Next week, the Chancellor, Rachel Reeves, apparently plans to raise the rate of National Insurance paid by employers. But the Government itself is a large employer, through the NHS for example. It has now occurred to somebody in Downing Street that this tax rise would cut the frontline budget of the NHS. Whoops.
Not to worry, Ms Reeves has a cunning solution. Rumour has it she will get the Government – ie, the taxpayer – to pick up the new tab for the public sector. In other words, the private sector will be paying not only higher payroll taxes for themselves but for the public sector too.
Where have I heard of that sort of thing before? Oh yes, back in the Middle Ages, the nobles and the clergy were often exempt from paying certain taxes. But the taxes paid by peasants went to support the nobles and the clergy so they could eat surfeits of lampreys.
Heads they won, tails the peasants lost! Ms Reeves is effectively reinventing this feudal, regressive system whereby one class of person is taxed heavily and another is not only partly exempted but gets to spend the taxes donated by the others.
Prime Minister Keir Starmer and Chancellor Rachel Reeves at this year’s Labour party conference
Council chief executives and NHS managers are the barons of today; quangos and grant-guzzling charities are the monasteries. Those in the beleaguered private sector are the peasants.
If she does force private employers to foot the bill of public sector employers’ NI contributions then Ms Reeves could not have made it clearer that this Government is on the side of the tax-eaters and not the taxpayers.
The Starmer administration’s actions on pensions, on striking train drivers and doctors and on borrowing all reinforce that message: let’s reward those who receive public money at the expense of those who generate the wealth to pay for it.
Politically, Ms Reeves knows what she is doing. The tax-eaters are her constituency and there are a lot more of them now than there ever were of barons and abbots. She and Sir Keir rode their support all the way to Downing Street because the opposition was split.
I reckon tax-eater versus taxpayer is now the great divide in British politics. If you get your wage or your organisation’s budget from the state, you have a vested interest in high tax even if you don’t like paying tax yourself. If, on the other hand, you get your wage and your budget from selling things to the public, you may prefer lighter taxation and less spending so you can keep your prices low to attract customers.
Kemi Badenoch – who I support for leader of the Tory Party and expect to win – must choose which side of this divide she is on. She must not succumb, like four of her Tory predecessors, to the siren voices of the tax-eaters who surround you daily in Whitehall.
A big part of the Conservative failure of the past 14 years to achieve growth was that MPs spent so little time meeting taxpayers and so much talking to tax-eaters. They kept falling into the trap of rewarding lobbyists, spending on pet projects and doing the bidding of bureaucrats, while talking the talk of low tax and free enterprise. Ms Badenoch’s best hope of winning back those who voted for Reform in July is to come out fully in support of the peasants, not the abbots and barons. By 2030 the failure to grow the economy will be even more acute after five years under Rachel Reeves, neo-sheriff of Nottingham.
Once upon a time, if you found yourself sitting next to somebody at a public event, you could roughly predict their voting from their wealth or background. Now I find it a general rule that if they are in the private sector, whether as a wealthy banker or a hard-scrabble labourer, they probably sympathise with the Tories or Reform, voted for Brexit and watch GB News.
If they are in or dependent on the public sector, whether in the civil service, academia or a subsidy-dependent industry, they prefer Labour, the Lib Dems, Remain and the BBC. There are exceptions and blurred boundaries but it’s a good rule of thumb. Every chairman of a public body, an arts organisation or a research institution makes roughly the same speech when they get the chance. ‘Our work is valuable, but times are tough, budgets have been cut and we need more money.’
You never hear them say: ‘Times are good, our budget is up, so thank you, taxpayers, for being so generous and paying our wages and here’s some of it back unspent.’
While economic growth is feeble, budgets in the public sector will always be thought tight, austere and squeezed because demand is infinite. Yet public spending by the British Government is 60 per cent higher, in nominal terms, 10 per cent in real terms, than it was in 2010. The Government raised £950 billion in taxes in the last fiscal year and spent more than a trillion pounds. This is not austerity.
If you work for an arm of the Government or even a company that feeds off Government grants, then growing your budget is your number one priority. You do that by expanding the remit of your organisation and lobbying for more funds, not by being more efficient or cutting costs. There is almost no incentive to spend the money more efficiently. If you do, you might find your budget cut next year. As (Lord) Jon Moynihan points out in his fine new book Return To Growth, public sector productivity has stagnated for a quarter of a century, a truly gobsmacking statistic when you consider the innovations that have happened during that time.
Imagine saying to a heritage beadle or environmental jobsworth in a council planning department, who has held up a planning application for many months, failed to reply to letters and asked for more documents over a triviality: do you realise how much you are driving up costs? You might as well be speaking Mongolian: costs are not his department.
By contrast, innovation, driven by entrepreneurs, can drive down the price of products. Airline tickets cost one-tenth as much as 50 years ago per mile; artificial light is 12 million per cent cheaper than it was in 1800. Jeff Bezos drove down the price of e-commerce; Elon Musk did so for rockets. Public sector folk mostly do the opposite: they raise prices.
Notice that the cost of things such as food, clothing, air travel and communication has fallen in recent decades, as a percentage of household budgets, while things like education, healthcare, electricity and housing have grown ever more pricey.
That is because the first four are provided by private enterprise, the second four by the state or crony capitalist businesses tightly controlled by the state. It is hard to name a single product whose cost has been lowered by the state, whereas there are plenty whose cost has been raised by the state: from housing to nuclear power to healthcare.
I take special interest in energy policy because I think it matters more than almost any other sector as an input to productive work. Electricity prices have marched relentlessly upward for years and Britain now has the most expensive electricity of any major economy for both domestic and industrial users.
But where is the incentive among electricity producers to bring them down?
The Government has banned the cheapest technology for doing so – coal – and mostly forced out the next cheapest – gas. It has driven up the cost of nuclear and is handing out lucrative subsidies to solar and wind.
The tax to pay for these subsidies is added stealthily to your bill, but there is no opportunity for you, the bill payer, to express your dissatisfaction with this persistently high cost.
You cannot take your business elsewhere because the Government has effectively nationalised the sector, granting itself the power to make decisions on your behalf about how much you pay for electricity.
Let me put that another way: on your behalf, but without consulting you, the Government decided that you would like to pay more for your electricity to have the privilege of getting it from offshore windfarms in the North Sea.
In much the same way, in the Middle Ages the Government decided on your behalf that you would like your taxes to pay for a chap to dress up as a tin can and go around slaughtering people because his cousin’s uncle’s brother wanted to be a king.
We cannot do without government altogether. Many things it does are essential and many of its beneficiaries are richly deserving people who do a great job. But does it really need to spend 45 per cent of GDP and employ hordes of diversity tsars?
Lord Moynihan calculates that data from all OECD countries shows that the smaller the state sector, the faster the economic growth. If we shrank the size of government from 45 per cent of GDP to 30 per cent, we would experience 2 per cent more growth every year – so within 30 years public spending would be bigger anyway.
Thus constraining the state is not about starving the beast – at least not in the long run: it is the only way to ensure growing support for social safety nets and other essential state functions.
Failing to drive down prices through innovation is more than just a pity. It deprives us of the one means by which we get to grow the pie.
If we don’t make most things cheaper, then there is no more money for the arts, science, regulations, benefits and pensions.
- Viscount Ridley is a writer and businessman.