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It’s February 2021 and Jeremy Corbyn is prime minister, leading the UK’s fight against the Covid pandemic. John McDonnell is chancellor, sitting in his Treasury office and putting the final touches to his spring Budget, aka The People’s Budget.
That budget has at its centrepiece the second of the socialist Labour government’s rises in corporation tax, taking it from the 19% inherited from the Tories (the fourth lowest among the world’s richest nations) to 24%. Another hike is planned for next year, part of a policy to raise a huge £23.7bn from companies.
Treasury officials, who under Philip Hammond had secretly looked at raising corporation tax as a “low hanging fruit” to get the public finances back in order, are relaxed about McDonnell’s latest move. The chancellor even has on his desk a copy of the Little Red Book he once flung at George Osborne, the man whose deep cuts to the tax had given Labour an easy way to raise cash.
Yes, it’s a parallel universe that requires some suspension of disbelief. But many Tory backbenchers can now be forgiven for rubbing their eyes, blinking and seeing the prospect of Rishi Sunak doing exactly what McDonnell planned. Leaks, so far strangely not denied, suggest Sunak will next week set out a “pathway” towards jacking up corporation tax over the next few years.
To make matters even more surreal, if any such increase were included in the coming Budget, it looks like Labour would whip its MPs to vote against it. So we would be likely to see a Tory rebellion against the tax rise, and could see a Labour rebellion in favour of the tax rise. And both sets of rebels would say they were being true to their party’s manifesto promises in 2019. Welcome to pandemic politics.
As it happened, Hammond popped up on the BBC to warn Boris Johnson that he must risk popularity and tell some “difficult home truths” about how he would balance the books. The problem with that is the public don’t really seem to be listening. I’m told that Tory party HQ has been taken aback by focus groups that show the voters really don’t care yet about repayment of loans by business let alone the state reducing borrowing.
While Hammond jibed that “as a populist government, giving money away is always easier than collecting it in”, it seems the punters really do believe in the Magic Money Tree that Theresa May once used to patronise a nurse in the 2017 election (before losing her majority). Boris Johnson himself often appears to splash the cash, and not a Commons statement goes by without him smiling kindly on pleas from Red Wall Tories for a new school, hospital wing, railway station or bypass in their constituency.
But plenty of other Tory MPs certainly are worried about borrowing and debt and think that cutting spending not whacking up taxes is ultimately the only way to do it. As former Treasury aide Sonia Khan predicts on our podcast, it may not be long before there’s a fiscal equivalent of the ERG (the FRG?). And its first cause celebre would be a corporation tax hike.
Which brings us back to Labour and Keir Starmer. There is a growing unease among Labour MPs, not all of them Corbyn supporters, at the idea that the party would vote against a rise in taxes it had in its last manifesto. But it’s the Left that is certainly most public, with former chair Ian Lavery telling HuffPost UK today it would be “grotesque” to whip its MPs against the rise.
In yet another twist to this story, Starmer’s position is backed up by David Cameron, who told CNN that “piling taxes” onto a fragile economy “wouldn’t make any sense at all”. Indeed this is the orthodoxy among think tanks like the IFS and others. A senior Labour source tells me: “Right now is not the time for tax rises, which would choke off the recovery before it has even started. That is the consensus of all major economists.”
That phrase “right now” is of course the crux of the matter. Many in Labour suspect Sunak is merely testing the water with those Budget leaks and don’t expect an actual corporation tax rise before the autumn if at all. The party won’t even say it would agree to tax rises once the economy has recovered from the pandemic, because judging exactly when that point is reached is very difficult indeed.
Shadow chancellor Anneliese Dodds however made clear in a Q&A today that Labour was certainly not ruling out corporation tax hikes in future years. “If we’re talking about a longer term trajectory, let’s have that discussion, let’s make sure that we do have that more effective tax system,” she said. A new poll tonight found that voters in every demographic group support a corporation tax rise. Across all voters, 67% support a rise and 10% oppose it.
So why is Starmer so insistent on his ‘no tax rises now’ policy? Well, first he and Dodds have spent months trying to get across this message on council taxes and other hikes. Second, this is all about saying Labour has changed. At his 2019 manifesto launch, Corbyn relished the opprobrium, saying. “I accept the opposition of the billionaires…I accept the hostility of the bad bosses”. In his recent speech, Starmer said business should not be “tolerated or taxed” but should be a partner of government.
And unlike the Biden administration, which is in power and can enact a huge spending stimulus matched by corporation tax hikes, Labour strategists think the very fact they are in Opposition restricts their room for maneouvre, especially off the back of that disastrous 2019 election result when few promises are believed any more.
Starmer has quietly led a 21st century equivalent of the “prawn cocktail offensive” that Gordon Brown used to get business and the City on board with New Labour in the 1990s. Finance firms and others have been impressed with him, and all the links he built up as shadow Brexit secretary with the CBI, Federation of Small Business and lots of sectoral players have built his reputation. Even this week, shadow City minister Pat McFadden went down very well indeed at the ABI’s annual conference.
Ultimately, Starmer’s bet is that the voters will see his party no longer looks trigger-happy about tax rises and would only enact them where absolutely necessary. Similarly, he wants to reassure them that their own taxes will be spent well and not wasted. But above all, he wants to embellish his reputation for credibility and competence.
Note too that this talk of partnership with business is not a ruse. It’s a break not just with Corbynism but Milibandism and its pantomime “predators and producers” rhetoric. I’m told that the Labour leader is heavily influenced by the factory his father worked in, which was a small firm at the heart of a community. Its demise is seen as yet another example of governments failing to work with business.
Starmer sounds serious about his business partnership. When the UK furlough plan was drafted, one option considered by the Tories was a Germany-style short-working to keep people in post rather than fire them. It foundered because the UK simply lacks the close trade union-state-business relationship found in Germany, where short working kept many in work during the financial crisis. Some Starmer supporters think a Labour government could reshape our economy by being more German (on skills, manufacturing too).
One senior party source tells me: “The approach being advocated by Ian Lavery and Richard Burgon is an unintended argument for austerity because it suggests you can fiddle with taxes and spending to pay off debt accumulated in an economic downturn. It’s the mirror of the argument George Osborne made a decade ago.”
“Labour must be far more ambitious – we should be the party focused on working with business to grow the economy and tackle the long-term weaknesses of our unequal and insecure economy, which is the way Britain will balance the books,” they add. Ironically this idea of “the proceeds of growth” being the answer to the tax/spend problem is exactly what Cameron and Osborne espoused in Opposition before the financial crash.
Back in 2006, the modernising Tories were terrified of being seen as “pro cuts” (hard to believe now, I know). Starmer, who wants to shrug off the image of being “pro taxes”, is opting for his own proceeds of growth policy too. The danger is that just as the Conservatives proved they were “the same old Tories” on austerity, Labour would risk being seen as reverting to type with any major tax hikes at the next election.
And that’s the real challenge for Starmer: being consistent. Just as the Tories veered between “Demon Eyes” (too dangerous) and “Bambi” (too soft) attacks on Tony Blair, the party still hasn’t quite found a way to damage Starmer in the eyes of the voters. Johnson again this week tried to paint his opponent as a “vacillator” who changes his mind (having tried and failed to make stick the line he’s a jobbing lawyer who easily changes briefs).
If Starmer can persuade the public there’s a right and a wrong time to hike taxes, he could avoid the charge of inconsistency. It won’t be easy, with attacks from left and right. But he clearly thinks it’s a prize worth winning.
