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26 February 2021

Why Rishi Sunak’s Budget will be politically dangerous for Labour

The Chancellor’s programme will require Labour to adopt a more radical and distinctive economic position. 

By James Meadway

Rishi Sunak’s Budget next week will be comparatively limited – extending existing support for the pandemic-ravaged economy, but detailing little of the government’s mooted five- to ten-year “endemic recovery plan”. Reports suggest that a further £30bn of Covid-related payments will made available, including help for businesses and an extension of the furlough scheme, with spending in other areas little changed from previous announcements. A staggered rise in corporation tax, from 19 per cent to 23 per cent, rather than the suggested 25 per cent, is likely, as are changes to the capital gains tax system, which mostly affects wealthier taxpayers, alongside the potential introduction of new digital taxes.

But there is the option of a Spending Review in the autumn, allowing the government to postpone major decisions until – hopefully – the lockdown is a receding memory. Sunak will almost certainly use the Budget as an opportunity to kick the can a little further down the road. Duty reductions on beer might add a swing to the unlocking parties already being planned, but they’re not exactly the foundations of a new economy.

Two key indicators of the government’s direction are, however, likely to make their first appearance in the Budget. Bidding for the first “freeports” in the UK – a key element of the Conservatives’ post-Brexit economic planning – has closed, with up to 40 bids arriving for low-tax, low-customs hubs which Sunak himself, while still a humble millionaire back-bench MP, advocated as key to industrial revival in the north. They are unlikely to create genuinely new jobs, with evidence suggesting that freeports tend to be parasitic on employment elsewhere. Any jobs they do produce are also likely to be worse paid than those they destroy, while the Royal United Services Institute has already raised concerns over the opportunities freeports create for organised crime.

[see also: Why Rishi Sunak can’t escape blame for the Covid-19 crisis]

Less widely trailed, but clearly under serious consideration, are increases in the capital allowance available under the corporation tax regime. The capital allowance prescribes the amount a company can claim back in tax rebates from the costs of investments it makes; the higher the allowance, the cheaper it is to invest. Many countries offer 100 per cent reductions, but the UK has for a number of years been less generous in its provision.

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Various conservative think tanks, from the Adam Smith Institute (ASI) to the more interventionist Onward, have championed the idea, claiming the tax system is biased against manufacturing. A significant rise in capital allowances would seriously reduce revenue from any simultaneous increase in corporation tax, while the ASI suggests £9.4bn could be lost to government from 100 per cent capital allowances if the current tax rates were left unchanged.

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Increasing the allowances would mark a shift in the business tax policy of the last 40 years. It was Tory chancellor Nigel Lawson who first cut capital allowances, pegging them to reductions in the headline rate of corporation tax. Under the coalition and then Conservative governments since 2010, continual reductions in the headline rate were matched to reductions in capital allowances. The corporation tax system became, in this sense, appreciably more neoliberal: by lowering both the rate and the allowances, the government was moving itself further and further away from how business operates – taxing their profits less, but also offering fewer incentives for investment. The system moved, in other words, closer to the “flat tax” principle previously beloved by neoliberals the world over.

There are problems with a capital allowance increase. Notably, higher allowances are already in place for smaller companies, which account for around 95 per cent of the UK’s firms. A more generous regime would amount to a significant handout to larger companies, while a blanket increase, which does not incentivise any particular kind of investment, is hard to justify economically.

But Sunak has an opportunity to gain a triple political advantage: he has already flummoxed the Labour front bench with a proposed corporation tax rise, making opposition a plainly unsustainable position. Giving much of the additional tax revenues back to businesses via increased capital allowances would help keep the Conservatives’ low-tax faction on side. Targeting those capital allowances on low-carbon investments in low-investment regions would also help to advance the Tories’ “green industrial revolution”.

[see also: The rise of the climate dude]

It’s clear where the general trend in Tory thinking is taking the party. The metro mayor of Teesside, Ben Houchen, heavily favoured to be returned to office in the May elections, has laid out a Red-Green Tory prospectus, with Freeports as sites for low-carbon manufacturing, such as building the wind turbines needed for vast new proposed developments in the North Sea. Reduced capital allowances across the north, meanwhile, could be steered to incentivise investment in green equipment. Freeports and regional subsidies are, of course, easy post-Brexit accomplishments for the government to claim, with the Tories’ deal with the EU radically reducing state aid and “level playing field” constraints on intervention.

Opinion polls have shown for years that greater government intervention in the economy enjoys public support, and is particularly favoured by the kind of former Labour voters the Conservatives are keen to retain. The emerging Tory package – large investment spending, day-to-day spending increases funded by taxes on the wealthy, even a pledge to freeze National Insurance contributions, basic-rate income tax and VAT – is strikingly similar to Labour’s 2017 election programme. 

[see also: The Budget showed Labour has won the spending debate – but a new economic model is needed]

Labour will find it difficult to respond to this. Casting the Conservatives as ideologically disposed to cut spending is unlikely to have much impact while the Tories have every incentive and opportunity not to follow this course. Basing a strategy on the belief that your opponent will make exactly the mistake that best serves your side is not wise. At the very least, the Tories will be careful to balance some targeted cuts against a broader narrative around support for jobs and increased government investment – and increased taxes for those who’ve done well during the pandemic.

There are some hopeful signs for Labour. Shadow chancellor Anneliese Dodds’s traditional pre-Budget speech contrasted the effective local actions of the Labour government in Wales and elected mayors across England during the pandemic, with the cronyism and incompetence of the government in Whitehall. Dodds’ “Empty Shop Orders” – allowing local authorities to take over and repurpose shuttered shops –  are a smart response to high street closures. But Labour has to tie these local actions into a big picture to rival the Tories and be prepared to pick the fights it currently shies away from. Why not pitch measures to help the high street as action against Amazon-style megaprofits? Above all, Labour needs to fight the Tories that are in front of it – not the ones in its head, familiar from the last decade.