuts is close to zero. In addition the media will remain constantly surprised that UK tax shares are steadily rising. This is unfortunate, because in trying to do the impossible (reduce the tax share) the Conservative party has done a great deal of harm. Obvious harm to the public services, but also to the economy. 

Austerity 1.0 is a key reason why the UK’s recovery from the Global Financial Crisis recession was so weak, and austerity also played an important part in influencing the Brexit referendum result. The damage caused by Truss we all know, while the game played by Hunt/Sunak is in danger of preventing Labour doing enough when they gain power. The dire state of the NHS is also directly influencing the economy. As the OBR notes, the number of inactive working age adults has increased substantially since the pandemic, with many citing long-term illness. The OBR now expects no recovery in labour force participation over the next five years, making the UK quite different from other countries where post-pandemic participation rates have recovered. This seems quite consistent with the continuing squeeze on public sector spending. For more details on how poor health has a negative influence on the economy as well as wellbeing, see the reports from the IPPR's Commission on Health and Prosperity, and Bob Hawkings here.

While there will always be a debate about whether high or low tax countries grow faster, the UK's experience over the last 14 years show that trying to cut taxes by shrinking the state when it is impossible to do so is very damaging indeed. Unfortunately neither the Conservative party nor many political commentators in the media appear willing to recognise the damage these attempts have done to both social wellbeing and the UK economy. 

[1] I fear there will be one more Autumn Statement before the election, and because that will involve another year of nonsense public spending assumptions, it will give the government room within its fiscal rules for further tax cuts.

[2] What they also did was starve the NHS of investment, which was bound to decrease efficiency, and privatize increasing amounts of its provision, which reduced the quality of provision.