Back in January, The Economist ran a piece outlining the “credibility trap” which the Labour Party found itself in once it went from being His Majesty’s Most Loyal Opposition to having its hands firmly on the levers of power. Prior to moving into Number 11, Rachel Reeves repeatedly sought to assure businesses by promising not to raise any of the main taxes and to abide by strict fiscal rules. Now faced with actually managing the country’s finances, there’s a strong argument that these guarantees are forcing the Chancellor into making sub-obtimal choices that make little economic sense in the long run.
News from the IMF this week that Britain’s future growth figures are expected to be higher than previously thought will therefore be well received on Downing Street. A bigger economy means bigger receipts for the Treasury, and thus fewer spending trade-offs. The credibility trap becomes that little bit less suffocating.
Perhaps more significantly, however, was that the revision came with what the Financial Times described as “political cover” for Reeves to amend her fiscal rules, opening up the possibility for her to extricate herself from the credibility trap. To promote stability, it recommended switching to annual, rather than twice-yearly, assessments of the public finances by the Office for Budget Responsibility, and “implementing additional revenue or expenditure measures as needed if shocks arise.” This wasn’t exactly a green light for radically changing course on tax, but it could grant the Chancellor grounds to have a more grown-up conversation about the nation’s fiscal situation.
Virtually all taxes drag on the economy, but not all do so in the same way. Economists generally see the wisdom in low but broad-based levies – such as income or consumption taxes – and warn against systems which impose high marginal rates and those which artificially distort individual decision making. It is these latter features which really destroy growth by discouraging economic activity. An historical example might be William III’s 1696 ‘Window Tax’; a more contemporary one would be Stamp Duty Land Tax, which stifles labour mobility by making it harder for people to move to where their skills are best deployed.
Whether or not Reeves takes advantage of the IMF’s helpful pronouncement is anyone’s guess. As much as it might make economic sense to rationalise the tax system, electoral sense may come up trumps. The pledge not to increase any of Income Tax, National Insurance and VAT was a signature manifesto commitment. Reform, now the main threat to many Labour MPs, are running on a platform to slash personal taxes considerably. The Government is still feeling the heat from its Autumn Budget which cut Agricultural and Business Property Relief.
That being said, Labour is still less than a year into governing. Four more will elapse before voters go to the polls again, and it’s not unthinkable that they will be more inclined to reward growth than they will be to punish backpedaling. Moreover, as evidenced by the recent howls from the farming community, it’s not necessarily true that the political consequences of hiking taxes on supposedly narrow groups are easily brushed aside – as may have to happen under the current rules if spending goes up.
With global economic volatility spiralling, this is not the time to abandon caution. But caution that prevents sensible adaptation is anything but. So far the Chancellor has frequently found herself boxed in, but this week’s IMF verdict was more than a minor upgrade in growth expectations – it was a route out of the credibility trap.
As You Wish
Building on a recent paper with the Tony Blair Institute (TBI) on how to build the National Data Library (NDL), our Head of Science and Technology Anastasia Bektimirova released follow-up work jointly with TBI this week, focused on what data researchers and innovators in academia and industry wish they had, and what’s getting in their way when trying to access and work with data.
It’s not a paper, but a website, mapping both barriers and opportunities. The findings are worth a read. Respondents from academia and industry have already revealed that it can take 50-150 weeks to access health data, HMRC Datalab has insufficient computers, some datasets haven’t seen updates for several years, compute power is “woefully poor,” and people are spending months just finding out what data exists. But the findings also give clarity about what’s possible. For example, detailed emissions data by industrial sites could accelerate decarbonisation, traffic and mobility data could provide “unprecedented understanding of accessibility, transport and inequalities,” and NHS records linked across care settings could transform treatment development.
The website is built as a living platform, designed to grow and become more useful over time, and inform NDL development as it takes shape. Anyone can share their insights, ideas, and frustrations related to data access. Ultimately, the NDL’s practical usefulness will depend on how well it meets actual user needs rather than assumptions about them.