I like big buts and I cannot lie. If I am presented with a rosy apple, I look for the worm. If I’m covered with dark clouds, I look for the silver lining. I’m that guy who likes to say “I think you’ll find it’s a bit more complicated than that”. I’m unapologetic: it usually is more complicated than that.
Sometimes, however, important simple truths are hiding in plain sight. Hercule Poirot noted that on one occasion he could not persuade anyone that something was a clue because it was four feet long. Many basic political truths come into the same category.
One such truth is currently giving British politics an air of unreality. Both main parties have decided that public restraint is so 2015 and they are currently competing to bribe the public with goodies of all kinds. Theresa May has declared an end to austerity. Jeremy Corbyn is building on his 2017 election campaign, for which one of his own advisers reckoned the spending commitments could be costed at a trillion pounds.
So you could be forgiven for not realising that Britain’s national debt has tripled in absolute terms (to more than £1.7 trillion) since 2005 and more than doubled as a share of GDP (to over 85%). The best that one could say is that it is now levelling out as a share of GDP. Britain continues to run a deficit of 2% or so. Far from being frugal, Britain has continued to live beyond its means and shows no signs of starting to.
If spending really is going to be unleashed in some areas, it can only come from reduced spending elsewhere, increased revenues from taxation, increased borrowing or expropriation.
The economy has grown anaemically for most of the last decade and shows no signs of producing the growth that would increase tax revenues to fund new spending promises (and reduce social security spending). Indeed, pessimists point out that on the normal business cycle a recession is well overdue. Recessions put a much greater strain on public finances and one would make an end to austerity even more challenging.
Getting the money by reducing spending elsewhere looks very difficult to achieve now. Local authorities have to date borne the brunt of the cuts and many are under severe financial pressure. One, Northamptonshire, has already gone bust. Others may follow. Central government looks an equally unpromising source in the main. For starters, if austerity has ended, that implies any cuts are going to be painless (and you would have thought they would have been made already if they were). The one department where cuts would not be noticed immediately by the general public, defence, is off limits for the Conservatives.
So Labour’s solutions, tax rises and increased borrowing, look a bit more promising than the Conservatives’. In practice the Conservatives would need to adopt those solutions too.
These are not get out of jail free cards. If the markets lose confidence that borrowings will be paid back, the costs of borrowing rise and can rise very sharply very quickly indeed. The Italian government fell in 2011 when lenders turned their backs on it, despairing at its inability to get a grip on public spending. The latest Italian government has suddenly seen its borrowing costs rise sharply when it thumbed its nose at EU spending. An obviously irresponsible British government would not be able to push its luck for all that long.
Tax rises are therefore going to form a big part of any spending spree. So whose pips are going to squeak? Like Doctor Samuel Gall, as recounted by Tom Lehrer, Chancellors of the Exchequer find their fame and fortune specialising in diseases of the rich.
This leads on to another obvious truth. Any rise in taxes is going to be very unevenly regionally distributed. London is far richer than any other part of the country, however you slice it. The Gross Value Added per head generated by London is twice that of the rest of the country. If you look at it on a GDP per head basis, it’s as though Switzerland were tacked onto Portugal. If property taxes are to be considered, the properties in ten London boroughs are worth more than all the properties in Scotland, Wales and Northern Ireland combined.
London already subsidises the rest of the country to an extraordinary degree. Any increase in taxation will make that imbalance still greater. That would not matter if London shared political values with the rest of the country. Increasingly, however, the capital’s politics are following their own path. In the last London-wide opinion poll, the Conservatives tallied just 25% of the vote, roughly 14% behind their nationwide polling level. As a reference point, in 1992, the Conservatives secured 45% of the London vote, 2% ahead of their nationwide polling level.
Any Conservative attempt at raising taxes to pay for spending is likely to be perceived in London, correctly, as an attempt to fleece the capital to prop up the government’s client base. This is unlikely to be accepted passively for any length of time. The Conservatives have spent so long using London as target practice for their provincialist rhetoric that they have forgotten that wealth creators always have options available that are not available to the recipients of largesse. So far Londoners have not used them, though their growing impatience with the Conservatives is shown in the polling. That forbearance will not last indefinitely if pushed.
Labour start with much more political capital in the capital. Their plans, however, are far more ambitious than the Conservatives’ and so the impact on voters’ pockets will be that much greater. It has to be highly questionable whether voters will accept the reality of much heavier taxation if it happens.
So both party leaders’ mouths are writing cheques that the body politic can’t cash. Is there another way? Pure expropriation is prohibited under the European Convention on Human Rights (though it would be amusing to watch Conservatives make that argument against any attempt by Labour to nationalise without compensation). That would probably be a step too far for either main party.
However, there are assets comprising the odd trillion that are available to a particularly shameless or desperate government. The government could nationalise private pensions. Preposterous? The idea has already been tried in Hungary and Poland. Britain’s private pension provision currently stands at roughly 120% of GDP.
The government would need to pay the pensions in the future, but that would be another government’s problem and the government has the ability to manufacture reserves by the use of racier actuarial assumptions than the private sector could justify. It would release a lot of immediate funds for all those exciting projects that the public crave without immediate losers. With some very well-publicised pensions failures recently, the cash grab could be sold as an improvement in pension scheme member security.
The idea has already been floated in Labour circles. Ann Pettifor, who sits on Labour’s Economic Advisory Committee, has called for pensions to be nationalised. It might be a very bad idea from the viewpoint of the economy in the long run but it could provide an answer in the short term to Labour’s trillion pound question. Definitely something to watch.