Rachel Reeves is ignoring one very simple truth — and we can all see it (Image: Getty)
The word “growth” has been spoken over 400 times in the House of Commons since the election last year. Labour ministers have mentioned it a further 200 times in written statements to Parliament. And the Chancellor has said she wants to go “further and faster” in the pursuit of growth as she announced another raft of policy changes this week. But behind the speeches and statements, Labour’s decision to substantially raise taxes tells a very different story.
In the words of the ever-quotable Winston Churchill, “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. Lower tax economies can be more dynamic, spurring growth and helping to sustainably pay for quality public services in the long run. However, Rachel Reeves’ first budget last year contained the biggest set of tax rises in a generation.
Part of the issue is with the word itself – what do we want “growth” to mean in practice? If it means improved job opportunities, Rachel Reeves’ decision to hike employer National Insurance contributions has delivered exactly the opposite – with the ONS showing unemployment rising in the aftermath of the Autumn Budget. Sainsbury’s alone announced it will cut 3,000 jobs this month, with tax increases understood to have been a factor.
If it means easing pressure for working families at the supermarket checkout, recent research by the Institute of Grocery Distribution estimates food inflation could hit almost 5 per cent in 2025, citing higher costs for businesses – again, linked to decisions in the Budget.
And if it means improved investment in infrastructure, the markets’ lack of confidence in the Government’s economic plans has pushed the Government’s long-term borrowing costs to the highest this century, increasing interest payments and so reducing the amount it can spend on improving services like rail and road infrastructure.
Competitive taxes are arguably one of the most important ways in which the government can stimulate growth and send a clear signal that Britain is open for business. Yet the pressure on Labour ministers to deliver on the demands of their trade union backers means their ability to pursue genuinely pro-growth tax cuts are limited. Just look at the decision to award above-inflation pay increases to train drivers – an average of £80,000 for a 4-day week – as an example.
Ministers are also having to face up to the reality that some of the tax rises they judged to be popular by their potential voters during the election campaign, like applying VAT to private schools, may raise significantly less than they claimed, whilst also bringing a number of unintended consequences that come with a cost. For example, three private schools closed in just one week earlier this month, risking increased pressure on state schools class sizes.
Tax cuts do need to be affordable, but alongside substantial tax hikes Labour’s Budget contained over £74 billion of spending increases. They also seem able to find funding for issues few voters would consider a priority, such as the reported £9 billion to cede sovereignty of the Chagos islands.
The Prime Minister and Chancellor have refused to rule out further tax rises in recent weeks. But if they are to make their “growth” mission more than just warm words, they will need to challenge their own party’s priorities and rediscover the simple truth you can’t tax your way to prosperity.
Iain Carter is a former Conservative Party Political Director who has also served as a special adviser in a number of government departments.