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17 September 2021

Why Labour should break the mould and promise to cut taxes

Pay rises for the many and tax rises for the few could be a winning message for the party.

By James Meadway

Labour made the right decision to oppose the Conservatives’ National Insurance increase. The party’s first polling leads since earlier this year are its reward. But to build on this, Labour needs to be much bolder in its approach to taxation. It should turn hard against its stereotype and come out loudly and clearly in favour of higher pay and lower taxes for ordinary people.

Norway’s Labour Party, victors in the country’s elections on 13 September, deposing the centre-right after eight years in power, promised tax cuts to all workers earning less than twice the average salary. A Norwegian worker on average pay would be equivalent to £257 better off per year – paid for by tax rises at the top of the income scale. Labour leader Jonas Gahr Støre has spoken of addressing inequality by making sure ordinary people have more money in their pocket at the end of the month, matching social democratic principles with bread-and-butter demands.

Cutting taxes is the quickest route any government has to beef up pay packets. Yet the Tories have backed themselves into a corner: it is, of course, possible that they will seek to reverse the National Insurance contribution increase ahead of the election, or find some other personal tax to chop, but to do so would require a change of leader – now a fading prospect – and, moreover, someone in No 10 prepared to squash Treasury “sound money” recidivism.

Labour, then, has been presented with a golden opportunity to demonstrate that it is unequivocally on the side of working people: committed not only to providing high-quality public services, but also to protecting and improving the real pay of those in work. “Pay rises not tax rises,” as deputy leader Angela Rayner put it.

VAT could be cut – or, outside the EU, varied across regions and industries. Cuts to income tax are expensive – just 1p off the 20 per cent basic rate most of us in work pay costs £5.75bn. And of course, because the cut applies to everyone earning more than the personal allowance, higher-rate taxpayers also gain. Any reductions to the taxes paid by the lowest-to-average workers have to be matched by increases further up the income scale. The Tories hate raising taxes at the top: they know their fundamental class interests. But there’s no reason Labour can’t do it.

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Nor would Labour thus open itself to charges of fiscal irresponsibility. It could make the change “revenue neutral”: exactly compensating the cuts to taxes at the lower end of the income scale with tax hikes at the top. Reintroducing a 10p income tax rate, for example, above the current personal allowance could be a major boost for, say, the poorest fifth of earners – and could be balanced in part with the reintroduction of a 50p rate at the top, above the point where the personal allowance taper ends.

Almost every person in employment would benefit from a Norway-style tax shift like this: making it revenue-neutral turns the government into Robin Hood, taking a little more from the very top and redistributing elsewhere, while parrying accusations of reckless giveaways.

Voters may be cynical about promises to improve public services or deliver better-paying jobs, but no one doubts any government’s ability to impose taxes. This is likely to be crucial in the places Labour needs to win back. There has been much handwringing over the party’s losses in the so-called Red Wall, but as Sebastian Payne’s new book, Broken Heartlands, shows, these former strongholds deindustrialised decades ago. Parts are today comparatively prosperous, populated by better-off homeowners, often retired.

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Classic Tory voters, in other words – to whom Labour needs to take a hard-nosed approach. “Values” are nice, but they don’t pay the bills. Labour should be ruthlessly transactional in rebuilding its coalition: emphasise the material goods Labour can deliver in government. Talk about putting more money in most people’s pockets.

But shouldn’t Labour be promising to fund public services? Of course. But there is no compelling economic reason to insist that every penny of spending has to be paid for by equivalent tax rises. When, in 2017, Labour presented a “fully costed” manifesto for its day-to-day spending proposals, the aim was to defuse a Tory and media attack line that our plans would lead to an increase in the day-to-day budget deficit. This was politics, not economics.

The politics of the deficit have moved on from the 2010s. An argument today that investment spending can and should be funded through borrowing is accepted by the Conservatives and their pals in the media. But this idea can be taken further: Joe Biden’s administration has argued that spending on care and education should be considered “human investment”, in the same way that we think of spending on infrastructure like railway lines or wind turbines.

Likewise for taxing wealth. Hugely popular with voters as a general idea, the details immediately open gnarly political rows, as 2015’s mansion tax showed. Targeting some of the more egregious discrepancies, like closing the gap between the low tax rate paid on capital gains compared with earnings, would be relatively easier wins.

These are two arguments to start now, well ahead of the next election, rather than springing them on the electorate at the start of a future campaign. As John McDonnell has recently written, one of the lessons of the 2019 defeat must surely be that policy takes a while to settle among voters, who need time to get used to and accept new ideas. Tax cuts don’t work like that: everyone knows what they are. Save them for a pre-election surprise and the “Labour’s Tax bombshell” headlines might even be good news for the party.

[See also: Can Keir Starmer break Labour’s losing streak?]