Labour’s misdiagnosis: A larger state is not the way to raise living standards

 
Adam Memon
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A mansion tax is not the way to raise funds for the NHS

To paraphrase the economist John Maynard Keynes, Ed Miliband’s speech yesterday to the Labour Party conference was an extraordinary example of how, starting with a mistake, a remorseless logician can end in Bedlam.

For Miliband, the market has failed to deliver rising prosperity, and it is now time for big government to get back in the game. While Miliband has indeed identified the symptom of stagnating living standards, his diagnosis of market failure as the cause is wrong. And his chosen treatment of higher taxes, more spending and state control will exacerbate the deep-seated economic weaknesses we face.

If living standards are stagnating, Miliband demands state imposed price freezes and state mandated wage rises. If inequality is higher than may be desirable, he wants to tax the rich until the pips squeak. If the NHS is showing signs of strain, more spending is the answer.

This agenda has been tried and tested to oblivion, and the uncomfortable truth for the Labour Party is that a great many of our economic problems are the result of too much state intervention, not too little. By once again prostrating at the altar of tax and spend, Miliband has now unquestionably abandoned the pro-consumer, pro-competition agenda with which he briefly flirted.

The mansion tax was once again wheeled out by Labour (inspired by the Lib Dems) as the magic pot of money which will pay for the party’s many spending commitments. The policy ignores the fact that owners of expensive properties already pay a disproportionately high level of taxes, especially with the recent changes to the stamp duty land tax regime. Moreover, with the fixed thresholds, it would distort the housing market by creating new “dead zones” containing very few transactions.

This is, of course, to say nothing of the fact that pensioners are quite likely to be hit hardest by the introduction of a mansion tax. Not only have a third of the properties which would be subject to the tax been in the same ownership for more than 10 years, but pensioners are also more likely to be asset-rich and cash-poor.

Miliband made sweeping promises of a new green economy, powered by strict decarbonisation targets and the rollout of vast government environmental schemes. He even reiterated an earlier pledge to “take the carbon out of our electricity by 2030.” However, these new burdens on business will ultimately lead to reduced growth and lower living standards.

Tougher regulations and higher green taxes will cut households’ disposable income, and reduce consumer expenditure by pushing up prices. Moreover, energy-intensive industries will drift away to friendlier countries in the medium term, attracted by the more competitive tax regimes found abroad. This ultimately means less potential for innovation and less technological progress – the real solutions to our environmental difficulties.

Miliband made much of the problems facing the NHS. It does indeed face enormous structural pressures on its budget, but his solution of using the revenue from the mansion tax as a temporary sticking plaster is utterly inadequate. Not only does Miliband have no solutions to deal with the root causes of health cost inflation – which is primarily the result of an ageing population – but the revenue from a mansion tax that he thinks will solve the funding crisis is far below what most experts suggest the NHS needs if it is to carry on in a similar fashion. In the long term, more profound reform is needed.

Instead, Miliband should have recognised that productivity growth is the only real determinant of rising living standards in the long term, creating more and better outputs for the same inputs. And in this regard, there is much that can be done. Our burdensome taxes are too high and too complex; they hold back entrepreneurial spirits and business investment. Draconian planning laws, meanwhile, inflate property prices and are creating major bottlenecks in the development of new sites. Markets from energy to banking are in need of a sharp dose of dynamic competition and energetic new challengers.

Miliband’s speech was a paean to the virtues of big government. Despite the strong economic growth and labour market success of the last 18 months, we face very real problems. However, the diet of taxes and more state control proposed by Labour will cost jobs, cut investment and keep medium-term living standards languishing in the doldrums.