Labour conference: Can John McDonnell win the country's trust?

As a politician, John McDonnell has said many controversial things. Now as Shadow Chancellor, he is having to elaborate, or apologise. People have to make up their own minds as to whether they trust him and think him credible. This applies with added force to his judgement about how a Labour government would manage the UK economy. At the Labour Party conference today, he will begin to make the case, pitching for radical change to what opinion surveys tell us is still a skeptical electorate.

The centre-piece of McDonnell’s strategy is, as we know, opposition to the austerity programmes being applied by the government to public services and welfare. To combat accusations of "deficit-denial," he now argues that Labour will subscribe to George Osborne’s plan to achieve a surplus by the end of this parliament in 2019-20.

It is probable—though not yet confirmed—that Labour’s definition of surplus would exclude capital spending. Few economists have a major problem with this, especially when the government can borrow money at exceptionally low interest rates, at least for the moment and prospectively. The contentious issue is going to be the radically different means whereby a Labour government would realise this goal, especially in the light of other political priorities that would add to spending.

The maths are straightforward. According to the Office for Budget Responsibility, current budget plans entail a reduction in spending in real, ie inflation-adjusted, terms of just under £18bn plus welfare savings of about £12bn by 2020. Accounting changes aside, then, this is the order of magnitude that a rival McDonnell agenda would have to aim for, subject to any as yet unspecified programmes, for example, increased pensions and other benefits, measures to control rents, and the re-nationalisation of rail, and possibly other companies in the energy and financial sectors. According to early briefings, the thrust of a new budget strategy would take the form of tax increases on the better off and on companies, and from harvesting billions of pounds in unpaid taxes and subsidies to enterprises.

It is reported, for example, that the top rate of income tax would rise to 50 per cent, there would be a 7 per cent National Insurance surcharge on incomes over £50,000 to fund the abolition of student tuition fees, corporation tax would rise by 2.5 per cent, and there would be an overhaul of inheritance taxation, levying higher rates on bigger estates. Consultations have been promised with respect to the introduction of a financial transactions tax.

In the boring world of tax revenue accounting, it should be noted that large revenue increases from modest, say 1-2 per cent increases in tax rates, only come from VAT, National Insurance contributions paid by employers and employees on regular incomes, and the basic rate of income tax. A 1 per cent rise in higher rate tax, for example, only produces a bit over £1bn. A 1 per cent rise in stamp duty, inheritance tax and other capital taxes don’t produce significant amounts of extra revenue.

In other words, while one can make a political or fairness case for levying higher taxes on the 1 per cent and on companies, the economic argument that the budget deficit can be closed by "taxing the rich" simply doesn’t wash.

In addition, Labour’s public relations have emphasised two other major possible revenue sources.  It will review the £93 billion of what is called "corporate welfare" in the form of subsidies to companies—much of which comprises capital allowances for investment, research and development and green technologies. It is not known how much of this might be recouped, or might be at the cost of damaging investment, itself.

And it will endeavour to claw back up to £120bn in taxes that are unpaid or evaded, although scrutiny by some qualified accountants has revealed this to be gross exaggeration. The Shadow Chancellor, himself, has acknowledged that a more realistic figure may be about £20 billion, and that a review of HMRC would be undertaken in order to increase its tax-collection capacity. This is 4-5 times what George Osborne has earmarked as his goal for clawback, but these boastful estimates can generally regarded as implausible, especially in economies where the "black" or shadow economy is considered to be pretty small, as it is in the UK.

Last but by no means least, McDonnell stands behind a loosely argued and poorly defined programme of PQE or People’s Quantitative Easing. To this end he wants to conduct a review of the Bank of England’s mandate or remit from the Treasury, with a view to "instructing the Bank" under circumstances we do not yet know to buy bonds to fund infrastructure, housing and other projects, including "skills" according to an interview conducted on the Today programme earlier today.

It is important to distinguish PQE from an alternative proposal, colloquially known as helicopter money, under which an independent Bank might be asked in a recession in which interest rates were still or again zero, for example, to buy a limited and agreed volume of assets—either private or new ones issued by, say, a National Infrastructure Bank—or to fund a tax cut. McDonnell has said that the Bank would remain independent but it is hard to see how this would be the case if PQE were to be pursued as its authors insist. If the Bank were to be "persuaded" by the Treasury to do its bidding, ie political control over the Bank were to be re-established, it is difficult to see how McDonnell could win the country’s trust and credibility—no matter how many Nobel Prize winners and best-selling authors in economics were on his advisory panel.