How much will Labour tax you?

Gordon Brown is playing it close to his chest when it comes to his plans should he become Chancellor. Hamish McRae weighs up the options on taxation, spending and borrowing that he would be most likely to consider

Stand back from the squabbles between the leadership and the rank and file over the detail of Labour's economic platform. Stand back, too, from the inevitable ambiguities that remain over tax and spending policies, for as Gordon Brown, the Shadow Chancellor, made clear yesterday, clarification will presumably not come until the campaign itself.

To understand what a Labour government might do to your taxes, start instead with three seismic shifts in economics since Labour last held power in 1979.

First, the dominance of the market system. Then, as the World Bank recently noted, about 40 per cent of the world's population lived in a functioning market economy; now the proportion is something like 90 per cent.

Second, the transformation in global inflation. There were two peaks of inflation, in 1975-76 and in the early Eighties. Before those, the long-term trend was up; since then it has been down. Government no longer has a choice about how much inflation might be acceptable; any rise is immediately "punished" by a rise in long-term interest rates.

Third, within the developed world there is increasing scepticism about the effectiveness of public spending as a means of achieving social aims. In most countries, this has yet to be reflected in a decline in public spending as a proportion of GDP, but in some (the Netherlands, Belgium, Ireland, New Zealand as well as the UK) there is a clear downward trend. In the UK, this trend was started by the last Labour chancellor, Denis Healey.

In this context, Labour is clearest about its attitude towards public spending and borrowing. Gordon Brown has committed a future Labour government to two rules. The first, which he calls the "golden rule" of borrowing, is that it will only borrow for investment, not for consumption. The second is that the ratio of public debt will be stable and kept "at a prudent and sensible level".

The first rule is open to wide interpretation, for "investment" is a word frequently used to cover what is in any accounting sense current spending, for example, investment in education. But the second, if adhered to, should contain any rise in borrowing to the rate of growth of the economy as a whole: this would suggest a budget deficit averaging about 2.5 per cent of GDP, well within the Maastricht ceiling of 3 per cent and substantially lower than the deficit over the life of the present Parliament.

Yet this fiscal prudence does not tell us much about the size of the public sector under Labour. For that we need to look at taxation. The most important institutional change would be the introduction of a Green Budget, for discussion of tax changes, several months before the Budget itself.

Mr Brown has suggested an income tax system that will reduce the tax burden on the low-paid and middle-income earners but will almost certainly increase tax rates of the higher earners. His suggestion (as a long-term objective) is that income tax will start at a lower band of 10 per cent,instead of the present 20 per cent, and move upwards in steps. The present top rate of 40 per cent will presumably be increased, but what that rate will be and the level of income at which it starts have not been disclosed.

Last week's spat over Clare Short's remarks that someone at her income level should be prepared to pay more tax suggests that any higher rate over and above the 40 per cent band would not start until an income of perhaps pounds 40,000. But even that level would catch a lot of people. John Prescott has admitted that many would pay more tax under Labour.

Some further clarification here comes from Tony Blair. He has made two important statements on tax. One is that Britain's top tax rates will be internationally competitive. The other is that he recognises that many professionals - for example, in the financial services business - are mobile; securing these activities in the UK requires appropriate taxation. It is not at all clear what "being competitive" means. If it means being competitive by European standards, it would suggest an increase in the top rate to perhaps 50 per cent. If it means being competitive with East Asia and the United States, it would leave very little scope for a tax rise at all, which seems unlikely.

A clever policy might be to hold the rise in top rates below 50 per cent, say to 45 per cent. That would be below that of the large European Union countries and, allowing for state and local taxes, not much higher than the United States.

But income tax isn't the only personal tax that is likely to rise. Gordon Brown has strongly attacked Conservative aims to abolish both capital gains tax and inheritance tax. The rules on both may be tightened. Yet there will also be tax incentives that may benefit the well off. Mr Brown has committed a Labour government to further incentives for saving. Present PEPs and Tessas seem likely to be maintained, and probably supplemented by some kind of individual savings account, which would be encouraged by tax concessions, paid after a qualifying period.

On indirect taxation, there are few clues. Mr Brown says that he would like to see a cut in VAT on fuel, but that would presumably apply only to fuel used in the home. It would be consistent with the tone of his approach for there to be higher taxation on any polluting activities, including road transport. Increasing VAT seems unlikely.

On company taxation, less is known, though the forthcoming corporate tax review will clarify things. One of the few specific suggestions is a windfall tax on the profits of public utilities, and Brown has criticised the use of offshore companies to escape taxation. There are words of encouragement for small and medium-sized businesses as creators of jobs, so it is unlikely that taxes on them will rise.

So where do these calculations on tax and borrowing leave us on public spending? In practice, the level of spending will be limited by the available revenues. If the taxation principles above are adhered to, they will create little additional revenue. There will be few bonuses from further privatisation as that cupboard is bare. Add in that fact and it is quite possible that a Labour government which intends to stick to its principles would have to tighten fiscal policy: public spending in future might be lower than it is now, however surprising a conclusion that may seem. Two things are likely to happen to public spending: it is likely to be redirected towards low-income families, and there will be a drive for better value for money.

Further, there will be a drive for better value for money in public spending. Mr Blair has praised a speech by Sir Geoffrey Holland, former permanent secretary at the Department of Education, now Vice-Chancellor at Exeter University, who argued that there could be a 30 per cent improvement in the education system within existing budgets.

Expect more of the same on interest rates, although Labour has pledged to give the Bank of England more independence, while making the way it sets monetary policy more open and accountable. The solidity of Labour's commitment to a single currency is not clear, but, in practice, policy seems slightly less hostile than that of the present government.

Criticism of Labour's economic platform from the right has generally followed a predictable line: new Labour is really old Labour with a more agreeable face, that when push comes to shove it will be a tax and spend, anti-business government. Behind this is the idea that Tony Blair and Gordon Brown will not be able to keep full control of economic policy, and the old, and still very evident, instincts of the rest of the party will dominate. This is a legitimate concern. Tony Blair adopts a completely different tone - particularly when he is speaking abroad - from those of his colleagues, including members of the Shadow Cabinet. It is almost as though they see two different worlds.

My own view, though, is not to be too concerned about this, not just because of the Blair/Brown dominance of the party, but more because the practical reality is that there is no alternative to the model now accepted by the leadership. Any straying from fiscal and monetary orthodoxy will be punished with swift ferocity. A Labour government will be given less benefit of the doubt than a Tory one. This is perhaps unfair but inevitable because of the legacy of distrust in the business and financial community.

My greater concern is that expectations of what a Labour government might achieve in economic policy run far beyond any conceivable reality. Gordon Brown's belief that changing economic polices will lead to higher growth is, at best, extremely optimistic. Tony Blair's belief that improved education will lead to greater prosperity has long-term merit, but it could take 10 or 20 years.

So much of the political debate in Britain presumes that the economic policies we adopt here are of great importance. Viewed from outside, they are not. It is a typical medium-sized economy with some strengths and some weaknesses. The UK is part of what inevitably will be a slow-growth zone in Europe, but it benefits from being one of the most outward-looking of the European economies. It can be nudged helpfully by appropriate government action, but all one can really ask for is reasonable competence.

That we may get from Tony Blair and Gordon Brown. But if we expect anything more, I fear we will be gravely disappointed.

Brown's Budget plans at a glance

New income tax higher rate: 45 per cent

Payable on income over pounds 40,000 Government borrowing to be cut to average 2.5 per cent of GDP

Interest rate policy unchanged Incentives for long-term saving VAT unchanged but cut for domestic fuel

Corporate tax under review Public spending virtually unchanged

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
Life and Style
Agretti is often compared to its relative, samphire, though is closer in taste to spinach
food + drink
Have you tried new the Independent Digital Edition apps?
ebooksA special investigation by Andy McSmith
Kelly Osbourne will play a flight attendant in Sharknado 2
Down-to-earth: Winstone isn't one for considering his 'legacy'
The dress can be seen in different colours
Wes Brown is sent-off
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Bookkeeper / Office Co-ordinator

£9 per hour: Recruitment Genius: This role is based within a small family run ...

Recruitment Genius: Designer - Print & Digital

£28000 - £32000 per annum: Recruitment Genius: This Design and marketing agenc...

Recruitment Genius: Quantity Surveyor

£46000 per annum: Recruitment Genius: This property investment firm are lookin...

Recruitment Genius: Telesales / Telemarketing Executive - OTE £30k / £35k plus

£18000 - £35000 per annum: Recruitment Genius: This company specialises provid...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?