May 16, 2017 / 4:44 PM / 8 months ago

Labour’s risky UK manifesto requires Brexit context

LONDON (Reuters Breakingviews) - To the typical UK voter, the Conservative Party is associated with sound management of the public finances. The Labour Party, meanwhile, is the go-to for progressives who don’t mind seat-of-the-pants tax and spend policies. Labour’s manifesto released on May 16 fits the pattern, but Britain’s impending exit from the European Union has muddied the waters over which party is the real risk-taker.

If Labour performs as poorly as expected in June 8’s general election, most will blame its unpopular leader Jeremy Corbyn for tacking to the left rather than to the centre ground. A Corbyn government would hike taxes for the top 4 percent of taxpayers, corporation tax from 19 percent to 26 percent, apply a tax to financial derivative transactions, and slap an extra levy on companies that are perceived to overpay their staff.

The problem comes if these higher earners, who pay over 40 percent of income tax receipts, take evasive action. They might increase their private pension contributions to benefit from income tax relief, work less, avoid tax, or emigrate, according to the Institute for Fiscal Studies. A unilateral “Robin Hood” UK derivative tax will either just push company costs and prices up, or encourage activity to head elsewhere. Overall, there’s a real risk that the 49 billion pounds of spending on areas like education and health isn’t matched by receipts.

Still, Labour also has some decent ideas. Raising 250 billion pounds to pay for infrastructure over the next decade could boost Britain’s flagging productivity if focused on growth-enhancing areas like transport and broadband. True, it might also add over 10 percentage points to the UK’s national debt-to GDP ratio if spent unwisely. But a 50 percent jump in annual funding is the kind of radical action politicians usually shy away from.

Moreover, Labour has one very good idea. Unlike the Conservatives, it won’t accept leaving the European Union without a damage-limiting deal. On the assumption that the absence of such a deal knocks 0.2 percent off annual GDP growth by 2030, the UK would lose over 100 billion pounds of tax, a Breakingviews analysis has shown. The sense that Corbyn isn’t the only one rolling the dice could limit Labour’s capacity for an electoral implosion.


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