So there we have it. The most bruising defeat ever for the Conservative Party and a supermajority for Sir Keir Starmer, who is roughly as personally popular as Ed Miliband was at the time of the 2015 election.
Middle England ought to be in a state of panic. The Institute for Fiscal Studies said that, whichever party won last week, the new administration would need to raise taxes or cut spending in order to meet fiscal targets. Anyone who believes that Sir Keir Starmer – the self-proclaimed socialist – will address the spending side of the ledger hasn’t been listening.
Government expenditure as a proportion of GDP is already around 45pc. Yet most of the Labour leader’s missions involve expanding the public sector. More NHS mental health staff, more teachers, a publicly-owned British energy company and renationalised rail. Through its close relationship with the unions, Labour is explicitly on the side of producers, not consumers.
All this is before you get to the fact that, with a majority this size, Labour will be under substantial pressure from the Left to make a spending splash for the whole electorate to bake in support from those expecting “change”. What that might be is anyone’s guess. The British Medical Association appears to believe its 35pc pay “restoration” is reasonable. Somehow it will “create” 650,000 green jobs.
How will it be funded? Generous estimates suggest VAT on private school fees will raise just £1.5bn a year. Ending non-dom status may bring in as little as £8,000 per person. As for its other plans to raise billions by clamping down on tax avoidance, Einstein’s definition of insanity springs to mind.
Labour was at pains during the election campaign to insist that their incoming government would not raise VAT, income tax or national insurance. But what of the additional three million workers who, thanks to Tory policy, will be dragged into the 40pc rate of income tax over the next five years? What of the many other levies left on the table?
We’ll soon know. Within a year of a Labour government we could see inheritance tax receipts increase, despite already hitting record levels. In March, then shadow chief secretary to the Treasury Darren Jones told a public meeting that it could be used to “redistribute wealth” and “address intergenerational inequality”.
Capital gains could soon be brought in line with income tax, even though the evidence from America indicates Treasury revenues could fall following the increase. If Starmer’s hypothetical growth fails to materialise, a wealth tax could be on the cards. Tax relief on pension contributions could be limited at around 30pc. The 25pc tax free lump sum from pension schemes could be targeted. Then there’s council tax – which the Left have been itching to hike for decades. Welsh Labour is already seeking to revalue the levy and using satellites to spy on homeowners with big gardens.
Given how high the tax burden already is, we should expect marginal gains from any increases. Every time the Government takes a cut it makes an activity less worthwhile. Whether that activity is a trade and exchange, or earning and spending, it is made more expensive to do, and people respond by doing less of it. Starmer’s claims of “going for growth” look increasingly risible.
We should perhaps not be surprised if Labour resorts once more to borrowing, meaning higher inflation – and interest rates – in the medium term. Much as Rachel Reeves likes to talk about the fiscal rules, they are far looser than most people realise.
Then there’s the inevitability of higher rents, given the slew of restrictions Labour are intending to impose on landlords. They will ban Section 21 evictions “immediately” and allow challenges to unreasonable rent increases (who decides?).
There’s the risk of higher energy costs if the winter is harsh and the international scene deteriorates.
According to the Institute of Economic Affairs, Labour proposed 63 new regulations in its manifesto, with plans to cut just 13. It will ban fracking, smoking, zero hours contracts, trail hunting. It will introduce rights from day one to parental leave, sick pay and protection from unfair dismissal. There will be bans on leasehold flats and new oil and gas exploration.
All regulation comes at a cost – and this won’t solely be borne by wealthy shareholders as the Left often likes to pretend. It hinders innovation, damages economic growth, and disproportionately affects lower-income households. It leads to lower wages for workers and higher prices for consumers.
What will life be like under Labour? No one can know for sure. Reeves has promised fiscal prudence and there remains a fighting chance that Starmer is more Blair than Wilson. If Labour delivers an “end to chaos”, businesses may thrive in a more stable environment. Interest rates are expected to come down in August now that inflation has returned to the Bank of England’s target. Over the past 72 hours, the new government has made many of the right noises around housebuilding and the NHS.
But there is a more frightening possibility: life could be much poorer.
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