Our Labour Conference debate - Is austerity really over and how can a Labour government pay for it?

The event was hosted jointly by CIOT, the Institute for Government and the Institute for Fiscal Studies. 

Shadow Chief Secretary to the Treasury Peter Dowd told the meeting that austerity was not over.  He said: “We have an economy of about £2.1 trillion and about 37 per cent of that comes in tax and goes into the system to pay for public services- there is going to have to be a debate at some point... the debate about that has to happen. Do we want that 37 per cent to be 41 or 42 per cent. What is it that we want to settle on as a country? Is there the appetite to invest more in our public services? What is the role of growth in the economy?” 

Dowd focused his fire on tax reliefs, claiming there is £450 billion of tax reliefs in the UK which could be used in a different way. He contrasted the abundance of tax reliefs to the ‘one in, three out’ rule that was a commitment undertaken by the previous government (2015 – 2017) to remove three pieces of regulation for every new piece brought in. 

Paul Johnson, Director of IFS, said austerity is over in the sense that both Labour and the Conservatives are committed to spending more money in the next few years. However, spending by most government departments, such as DWP, will be less in 2020 than 2010 – so while the direction of travel has changed, levels remain below where they were, for most departments. He noted that the size of the state has not fallen since the last Labour government. While the overall size of the state has not changed, the shape of it has changed, such as by more spending on the NHS. He warned that a potential ‘no deal’ Brexit will shrink the economy, could lead to deficit rise and another round of austerity. On the Labour 2017 manifesto, Johnson said it was less about ending austerity and more about changing the state with ‘new stuff’, such as through nationalisation and free childcare; there was not much about reversing cuts to benefits or increasing health spending - but this will be different in the next manifesto, he predicted. If spending rises under Labour by £70 billion a year, that is four per cent of national income; plenty of European counties spend that amount of their national income. 

Frances O'Grady, the general secretary of the Trades Union Congress (TUC), claimed austerity is not over if you define it as a reversal of real terms cuts.   She said ordinary people are paying the price for the ‘bankers’ crash’ (of 2008); the poor got poorer as a result, and austerity actually choked off economic growth, she said. O’Grady suggested that the rise of self-employment is a sign that people have been forced into precarious forms of employment status. She spoke up for Labour’s 2017 manifesto, reminding the audience that it was fully costed. She bemoaned that the Conservative government has offered tax cuts to the wealthiest people and to companies during a period of austerity. Similar to Johnson, O’Grady believes a ‘no deal’ Brexit is the biggest threat to the economy. She used the event to outline TUC proposals for what the Labour Party should do in government, which includes a £10 minimum wage and the wealth workers create being spread more widely. Time to move from ‘free market fundamentalism’ and ‘give a chance to everyone’, she exhorted. 

CIOT President Glyn Fullelove pointed out that former PM Gordon Brown’s 50 per cent top rate of tax is the only new tax rate in the past 20 years. He pointed to the unintended consequences of the increased personal allowance and rules on taxation of pensions. On the personal allowance, he explained how those on low incomes and in receipt of means tested benefits face the highest marginal tax rates. And he highlighted how the lifetime allowance on pensions is tempting doctors to retire early. He welcomed that there is a debate on whether the UK should have high or low rates of tax today, and therefore discussion about the amount of tax take, rather than constant tinkering with the tax system such as through tax reliefs. If the next Labour Chancellor wants to know what is he doing and that it will work, not only has he got to change the rates, he has to start rolling back the complications in the system, said Fullelove, adding that, otherwise, he may find in a second Labour Budget that his earlier changes have led to unintended consequences. 

Chief Economist at the Institute for Government Gemma Tetlow chaired the event and opened the Q&A session.  

O’Grady suggested people have lost faith in the tax system because of perceived advantages enjoyed by multinational companies and wealthy people. Fullelove said the OECD work in recent years means multinational companies will pay tax somewhere. Johnson said inheritance tax is so unpopular despite the low proportion of people who pay it; because the perception is that the wealthy do not pay it (he cited the example of the Duke of Westminster). 

TUC chief O’Grady claimed that the Brexit referendum result to leave the EU had a lot to do with upset at austerity. She said that not everything can be solved by the tax system but it can reflect the kind of society we wish to have in the UK. She said Labour is an international movement and therefore should use international institutions to ensure large companies pay their ‘fair share’ of tax.

Dowd said he had worked for 40 years in local government and the NHS. He cautioned against radical change to council tax, saying that £35 billion comes from it. A local income tax, mooted by an audience member, is a thorny issue for him because the UK is so regionally imbalanced. He added that he hopes for a more redistributive tax system under a Labour government, saying that tax is the price we pay for a civilised society. The MP reiterated Labour’s concerns that HMRC is under resourced. 

The debate was held on 23 September 2019 at the Brighton Hilton Metropole, in front of Labour party members, representatives of business and think tanks, and other conference goers. 

CIOT will also be holding events at Conservative and SNP conferences.

By Hamant Verma