Sunday, May 21, 2017
Polls apart, but the Tories and Labour both pose risks to the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

This election is turning out to be a bit more interesting than I was expecting although, unless the polls are spectacularly wrong, though they are narrowing, it is still unlikely to be much of a whodunnit.

It is interesting because, for the first time in a very long time – perhaps since Michael Foot in 1983 – nobody, not even the Tories, has had to speculate about what dark, left-wing ideas lurk behind a bland Labour programme.

This time, instead, the left-wing ideas are in full view. Labour has produced a manifesto in the image of its leader, which means that a fascinating experiment is now unfolding. There has always been a strand of Labour opinion which holds that the party has suffered electorally, most notably under Ed Miliband two years ago, from not being left-wing enough.

Now that proposition is being tested, though sadly it will not settle the issue. If Labour’s vote share is in the low 30s, similar or better than Miliband in 2015 (30.4%), it will be greeted as progress, with alleged media bias against Jeremy Corbyn blamed for the message not fully getting through.

There are, as with all manifestos, good and bad ideas in Labour’s proposals. A National Transformation Fund, which would take advantage of low borrowing costs to invest an additional £250bn in Britain’s infrastructure over the next 10 years, has a lot to be said for it.

Though the arguments are not as strong as they were, there is also an argument for Labour’s National Investment Bank and its proposed network of regional development banks, which would draw on private finance to generate £250bn of what Labour calls “lending power”, operating in the gaps left by the commercial banks, particularly in small business lending. Calls for such an institution, modelled on European lines, go back a very long way.

Where Labour comes over all unnecessary in its manifesto is its proposal to renationalise chunks of the economy, including the rail companies, the water industry, Royal Mail and by “regaining control” of energy supply networks. The argument that “democratic control” of these industries would bring a better deal for consumers defies the experience of the past, though it would keep the unions happy. As a priority it is a weird one.

Even weirder, though perhaps entirely predictable, are Labour’s tax plans. Raising taxes on high earners may have made sense in the immediate aftermath of the financial crisis, though it is not clear the 50% rate Labour announced then on incomes above £150,000 raised much money.

To go further at a time of Brexit, when Britain needs to prevent its high earners, particularly in the City, from heading to Frankfurt, Paris or Dublin, makes no sense at all. And yet that is precisely what Labour is proposing, and more, with a new 45% rate kicking in at £80,000 and 50% at £123,000.

Similarly, in the context of Brexit, raising corporation tax from 19% to 26% at a time when Britain’s appeal to foreign direct investors is being undermined by our exit from the single market is, as I noted last week, really dumb.

Labour’s defence, that 26% would still be the lowest in the G7, does not wash. These things do not stand still. Donald Trump, if he hangs around long enough, aims for a rate of 15%. And, as the Institute for Fiscal studies points out, the rate is not everything: other countries allow a larger share of capital spending to be offset against tax, together with other reliefs, so even at 19% Britain has “a less competitive tax base than other countries”.

The icing on the cake of Labour’s tax-raising exercise is its proposed policy of converting stamp duty, currently 0.5% on share purchases, into a “Robin Hood” tax on a much wider range of financial transactions. Again, at any time this would be very risky. At this time, making the City much less competitive at a stroke would provide an open invitation for international investment banks and others to migrate en masse to Europe.

The logic behind Labour’s tax policies, which would end up raising very little, is hard to fathom in the context of Brexit. Either the party does not expect to be in power to implement them or it believes it could blame Brexit when everything goes wrong. The worry would be if enough people believed they were the right thing to do. We are still, after all, in a strange era.

You might think after all this that it would be a relief to turn to the party we must now call “Theresa May’s Conservatives”. The prime minister has been happy to accept the soubriquet “bloody difficult woman and would be nothing if she does not come over as a sensible one.

Her Tory manifesto gets some of its economics wrong. Britain is not the fastest growing economy in the G7. Barring revisions, Germany was last year and plenty of other G7 countries were in the first quarter of this year.

Her government’s more relaxed approach to deficit reduction will mean that the public finances will be in the red until the mid-2020s, meaning one of the longest runs of deficits on record. Even then, George Osborne’s ambition of budget surpluses has been replaced by the meeker “balanced budget”.

There are, as with Labour, good things in the Tory manifesto. Though it will not make any difference for several years and not too much then, replacing the triple lock on state pensions with a double lock (pensions to rise by the greater of prices or earnings) is a modest step in the right direction, as is the proposed withdrawal of the winter fuel allowance for better-off pensioners.

The Tory proposals for social care at least address the problem, but they do so in a messy and incoherent and unfair way, particularly in comparison with the Dilnot Commission’s proposals. They will need to be revisited.

The Tories would not renationalize anything but they would intervene willy-nilly. May’s Tories are suspicious of markets and business and have an attitude to foreign investment that verges on protectionism.

There are, moreover, two particular problems with the Tory manifesto. A sensible approach to immigration would have been to acknowledge that voters believe it is too high but also to say that a lengthy period of adjustment will be needed to reduce Britain’s dependency on foreign workers. It would also have made a lot of sense to exclude students from the figures.

Instead, May has gone for a hard-line Home Office approach which will harm the economy and business and, when her “tens of thousands” target is not met, harm her. By doubling down on the migration commitment, toughening the visa requirements for students and increasing the costs for employers of bringing in non-EU migrants, she has prioritized politics over economics. Clamping down on migrants will, according to the Office for Budget Responsibility, hurt the public finances, making even that elongated balanced budget target harder to meet.
The prime minister also rode roughshod over the Leave supporters in her own cabinet who insist Brexit is not about immigration.

The other concern is that “no deal is better than a bad deal” with the EU will, if she is elected on June 8, be part of her mandate. If Britain were to suffer an abrupt, cliff-edge exit from the EU, the damage of which I have written about here before, nobody could say they were not warned, or that she had departed from the script.

People like me are supposed to compare Labour’s wish list and spectacularly ill-timed tax plans and conclude that the country would be better off with sensible Tory policies. But the contrast is less stark than you might think. We are talking mainly about different kinds of damage.