Labour's big-state, big-spend, transformation plan

Faisal Islam
Economics editor
@faisalislamon Twitter

Image source, Getty Images

This is a radical attempt to change Britain's business model, involving not just huge amounts of public spending and investment, but also an attempt to rewire the way the economy works.

Labour's answer to "can we afford this?" is "we can't afford not to" - arguing that only a very active government can reshape the economy to change the fate of the country, in particular to meet the green challenge.

Labour is part of a now-shared consensus across every single party, the IMF and finance ministries across the world, that currently low interest rates charged on government borrowing should be used to fund substantial investments.

Labour has used this opportunity to push the radicalism of its 2017 manifesto much further with about £140bn extra in spending a year, versus for example £80bn a year from the LibDems, and tens of billions from the Conservatives.

It leaves all the major parties promising voters hundreds of billions over the Parliament. At around £600bn more in spending promises over the five years Labour has put clear blue water between themselves and the extra spending of the other major parties.

Is this affordable? It is more risky than more-modest spending plans.

It is true that there is an appetite for cheap borrowing by governments, and that could stretch to 2-3% of GDP on investment spending implied by Labour's plans.

But with a backdrop of concern from international investors on their stakes in utilities being nationalised, and new and much higher taxes on wealth, share trades, and the rich, the Labour plans risk pushing up the cheap borrowing rates they are relying on.

Labour's answer: It is an even bigger risk not to borrow to invest in the transformation of the economy.

The day-to-day spending plans are bigger than in 2017, at £83bn a year by the end of the Parliament, providing funding for schools, sure start, scrapping tuition fees, health and social care, and public sector pay.

That is matched by tax rises on the wealthy and companies. These are huge sums which indirectly will surely be felt well beyond the super-rich and wealthy business owners.

Stepping corporation tax back up to 26% is the biggest single measure, but applying income tax rates to capital gains (taxing your shares and assets) is a huge measure - raising £14bn, and catches more than just the richest 5% in its net.

Labour's planned corporation tax revenues would be the highest in the developed world. The size of the state in terms of spending would be the highest outside of a crisis since the 1970s, although that also would mean it would be about the same size as Germany.

So a big change for Britain, a transformation of the business model that we're used to here, but not wildly out of kilter with other developed economies that have retained a strong state.