CIOT and IFS Labour Conference Debate 2022: Can Tax Help Tackle the Cost-of-Living Crisis?

You can watch this debate here

Shadow Financial Secretary James Murray MP was one of three speakers who joined chair Susan Ball, President of the CIOT, on the panel for the well-attended fringe meeting on 26 September. With around 100 people in the room, it was the best attended Labour conference debate CIOT and the Institute for Fiscal Studies (IFS) have hosted since they started holding them in 2013.

First up was Paul Johnson, Director of the IFS, who thanked Chancellor Kwasi Kwarteng for ‘making tax exciting – at least for a while’ with his mini-Budget earlier in the month. Johnson said the Government’s intervention on energy in the mini-Budget was the biggest fiscal announcement of his life. He called the ‘huge’ intervention by the Government to cap energy prices for homes and businesses ‘extraordinary’. He said it is an extraordinarily bad policy in many ways because it is untargeted, expensive and dampens down incentives to save energy – but he understands why it was done in the short run. He is worried, however, that there is no ‘exit strategy’ from it – suggesting the Government put 5,000 civil servants to work immediately on a better targeted and cheaper solution ready for next year. If energy prices stay high we cannot go on subsidising bills like this, he warned.

Johnson said tax cannot do much for the cost-of-living crisis because the people suffering most are those on the lowest income not paying direct taxes, while cutting VAT or excise duties is not going to do much to help them and is expensive and inflationary. Yes, you can cut direct taxes for those on low incomes who are paying them, he said, but the reality is that tax cuts are only going to play a minor role. You need a combination of benefits, some targeted tax cuts and the ‘universalism’ we have seen, he suggested.

The £45 billion-a-year tax cuts starting immediately which were announced by the Chancellor last month surprised Johnson because it pushes additional money into the economy while inflation is high. Johnson complained that we did not have any statement about how Chancellor Kwarteng sees this as consistent with sustainable public finances. Debt is on an unsustainable path, fears Johnson.

On politics, Johnson said Tony Blair’s Labour inherited pretty good government finances in 1997 in contrast to what than any incoming Labour government can expect in 2024. Labour will want to spend more money on public services - especially if we do not get anything to reflect much higher inflation - but may inherit unsustainable public finances. This will leave them with ‘tough decisions’. Yet Shadow Chancellor Rachel Reeves says she will keep the rollback ‘cut’ to national insurance and income tax. This leaves Labour with the difficult task of how to ‘square that circle’.

Baffled by the 'mini-Budget': Murray, Ball (chair), Giles and Johnson

On Kwarteng’s mini-Budget, Chris Giles, Economics Editor and columnist at the Financial Times, said he agreed with 99 per cent of what Johnson had said – saying the one per cent difference is that the Government has actually said it will not spend any more money on public services on top of what it planned to announced it will spend last year ‘so the fact they take a real-terms cuts is tough, says the Government’. In contrast to the Prime Minister’s criticism of Treasury orthodoxy, Giles spoke in favour of economic orthodoxy because it is built up from evidence and countries that follow it do not have ‘horrible things happen to them’.

Giles said that the Government must use all its levers to deal with wholesale energy prices 10 times higher than normal. But he said it is a bad time to borrow money with increasing interest rates.

The columnist said incentives matter in tax. With regard to the top rate abolition, Giles said that if you are Kwarteng and you think British people are the ‘biggest idlers in world’, as stated in the book Britannia Unchained, which the Chancellor co-wrote, you might think if you took away the 45 per cent tax rate they would have to ‘work less hard to get the same amount of money’ (called the income effect in economics). You must think hard about incentives and do not assume people want to do the things you want them to do, Giles warned. If the Government does not compensate the public sector at all for higher inflation, then people will not want to work in that sector, he fears. Giles said financial incentives are much easier to change and change more rapidly than real behavioral change: “so if you get rid of the IR35 rules people will put money through a company and not declare it properly. And if you get rid of dividend tax, at the higher dividend tax rate of 45 per cent rate, people will wait until April to pay their tax and you will lose out – this is a windfall tax except with a negative rate, by the way”. Giles joked that Liz Truss is in favour of a windfall tax but only with a negative rate for people she likes.

Labour’s Shadow Financial Secretary to the Treasury, James Murray, said businesses that he has spoken to at the Labour Conference are anxious that the Government is gambling with taxpayers’ money with its mini-Budget (he called it a ‘reckless gamble’). Murray suggested gambling is the only option left to the Government because of 12 years of low growth, low investment and low productivity – but they are gambling with ‘our money’. He observed that the Government has now had seven plans for growth in 12 years. The Government has finally accepted it has a problem with low growth after years of denial, he said. Murray is happy that economic growth is at the centre of the battleground in Westminster because the Government has had a problem with growth for 12 years and Labour has set out its own growth plan.

Murray accused the Government of offering more of the same: the repeal of the national insurance increase (which Labour supports) is taking us back to where we were in March this year and the announcement on corporation tax continues with how we are today. On changes the Government has made, abolishing the 45p rate and lifting the cap on bankers’ bonuses should not be priorities. And the MP said it is ‘inexcusable’ in the current context for the Government to refuse to put in place a more ambitious windfall tax on energy companies to limit energy prices. That leaves us with the Government paying for the intervention through borrowing rather than a more extensive windfall tax. He closed by saying the markets are issuing their negative judgement on the mini-Budget. He then promoted Labour’s green investment pledge.

In the Q&A, Murray said the Government’s emphasis on taxation of work over assets is ‘misguided’.  ‘Making work pay’ is important, he said. Separately, Murray he said Social Investment Tax Relief is an important part of Labour’s economic policy.

On business taxation Murray said the Government’s assumption that reduced corporation tax rates lead to higher tax revenue has been proved incorrect. He suggested Labour will focus on investment incentives to boost growth. Labour wants a review and potential abolition of business rates, with Murray saying it seems wrong that businesses pay them no matter if they are making a profit or not.

In response to a question from a Times reporter about whether the UK will need a bailout from the IMF, Giles suggested that that would not be possible because the IMF does not have the money to bail out the UK anymore.

By Hamant Verma, CIOT Senior External Relations Officer