A MESSAGE FOR THE CHANCELLOR: THE TIME IS NOW RIPE FOR TAX REFORM / THE FINANCIAL TIMES OP EDITORIAL

A message for the chancellor: the time is now ripe for tax reform

Healey’s challenge is to improve the efficiency of the UK’s fiscal system

Martin Wolf

John Healey, the UK chancellor, will deliver his first Budget next month © Charlie Bibby/FT

Statistics have rarely been more exciting. 

This is particularly true of UK statistics, normally boringly sound. 

That is no longer true. 

On September 17, the Office for National Statistics rewrote the post-financial-crisis history of UK productivity. 

But, while an extraordinary event, this is unlikely to make the challenges confronting the chancellor of the exchequer easier.

As Cliodhna Taylor, head of productivity statistics at the ONS, writes: “Our previous estimates suggested UK labour productivity per hour grew at an average annual rate of 2.1 per cent before 2008 and 0.7 per cent thereafter. 

Today’s improved estimates indicate that productivity grew a little slower before 2008, at 2.0 per cent, while it grew at an average of 1.3 per cent from 2009 to 2019.” 

As the Resolution Foundation noted, this took the growth of UK output per hour “from second worst in the G7 over this period to second best”. 

Hallelujah!

Or maybe not. 

The explanation for this upward revision is a downward revision of the growth in hours worked, not an upward revision in output. 

The slowdown in the latter is largely unaffected. 

The Resolution Foundation states that the “revisions do not . . . alter the stagnation in incomes and wages that has held back families’ living standards”. 

Nor, it adds, do they change the UK’s output per worker or GDP per head relative to its peers. 

In sum, the productivity puzzle has just been transformed into an hours-of-work puzzle.

This need not change the Office for Budget Responsibility’s forecasts. 

Yes, raising hours worked is now a larger potential source of higher output. 

But without knowing why working hours grew less than thought and making relevant policy changes, it might not be realised. 

The labour market changes introduced by Labour — tighter regulation and higher minimum wages — might even make the problem worse.

In sum, these revisions change nothing for the chancellor. 

As Valentina Romei and Alan Smith noted in “The FT’s Budget dashboard” on September 24: “When John Healey unveils his Budget on October 28 . . . he will be contending with higher borrowing costs, weaker growth expectations and Prime Minister Andy Burnham’s stated desire to help voters with the cost of living.” 

The “headroom” before he breaches his fiscal rules has shrunk and the short-term risks, particularly on the costs of borrowing, are large and uncontrollable. 

If Healey wants to understand what can happen if he loses the confidence of the markets, he needs to read the sobering reminder from John Plender of what happened 50 years ago, when the UK had to do a deal with the IMF. Arguably, that painful humiliation finished Labour for two decades.

The chancellor faces two challenges in preparing his Budget — the urgent and the important.

The urgent one is to cut off the “bond-yield-tail-risk”. 

To do this, he needs to create a fiscal path that credibly reduces the ratio of net public debt to GDP, so recreating some of the room the country lost over two decades of crisis. 

This will mean a substantial fiscal tightening. 

The current fiscal rules are not enough. 

Healey must also take account of the need to spend more on defence. 

Since he is in a Labour government that will not slash spending, this means higher taxes. 

The UK is not in truth a high-tax country, at least by the standards of its European peers. 

Labour must now dare to recognise that reality.

The important challenge is to improve the efficiency of the fiscal system. 

This cannot be done overnight. 

But if the chancellor is bound to raise taxes, he needs to do so in the least damaging way possible. 

Good fiscal reform needs an intellectual framework. 

The best was put forward by the Mirrlees commission, which published its report in 2011. 

The core of its recommendations is “for a progressive, neutral tax system”. 

The most important word is “system”: do not look at a single tax on its own but relative to the rest. 

The time now is ripe for such reform.

The tragedy is that the country has a government with a huge majority that has limited itself to minor changes. 

Sir Keir Starmer ruled out raising income taxes or VAT, the most effective way to solve large fiscal problems. 

This pledge remains a halter around the neck of his successor. 

Andy Burnham, the prime minister, should dare to say that the situation is not what his predecessor had hoped and so taxes must now be substantially raised.

This may be politically impossible and even constitutionally improper. 

But it is essential to understand that pressure from higher interest rates might destabilise everything. 

Fiscal credibility is not a luxury. 

A government that does not deliver it is walking naked.