Starmer needs to jettison Labour's pre-election tax pledge - and the new Cold War is the perfect excuse

20 March 2025, 18:03

Our Labour government is trapped between resentful taxpayers and disappointed supporters who want to see a properly functioning European welfare state.

It is trapped in a cell of its own making having locked itself in and thrown away the key. It recklessly, if understandably, promised not to raise the main taxes on income and spending. And it signed up to demanding fiscal rules, fearing ambush by the bond market vigilantes, a la Truss.

Shackled by self-imposed constraints, the government is struggling to repair badly depleted public services, rescue near-bankrupt local government and universities, and cater to an ageing and increasingly sick population expecting free and unlimited health care.

Then, there are rising borrowing costs. And, now, the cost of rearming the country for a return to the Cold War.

Where is the Growth Fairy when she is needed? Her magic would provide the necessary tax revenue. But the Growth Fairy is comatose: recuperating after a debilitating series of heart attacks: the Financial Crisis; Brexit; Covid; the ‘cost of living’ crisis.

The government has tried to revive her: the overdue and welcome commitment to ‘borrow to invest’; promised planning reforms. But business confidence has been hit by reregulating labour markets and higher labour costs. And Trump.

So what is the government to do? So far it is taking the easy option: cutting what it judges to be unpopular public spending. Shaving bits off the welfare bill will make little difference and hurt many disabled people.

Britain’s welfare bill, even for health-related claims, at around 2% of GDP, is anyway not exceptional. The more expensive and popular bits of the welfare state like the generously proofed state pension and the NHS are untouchable.

(Allegedly) popular cuts also involve wiping out much of British overseas aid which has undermined British credibility overseas. Neglecting prison overcrowding probably boosts reoffending. The cuts may go down well in the Dog and Duck but are storing up future trouble.

I am not (now) a Labour supporter, but I want this government to succeed. I want the leadership to think through what they are there for. One option is to fill the vacuum left by the Conservatives; to be a slightly more empathetic version of Sunak-Hunt. That is where they seem to be headed.

A better alternative is to embrace the idea of Britain being a proper European-style social democratic country. We seem to be obsessed by the ‘record’ UK tax burden of 35% of GDP.

But in Denmark and France the figure is around 44%. Yet Denmark is at the top of the ‘happiness’ league table; its public services are better than ours; and it does well at business (think Lego). France isn’t so happy, but its hospitals, trains and public realm can put ours to shame.

Mr Starmer needs to jettison its pre-election pledge on tax. He has a perfect excuse thanks to the new Cold War. And as Keynes once advised: when the facts change, change your mind.

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Sir Vince Cable is an author, economist, and former Business Secretary.

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