Labour’s Plan to Change Britain

The Labour Party is expected to win a huge parliamentary majority in the United Kingdom’s general election July 4. Though Labour’s campaign manifesto doesn’t give exact details about what economic policies it will pursue, we have some idea.

First, it has promised not to raise the three main forms of taxes almost everyone in the county pays: income tax, National Insurance Contributions (NICs), and value-added tax (VAT). While Labor is right not to seek to worsen the tax burden on working people—already greater than at any point since the end of World War II—making such a sweeping commitment is a mistake.

With taxes, it’s best to have as broad a base as possible, with minimal exemptions or different rates. This allows the Treasury to maintain a stable inflow of revenue and minimizes distortions to economic activity. If Labor plans to boost public spending even slightly, however, as some of its commitments clearly demand, then it will need to find the money somewhere. The party has pledged to stick to the current government’s fiscal rules, which essentially bar more borrowing; so, it will have to raise taxes, introduce new ones, or do both.

Breaking manifesto commitments is considered a big deal in UK politics, so Labour is unlikely to seek higher rates of income tax, NICs, or VAT right off the bat. Instead, the new Chancellor of the Exchequer will probably hold an “emergency budget” meeting early on and claim that the economy and public finances are in much worse shape than previously understood, making higher taxes necessary. The government is also likely to try to levy the most damaging taxes on politically unpopular businesses, such as those in energy, tech, and banking.

This is the wrong approach, because, again, it is more sustainable to have as broad a system as possible. This way, the Treasury can be sure that it can raise the revenue it needs rather than worrying that the groups it’s targeting will decide to leave the country or stop doing the activity that is being taxed. But the extra revenue, if spent wisely, could yield some positive results. The UK economy would benefit from a boost in public investment, especially in areas such as transport infrastructure and energy generation. It might be better if this spending were through moderate borrowing, but Labor worries about being seen as economically reckless, so this is doubtful to happen anytime soon.

It’s encouraging that Labour has pledged not to raise the headline rate of Corporation Tax and has suggested that it might even be willing to lower it to keep the UK competitive. It has also promised to maintain the “super-deduction,” a massive capital allowance that provides a strong incentive for firms to expand investment. Unfortunately, it has failed to pledge to abolish the most damaging tax on the books: the Stamp Duty Land Tax, a levy on the purchase of real estate or other properties above a threshold.

In international trade, there’s a cause for cautious optimism. Labour has pledged to finalise a trade deal with India. It has also said that it wants to work with partners and the World Trade Organization to modernize the trading system, a sorely needed improvement. Unfortunately, the party makes no mention of a trade deal with the United States, but this is probably expectation management, given that neither President Joe Biden nor a newly elected President Trump would be too keen on trade deals. Still, if the conditions were right for both sides, a Labor government would likely pursue a deal with the US

One undeniable bright spot is Labor’s planning proposals: land use, in American parliament. Arguably the main thing holding back the UK economy is the dysfunctional planning system, easily gamed by anti-development forces and rent-seekers. In the UK, it is effectively illegal to build anything: homes, transportation infrastructure, offices, science labs, nuclear power plants, solar farms, wind turbines, and data centers—all of which the country needs to fuel productivity and economic growth. Labour has committed to building more and to overrule local residents, if necessary.