Labour needs to take action on post-war scale

The current reality - around 14.4 million people live in poverty - Credit Betty Longbottom Wiki Commons

Prem Sikka outlines the harsh reality of life for millions and sets out a radical alternative for a Labour government.

If opinion polls and by-election results are anything to go by, the Labour Party is likely to form the UK’s next government after the 2024 general election. It will face a daunting list of problems requiring bold action, at par with the post Second World War reconstruction undertaken by the Labour government led by Clement Attlee.

It is only possible to provide a glimpse of interconnected problems. Since the 1970s, neoliberal governments have declared war on trade unions and workers’ rights. The result is an unprecedented squeeze in household incomes. At the end of second quarter of 2023 workers’ share of gross domestic product, in the form of wages /salaries declined to around 50%, compared to nearly 65.1% in 1976.

Despite economic growth, the real average earnings are unchanged since 2005. In September 2023 median monthly UK wage was £2.264, or £27,168 a year. The average house priced at around £290,000, more than twice that in London and the South East of England, is beyond the reach of most workers. Low incomes also deprive people of good food, education, pension, healthcare and the possibility of living a fulfilling life.

Low income and rising inequalities have condemned millions to a life of poverty, insecurity and social exclusion. Around 14.4 million people, including 4.2 million children, 8.1 million working-age adults and 2.1 million pensioners live in poverty. The average person in the UK has £17,365 in savings; whilst 34% of adults have either no savings, or less than £1000. The lack of purchasing power and economic resilience discourages investment, and leads to low productivity.

The UK investment in productive assets is lower than any other G7 country.  This is despite long periods of low inflation, interest rates and corporate taxes; high financial incentives and negative real wage growth. In 2021, the UK was ranked 35th out 38 OECD countries.

The neoliberal control of the state is a major reason for low investment. After the Second World War, the entrepreneurial state invested directly in steel, shipping, airlines, oil, gas, electricity and emerging industries such as aerospace, biotechnology and information technology, especially as the private sector showed little appetite for large investment and high risks. Neoliberals replaced the entrepreneurial state with a profit guarantor state. It guarantees corporate profits through outsourcing, privatisation and massive subsidies to footloose capital.

The lack of investment in public services is especially visible in the healthcare sector. Around 65% of maternity care in England is unsafe. The number of people waiting for a hospital appointment in England has increased from 2.5m in 2010 to 7.78m at the end of August 2023. In the last five years 1.5m have died whilst waiting for a hospital appointment. Some 2.6m have become chronically ill and are unfit to work.

Economic revival cannot be achieved without direct public investment. Labour will need to directly invest in infrastructure, and new green and manufacturing industries.

Labour has a number of options for financing economic revival. It can create money as supporters of modern monetary theory advocate, but this has no traction in political circles. After the 2007-08 banking crash, Labour initiated a programme of quantitative easing, eventually reaching £895bn under the Conservatives, to fund bailouts and prop-up markets, but there is little enthusiasm for that now. The Labour government could borrow money to rejuvenate the economy; the leadership says that it is committed to ‘ironclad discipline’ with public finances which signifies unwillingness in borrowing and investing.

Labour can raise additional revenues through progressive taxation, but has ruled out wealth taxes and increasing capital gains tax. Such promises can’t deliver economic recovery. In fact, Labour does not need to increase the overall tax burden. It needs to eliminate tax perks of the rich and broaden the tax base.

Here are some examples:

Currently wage earners pay income tax at the marginal rates of 20%-45%.  They also pay national insurance contributions (NIC) at the rate of 12% on annual earnings between £12,570 and £50,270, and 2% on income above £50,271. In contrast, capital gains from the sale of second homes, stocks and shares, antiques and artworks are taxed at rates ranging from 10% to 28%. Dividend income is taxed at the rates ranging from 8.75% to 39.35% Recipients of capital gains and dividends do not pay NIC even though they use the National Health Service and social care. No NIC is levied on investment income, which includes bank interest and rental income.

As all income, regardless of the source, provides identical access to goods and services it needs to be taxed at the same rate. A TUC study estimated that an additional £17bn a year could be raised by taxing capital gains at the same rate as wages. By levying national insurance on the same, possibly another £8bn could be raised. Applying the same logic to dividends can raise another £6bn-£10bn. Equalising the tax rates also eliminates opportunities for tax avoidance.

National insurance is a regressive tax and the rich pay a lower proportion of their income in NIC. By extending the 12% rate of NIC to all earned income, more than £14bn can be raised each year. The state can actually recalibrate the thresholds of NIC and levy lower rates on lower income and then progressively increase them for higher incomes.

The net cost of pension income tax and NIC relief is estimated to be £48.2 billion in 2020 to 2021. About two-thirds of goes to wealthy individuals paying income tax at the marginal rate of 40% (on income between £50,271 and £125,140) and 45% (on income over £125,140). People with annual incomes below £12,570 get no pension tax relief. By restricting tax relief/credit to everyone at the rate of 20%, the next Labour government can generate £14.5bn a year.

The purchaser of shares pays a tax or duty of 0.5% on the transaction. This ought to be extended to all marketable securities, including derivatives. Even at very modest rates it could raise nearly £4.7bn a year.

Britain’s 50 richest families hold more wealth than the entire bottom 50% of the nation’s population, and must make additional contributions. A wealth tax of 1.7% on people with more than £3m in assets could yield £2.7bn. On assets above £5m the tax rate could rise to 2.1%, raising another £3.2bn. Above the £10m threshold the rate could rise to 3.5 % and raise £4.6bn. That is a total of over £10bn from 140,000 rich individuals. Such a tax is supported by Patriotic Millionaires, some of the richest people in the UK.

higher rate of VAT (30%) on luxury goods could raise £1.6bn a year.

The government hands 1,180 tax reliefs costing billions to the public purse. Too many, such as those relating to research and development, are abused as accountants find creative ways of claiming them. A former head of HMRC has urged the government to abolish the “entrepreneurs’ relief”, one of the many tax reliefs, because it is just a tax perk and has provided “no incentive for real entrepreneurship”. All reliefs are not fully costed and the government has little idea of the economic benefits. A revision is long overdue and will save billions.

The biggest tax perk for corporations and the rich is that HMRC is unable to collect taxes from them. Since 2010, between £450bn and £1,500bn of tax revenue has been lost due to avoidance, evasion and error. For every £1 of investment into large business investigation HMRC has yielded £69 in extra tax revenue. So, greater investment in enforcement is needed. This would also enable HMRC to challenge offshore tax dodges which are costing the world, including the UK, $4.8 trillion over the next decade.

The above is a small sample of policies that can raise large amounts of tax revenues without increasing the level of taxation for the masses. A Labour government would need to be entrepreneurial and use the proceeds to directly invest in infrastructure and new industries to create new skilled and semi-skilled jobs. It could fund education and training of workers to address the productivity gap. This would stimulate private sector investment too as it would supply most of the materials, goods and services for national reconstruction.

Labour could alleviate child poverty by providing free meals for all school children, and end the two-child benefit cap which currently deprives poorest families of £3,000 a year in support.

It can use the proceeds to cut taxes on the less well-off and improve their purchasing power. For example, it could abolish VAT on domestic fuel, or reduce the NIC rate for basic rate of income tax payers. In fact, it could totally recalibrate the NIC thresholds.

Public investment needs to be accompanied by social reforms, such as a living wage of at least £15 per hour, improved worker rights, better state pension and enabling local councils to build social housing.

The above would only be possible of Labour is willing to free itself from the self-imposed shackles of neoliberal policies.

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