IFS Talks Nonsense in Trashing Labour’s Plans

 The Institute for Fiscal Studies (IFS) has proclaimed in its usual magisterial manner that Labour’s spending plans are “not credible.” Labour is proposing to spend an extra £82.9bn over five years if elected, 28 times more than the Tories. Billions will go on education, on health on social care, and on other social services. Labour promises that £5bn will go to increase the wages of public sector workers which have been frozen for years, so they have fallen behind inflation and declined in real terms. The inevitable outcome has been an outflow of vital workers from the public sector and a collapse in the standard of public services. 

In addition to the manifesto It’s Time for Real Change that sets out Labour’s exciting new plans, the Party has produced a 44 page Grey Book called Funding Real Change which carefully lists the costs of the project. It shows £82.9bn extra spending with every penny of £82.9bn costed. Why is that “not credible” for the IFS?  

The Grey Book even takes account of what it calls “behavioural responses.” This is a polite way of saying the rich will try to dodge taxes if they go up. Of course they do that anyway.

Labour has pledged that 95% of the population will not have to pay more tax. Only the rich and business will pay. The IFS disputes Labour’s pledge . Apart from £5bn on income tax for those on more than £80,000 pa and £30bn from raising corporation tax, Labour proposes to increase capital gains tax and to tax dividends at the same rate as income tax. 

The IFS has a reputation for objectivity because it grumpily rubbishes all the parties’ plans. Their reputation is undeserved because their method of analysis is deeply flawed. The IFS protests against the additional costs of Labour’s programme without taking any account of the benefits. For the IFS it’s all costs and no benefits! That is bound to justify the economics of austerity for ever.

Serious economists have picked up on this critique. For instance Mariana Mazzucato of UCL (Observer 24.11.19) explains: “Labour is also planning to spend £30bn a year in a social transformation fund to put back into the NHS, schools and social services the money that was siphoned out from 10 years of austerity. The levels of homelessness and teenage knife crime are an embarrassment to the pretence of being a civilised country. Beyond the cost to human lives it also makes poor long-run economic sense as it costs more to imprison someone than to educate them.” 

What Oscar Wilde says of cynics should really be applied to economists of the IFS stripe: “They know the price of everything and the value of nothing.” 

The director, Paul Johnson, is quite explicit that the IFS is “a microeconomics research institute.” Microeconomics deals with the behaviour of individuals and firms. What may be true for individuals and firms is not necessarily true for the economy as a whole. That is dealt with by a different discipline - macroeconomics. That is why macroeconomics  exists.  And of course we are interested in the effects of Labour’s programme on the economy, on all of us.  

For instance Labour’s programme for free broadband throughout the country will have a stimulating effect on the economy both in its implementation and as a permanent resource for people to take advantage of. This is completely ignored in the IFS’s ‘analysis’. 

This weakness is dealt with more fully by John Weeks in We Need to Talk about the Institute for Fiscal Studies:: https://www.opendemocracy.net/en/oureconomy/we-need-talk-about-institute-fiscal-studies/ 

Labour’s Grey Book shows that only about £5bn of the proposed extra £82bn spending will come from wealthy individuals earning more than £80,000 a year. Much of the rest (£30bn) will come from corporation tax of 21% on small business and 26% as the main rate. Corporation tax was cut from 28% to 19% under the Tories. They argued in the past that cuts in the tax rate could actually increase the Treasury’s tax take - a free lunch! When Johnson admitted to the CBI Conference that he was deferring further cuts in corporation tax to divert £6bn to the NHS, he was confessing that the Tories have been lying to us all this time. The cuts were just a giveaway to big business. Cuts in corporation tax cost the Treasury money. Therefore under Labour tax rises on business can pay for improvements in public services. 

Even in microeconomic terms the IFS’s critique is misguided. Corporation tax is a tax on firm’s profits. Regarding the tax, the IFS argues: “The truth is of course that in the end corporation tax is paid by workers, customers or shareholders so would affect many in the population. In the end, it is unlikely that one could raise the sums suggested by Labour from the tax policies they set out. If you want to transform the scale and scope of the state then you need to be clear that the tax increases required to do that will need to be widely shared rather than pretending that everything can be paid for by companies and the rich.” 

If, as the IFS asserts, customers ‘pay’ corporation tax, they can only do so if firms put up their prices. In such cases, firms could put up their prices whenever they felt like it. Most firm managers will explain that they can’t just pass on tax increases to customers. They are constrained by the whip of competition.  

Can firms just drive down their workers’ wages to preserve their profits and compensate for the tax increase, as the IFS argues? Labour has a programme of workers’ rights to make sure they wouldn’t get away with it. So companies will have to stump up for Labour’s reforms.  

The IFS emerges as a pathetic defender of austerity and the status quo. It peddles a failed economic theory which defends a failed economic system. 

The Tory Party manifesto promises very little in the way of extra spending- a titchy £2.9bn. That signals that austerity will remain in place should they be re-elected. After all the damage they’ve done that would be devastating. The NHS for one would be in shreds after five more years of the Tories. So Labour’s plans are ambitious, but they are absolutely necessary. Most of the extra spending will go to repair the damage done to the social fabric since 2010. If Labour’s programme is implemented in full social spending in the UK will still only be at about the same level as Germany and below that of Scandinavia. 

All the above refers to Labour’s plans for current spending. What will really be transformative are their investment projects. Labour is proposing a £250bn green transformation fund, creating jobs and starting to deal with the climate emergency at the same time. On top of this Labour has pledged to spend £75bn on social housing in its first five years.https://labourrep.com/blog/2019/11/23/labours-programme-on-housing

 This is all good stuff. How on earth will it be paid for? Labour is committed to borrow in order to invest, to renovate our infrastructure. Isn’t that irresponsible? On the contrary. As the chief economics commentator of the ‘Financial Times’ Martin Wolf commented (24.02.16): “Major governments are able to borrow at zero or even negative interest rates, long term. The austerity obsession, even when borrowing costs are so low, is lunatic.” It was grossly irresponsible of the Tories not to take advantage of the ‘free money’ for so long. Labour will not make that mistake.

 Go out and argue the case for Labour’s spending programme. Shoot the critics like the IFS down in flames. British people have been conned for too long by the Tory myths about the need for austerity. There is an alternative. Labour is offering it.