The Labour Party is expected to win a huge parliamentary majority in the United Kingdom’s general election July 4. Though Labour’s campaign manifesto doesn’t give exact details about what economic policies it will pursue, we have some idea.
First, it has promised not to raise the three main forms of taxes almost everyone in the county pays: income tax, National Insurance Contributions (NICs), and value-added tax (VAT). While Labour is right not to seek to worsen the tax burden on working people—already greater than at any point since the end of World War II—making such a sweeping commitment is a mistake.
With taxes, it’s best to have as broad a base as possible, with minimal exemptions or different rates. This lets the Treasury maintain a stable inflow of revenue and minimizes distortions to economic activity. If Labour plans to boost public spending even slightly, however, as some of its commitments clearly demand, then it will need to find the money somewhere. The party has pledged to stick to the current government’s fiscal rules, which essentially bar more borrowing; so, it will have to raise taxes, introduce new ones, or do both.
Breaking manifesto commitments is considered a big deal in U.K. politics, so Labour is unlikely to seek higher rates of income tax, NICs, or VAT right off the bat. Instead, the new Chancellor of the Exchequer will probably hold an “emergency budget” meeting early on and claim that the economy and public finances are in much worse shape than previously understood, making higher taxes necessary. The government is also likely to try to levy the most damaging taxes on politically unpopular businesses, such as those in energy, tech, and banking.
This is the wrong approach, because, again, it is more sustainable to have as broad a system as possible. This way, the Treasury can be sure that it can raise the revenue it needs rather than worrying that the groups it’s targeting will decide to leave the country or stop doing the activity that is being taxed. But the extra revenue, if spent wisely, could yield some positive results. The U.K. economy would benefit from a boost in public investment, especially in areas such as transport infrastructure and energy generation. It might be better if this spending were funded through moderate borrowing, but Labour worries about being seen as economically reckless, so this is doubtful to happen anytime soon.
It’s encouraging that Labour has pledged not to raise the headline rate of Corporation Tax and has suggested that it even might be willing to lower it to keep the U.K. competitive. It has also promised to maintain the “super-deduction,” a massive capital allowance that provides a strong incentive for firms to expand investment. Unfortunately, it has failed to pledge to abolish the most damaging tax on the books: the Stamp Duty Land Tax, a levy on the purchase of real estate or other properties above a threshold.
On international trade, there’s cause for cautious optimism. Labour has pledged to finalize a trade deal with India. It has also said that it wants to work with partners and the World Trade Organization to modernize the trading system, a sorely needed improvement. Unfortunately, the party makes no mention of a trade deal with the United States, but this is probably expectation management, given that neither President Joe Biden nor a newly elected President Trump would be too keen on trade deals. Still, if the conditions were right for both sides, a Labour government would likely pursue a deal with the U.S.
One undeniable bright spot is Labour’s planning proposals: land use, in American parlance. Arguably the main thing holding back the U.K. economy is the dysfunctional planning system, easily gamed by anti-development forces and rent-seekers. In the U.K., it is effectively illegal to build anything: homes, transportation infrastructure, offices, science labs, nuclear power plants, solar farms, wind turbines, and data centers—all of which the country needs to fuel productivity and economic growth. Labour has committed to build more and to overrule local residents, if necessary.
Though the economically flawed and misanthropic ideology of “de-growth” is becoming popular, most mainstream U.K. politicians remain pro-growth. They also tend to favor building things, albeit in the “right” places. Sadly, however, few politicians have the guts actually to follow through, worried about angering voters and often their own MPs. This is one area for which having a Labour super-majority could prove useful. Party leadership could then ignore the objections of some of its own MPs.
Much of this is speculation. But given that Labour will enjoy a huge majority, it can largely do what it likes. Concerns about its fiscal plans are certainly warranted, but the party’s stated determination to grow the economy, modernize an approach to international trade, and get Britain building again are encouraging signs.
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