The UK’s new prime minister, Andy Burnham, laid out a radical agenda in his short speech upon taking office. He called for a long-term strategy to reverse 40 years of Thatcherism, and the privatisation and centralisation that resulted. Wisely, he put a ten-year horizon on these objectives and it is now up to his new chancellor, John Healey, to realise his ambitions.
Author
- Steve Schifferes
Honorary Research Fellow, City Political Economy Research Centre, City St George’s, University of London
Sensibly, Burnham has also announced less costly but limited measures to deal with the cost of living and the housing crisis – intended to convince the public that he understands their concerns. So far these include a pledge to cut VAT on electricity bills from October, and to end rough sleeping (with no time frame specified).
The government said that the cut in energy bills is fully funded by scrapping plans for digital IDs. But spending watchdog the Office for Budget Responsibility (OBR) has pointed out that the funding for this was set to be covered by further, albeit modest, cuts to other government departments.
By appointing Healey, Burnham has reassured the bond markets , which feared the more leftwing Ed Miliband would become chancellor. Healey resigned as defence secretary in June, which played a major role in Keir Starmer’s resignation . His exit was caused by the Treasury refusing to find the funds to allow the UK to reach Nato’s defence spending target of 3% of GDP. Now it will be Healey’s job to find this money.
Other long-term goals will be just as expensive. Building council housing, fixing social care and acquiring privatised companies will all make a considerable dent in the government’s finances. These have already been weakened by the effects of the Iran war , with growth this year projected to be just 1% .
Like all chancellors, Healey’s central aim must be to boost long-term growth and productivity. This is the only way to ensure prosperity for voters and enough funds to improve public services without increasing government debt.
Although Burnham has pledged to abide by the fiscal rules and Labour’s promise not to raise income tax, VAT or national insurance, the chancellor will be able to find a number of tweaks that give him room for manoeuvre – just as chancellor, Rachel Reeves revised the fiscal rules in a way that eased restrictions on borrowing money in order to invest.
Many new policies, from building council housing to funding social care and training for young people, have long-term benefits to the economy. There could be an argument for reclassifying these as investment spending. In the case of council housing, it is actually providing the government with a valuable physical asset.
Time for a wealth tax?
Meanwhile, there are also many ways to increase revenue without breaking Labour’s taxes pledge. Burnham’s main focus is likely to be further taxation of wealth, which might aim to equalise rates with taxation on earned income. Tax relief on private pensions, which mainly benefit the better-off, could also be a target. And changes to the top rate of income tax, if it was balanced by an increase in the personal allowance to ensure people on the basic state pension do not pay income tax, could be popular.
The most contentious issue will be the taxation of property. Broadly, the reform of council tax – the system introduced by the Thatcher government and still based on property valuations made more than 30 years ago – would sharply increase costs in rich areas like London and the south east, while easing burdens further north. But that would have to be accompanied by a redistribution of funds to northern councils, which would otherwise see their revenues fall sharply.
This points to the broader question facing the Treasury – and the government – on how to carry out a meaningful devolution to the regions. It is likely to mean giving some of central government’s revenues – such as income tax – to regional authorities. They could also be given powers, like in Scotland, to raise income tax in their region.
There are also some fixes that could reduce the government’s deficit – the difference between what it brings in and what it spends. Firstly, key policies such as social care could be funded by a special tax on housing, as Burnham himself proposed in 2010 when he was health secretary. And some of the huge increase in defence spending might be funded jointly by a number of Nato countries issuing a common defence bond , which might lower borrowing costs and may not be counted as part of UK government debt. Finally, the government could gain effective control of failing private utilities, such as Thames Water, without fully nationalising them.
Like all chancellors, Healey will have to balance the need for more spending with voters’ desire for lower taxes. It will take a clever politician to square this circle, given the weakness of the UK economy and that of its key trading partners.
One route to achieving these objectives without upsetting the markets is to put forward measures that show it is on the side of the people, while announcing revenue-raising measures aimed at more unpopular targets. For example, a cut in rates for small businesses (especially pubs) in northern cities could be popular, and might be funded by higher taxation of warehouses owned by retail giants.
Devolution could also help by pushing responsibility to the local level. Voters would then be able to see the benefits in their own communities. And giving councils a bigger role in welfare reform may pay off if investment in training and mental health support led to a national reduction in the welfare bill. This will be one of Healey’s key objectives, as well as being a major concern for the markets and the OBR.
So far the markets have adopted a “wait and see” approach to the Burnham government. The autumn budget could be crucial in determining whether the new administration has a credible long-term economic strategy that can win both public support and market acceptance.
