Criticisms of Labour’s spending plans are strangely disconnected from economic reality

The question is not are they too radical but are they radical enough

December 09, 2019
Shadow Chancellor John McDonnell. Photo: Kirsty O'Connor/PA Wire/PA Images
Shadow Chancellor John McDonnell. Photo: Kirsty O'Connor/PA Wire/PA Images

When Labour announced its spending plans they were immediately called “not credible.” They comprised an additional £80bn in day-to-day spending and £55bn in investment; and subsequently a further £12bn for WASPI pension compensation.

These plans have faced three major criticisms, primarily from the well-respected Institute for Fiscal Studies: that their cost is unfeasibly high; that they cannot be funded without further tax rises; and that Labour is trying to do things too quickly.

All the parties’ plans should be properly scrutinised. However, these criticisms have been strangely disconnected from wider discussion around the economy, and the urgent need for change.

The IFS’ Paul Johnson called Labour’s tax and spending pledges “vast numbers, enormous, colossal, in the context of anything we’ve seen in the last—ever, really”; the Daily Mail cited “massive giveaways”; the Telegraph dubbed it a “Venezuela-style spending spree.”

But the UK’s public spending levels are unusually low by international standards. As the IFS and others have pointed out, Labour’s proposals would do no more than bring us up to European standards of public spending—from 38 per cent to 44 per cent of GDP, compared to an average of 48 per cent across the rest of Europe. And we need to raise spending levels to meet rising need as the population ages—there is consensus around this.

The IFS has also argued that funding these proposals will require further tax rises, noting that no other country with these spending levels has been able to fund them without higher tax rates on average earners. But the UK is also one of the most unequal countries in the developed world—so it makes sense that more taxes will be paid by the richest, too. And overall judgments of the feasibility of Labour’s proposals require assessment of their macroeconomic effects—their potential to move the country on to a different growth path, and thus affect tax revenues and the public finances. These are assessments which the IFS, as a microeconomic institution, does not provide.

Paul Johnson has also questioned Labour’s investment proposals, which aim to fix neglected infrastructure and move us to a sustainable economy over ten years. Johnson argues that it is probably “physically impossible” to spend this money effectively within the planned timeframe. But at a time when we have public services at breaking point, and are on a collision course towards irreversible environmental damage, it seems strange to fear a policy agenda that is too bold over one that is not bold enough.

Over the last few years, our common understanding of the economy has shifted, recognising that the current model is failing, and that there is a need for change. Real wages have stagnated; investment is chronically low; inequality has widened; the country’s regions are pulling further apart; we are facing environmental destabilisation. But this understanding has been largely missing from the curiously bloodless debate around the parties’ plans, which has instead suffered from a myopic form of status quo bias.

Of course all plans should be examined carefully and the Labour Party’s should not be immune from criticism. But anything new has attracted immediate and furious scrutiny, while the assumption that we can safely continue on as we are has gone unchallenged. This serves no one.

The question we should be asking is not “Are these spending proposals too radical?”, but “Are they radical enough to meet the challenges that face us?” The next five years will give us our answer.