In the wake of Trump’s tariffs, Prem Sikka argues that Labour must borrow to invest, ditch self-imposed fiscal rules, and completely overhaul tax and spend policies to redistribute wealth
US President Donald Trump’s trade tariffs are challenging the global economic order. The UK’s Labour government needs to reset its economic policies to build a resilient economy.
Labour has nailed its colours to the expansion of the finance industry. This is an error and is more likely to deliver scandals rather than economic rejuvenation. In recent years, the UK has had low inflation, low interest rates and low corporate taxes, but that did not stimulate investment in productive assets as the City doesn’t have appetite for long-term investment and risks. The result is that the UK has been bottom of the G7 league for investment for 24 out of the last 30 years. It ranks a lowly 28th for business investment out of 31 OECD countries.
The government must ditch its self-imposed fiscal rules, the neoliberal aversion to public ownership and taxing the rich. It must invest directly in industry and prioritise manufacturing and non-financial sectors. Every £1m of manufacturing activity supports a further £1.8m in indirect and induced multiplier effects. There are plenty of opportunities to invest and build a resilient economy. The UK imports roughly 40% of its food and 40.8% of energy needs. The UK is the world’s largest importer of bricks and imported over 500m bricks in 2022, and 30%-40% of its cement. Much of the UK infrastructure, such as water, energy, ports, railway rolling stock, airports, steel, auto and more, is foreign-owned and highly vulnerable to trade wars. Any government looking for a resilient industrial base must consider public ownership of vital industries.
There are numerous ways for the state to reshape the economy and society. Supporters of Modern Monetary Theory (MMT) claim that currency-issuing governments can create money to achieve social aims, but that remains untested and doesn’t have traction in political circles.
The government can borrow more. This is far cheaper than anything funded through the Private Finance Initiative (PFI). The UK public debt of £2.9 trillion is around 95.5% of GDP. It includes some £654.5bn associated with quantitative easing and isn’t really a debt as it represents transactions between the Treasury and the Bank of England. Its exclusion would reduce the debt to around 75% of GDP. In comparison, the post-war construction of the UK was facilitated by government debt of 270% of GDP. This built the welfare state, infrastructure and new industries. It revived the private sector, boosted employment and generated tax revenues. By 1976, the debt was reduced to 49% of GDP, and declined to around 22% of GDP in 1990. An entrepreneurial state is necessary again.
The government must stimulate domestic demand by boosting the purchasing power of the bottom 50% of the population. Currently, 16m people live below the poverty line. People can’t dip into some reservoir of wealth to boost demand and economic growth. The bottom 50% of the population has 5% of wealth, and the bottom fifth has only 0.5% of wealth. The real average wage is unchanged since 2008. Some 37% of the Universal Credit claimants are in work and millions rely on charity or survival. Poverty is compounded by a regressive tax system. The richest fifth pays 30% of gross household income in direct taxes, compared with 16% paid by the poorest fifth. The richest fifth pays 11% of their disposable income in indirect taxes compared with the poorest fifth paying 27%. Altogether, the poorest pay a higher proportion of their income in taxes. Redistribution is long overdue.
One consequence of inequitable distribution of income and wealth is that a large proportion of the population cannot spend enough to stimulate economic growth. Labour must look at corporate welfare. Uncounted billions are handed in subsidies to oil, gas, coal, biomass, steel, auto, shipbuilding, internet and other industries without any equity stake. The money isn’t even in the form of repayable loans. It is free money that enables companies to acquire assets and the resulting income streams.
Some 1,180 tax reliefs are handed out by government. They cover a wide range of economic activity such as full expensing of capital allowances, R&D tax credits, draught relief, film tax relief, video game relief, patent box, theatre tax relief, capital gains tax exemptions and more. Fraud isn’t uncommon. HMRC has published estimated cost data for 365 reliefs, leaving 815 uncosted. Therefore, it is hard to monitor economic benefits or abuses. A cull of these reliefs can yield billions.
The government hands billions to elites in other ways. Here is one example. The 2007-2008 financial crash was followed by £895bn of quantitative easing (QE), enabling the state to lubricate capital markets by buying government gilts and corporate bonds. It increased the value of financial assets. A Bank of England study estimated that QE increased the wealth of the richest 10% of households by between £128,000 and £322,000. This should have been clawed back. Now the government is reversing QE (quantitative tightening) and is selling gilts and bonds at a loss. It is also paying interest to commercial banks on what are called central bank reserves, created as a result of QE, and essentially enabling interbank transfers. Since October 2022, the Treasury has taken a hit of £85.9bn from the losses and interest payments. The Treasury is expected to pay over £150bn to the banking sector by 2028. This is a huge, hidden, and unnecessary wealth transfer to the ultra-rich and must be curtailed.
HMRC admits that since 2010 it has failed to collect over £500bn in taxes due to avoidance, evasion and errors. Others estimate it to be around £100bn a year, totalling £1,400bn for the period 2010 to 2024. In addition, HMRC has written off some £38bn of tax debt due to fraud and bad laws. For example, HMRC is not a preferential creditor for a business’s own taxes. HMRC’s estimate of tax loss does not include taxes lost on over £570bn of wealth stashed in offshore tax havens by UK residents. It does not include billions lost through profit shifting by corporations to low/no tax jurisdictions. Labour’s focus on tax avoidance is welcome, but it has shown little appetite in tackling corporations and ultra rich.
Patriotic Millionaires have long called for the elimination of tax anomalies and extra taxes on the ultra-rich. Just 685,500 Britons in the richest 1% have wealth totalling £2.8 trillion. In comparison, approximately 48m Britons (70% of the population) have a total of £2.4 trillion. The richest four Britons have more wealth than 20m people combined. A start must be made by eliminating tax anomalies. Here are a few examples.
Capital gains are taxed at rates of 10%-28%; dividends are taxed at rates of 8.75% to 39.35%, compared to wages and salaries at rates between 20% and 45%. Recipients of capital gains and dividends don’t pay national insurance either as governments have chosen to tax return on wealth at lower rates than return on investment of human capital. By aligning taxation of dividends and capital gains with wages, the government can raise over £20bn.
In 2023, the government handed out £70.6bn tax relief on pension contributions. Some 63% of it went to 6m individuals paying income tax at the marginal rate of 40% and 45%. The remaining 37% went to 28.1m basic rate (20% rate) taxpayers. By restricting tax relief at the rate 20% to all, the government will have £14.5bn spare. It can restrict the relief to 25% and will still have billions left over.
Employees pay national insurance at the rate of 8% on annual incomes between £12,570 and £50,270. Beyond that, the rate is 2%. This means that the rich pay a lower proportion of their income in national insurance. The government can extend 8% to all incomes or have a graduated approach. A flat rate of 8% on all earned income can generate an additional £12.5bn a year. The government can take a more graduated approach. For example, it can leave the bands as they are now but levy an additional 2% on incomes between £50,271 and £100,000; and say 3% on income between £100,001 and £150,000, and a higher rate on incomes above that. A progressive reform of national insurance can generate large sums.
Some high earners escape national insurance charges altogether, even though they benefit from the social infrastructure. For example, accountants, lawyers, architects, surveyors, private equity managers and many others operate as limited liability partnerships (LLPs). Members of LLPs are treated as self-employed for national insurance purposes and pay the lower Class 4 rate. No employer’s national insurance is paid. This perk alone saves the partners around £138,000 for every £1m of profit shared. Partners of just four big law firms alone benefit by around £4bn a year. By ending this dodge, the government can collect billions.
There are numerous other possibilities, such as a wealth tax, a financial transactions tax, a tax on private yachts and planes, and income tax surcharges on unearned income. Yet Labour has chosen to hurt the vulnerable through the two-child benefit cap, winter fuel payment cut and disability benefit cuts. Such choices will reduce its electoral chances. It must develop a bolder strategy to build a just society.