Labour launches £82bn tax and spend plan

This is it. The biggest shift in wealth and power in a generation

Labour just launched its manifesto - leading with a windfall tax on oil/gas companies, a £250bn green transformation fund and a 5% pay rise for public sector workers. It’s a transformative agenda and as I predicted the whole offer on investment, jobs and growth is framed around combating climate change.

The detailed focus for economists - and economic journalists - will be on the tax and spend plans for day-to-day spending.

Labour will hike taxes on the rich and big business to the tune of £82 billion a year and spend it on the most radical programme of economic renewal proposed since the war. That's the message of the Labour manifesto launched today, and the deep detail contained in a so called Grey Book, shows John McDonnell's treasury team are prepared to go mano-a-mano with right wing economics profession to show it can be done.

The Grey Book, constructed like a shadow budget, shows where Labour intends to raise taxes and where it intends to spend the money. 

The main pledges are:

20bn extra for local councils

10.8 billion to introduce free personal care for over 65s

7.7 bn to abolish student tuition fees

8 bn to reform Universal Credit and extend maternity/paternity pay

5.6bn to expand early years education and Sure Start

7 billion on the NHS and free dental care

5.5 bn extra for schools

With other measures and improvements to public sector pay the spending plan comes to 82.5 billion - much bigger than the £49 bn Labour promised last time. So how are they going to raise it?

Labour will phase in a two tier corporation tax, with small firms paying 21% and big ones 26%. This, they say, should raise £24bn by 2024, with a further £6bn raised by changes to the taxation of multinational companies.

Capital gains and dividends will be taxed at the same rate as income tax, bringing in an extra £14bn

Only £5bn of the extra revenue is expected to come from taxing people earning over £80k and £125k. And while Labour reckons increased growth will drive higher tax revenues, McDonnell's team have allowed only £5bn to be raised this way.

The 44 page document contains a detailed arguments and calculations. Unlike last time, Labour has tried to build in "behavioural responses" from companies and rich individuals, marking down its ability to collect tax at the headline rate. 

As always, think tanks like the Institute for Fiscal Studies are queuing up to rubbish the plans. Because Labour's investment plans are funded by £400bn of borrowing, it's hard for the elite's ideologists to say "it can't be done": government borrowing is cheaper than at any time in living memory.

So the focus will be on this £80bn. The critics will claim:

- you can't raise the money because companies will change behaviour to evade taxation

- you can't tax high earners because they will structure their wage-deals to avoid the new thresholds

- growth will suffer because rich people will pull their money out of Britain

- there's not enough capacity in the economy to absorb the new spending.

Let's take these arguments one by one.

On "you can't raise it" Labour has tried to factor that in. But if the behavioural change is bigger than expected, Labour has clear fiscal rules that would limit borrowing to make up the shortfall. The hard fact is that, if the right wing economists are correct, and the tax isn't raised, some of the spending has to be delayed. But we have no idea whether their fears are justified because no government has ever tried to seriously make the rich and the speculators pay their way.

On high-earners, there's so little of the £82 billion actually raised from income tax, that it's a secondary issue whether a few of them evade or avoid the new taxes. Labour has already accounted for most of this anyway.

It's true a few billionaires might Head to the Concorde Lounge at LHR, once they are being made to pay their way. But Labour's massive spending boost should draw in serious money from investors in wind, solar, railway expansion, public housebuilding and broadband technologies, not to mention the boost to the university sector that will come from abolishing tuition fees and paying them direct from the state.

Plus, if Labour wins, there's a good chance it will stop Brexit, and even if Brexit happens, we will remain close to the single market and in a customs union: years of uncertainty will end and the auto, aerospace and pharmaceutical industries should be ready for a new round of investment. 

The capacity issue is a challenge. Embarking on a massive programme of housbuilding, wind turbine building and rail upgrades will mean the pump has to be primed by more planners, architects, construction workers etc.

But if we take the wartime approach - rapidly training workers now doing jobs like cleaning and coffee bar work into skilled jobs building the new economy; and if we end the madness of new immigration controls on foreign workers; the country should be buzzing within 6-12 months of this programme being implemented.

The whole fiscal programme is a much bigger deal than 2017 - it is heavily focused on green investment and unlike last time it doesn’t privilege student fees over benefit restoration and local council spending. If they achieve only half of this, neoliberalism is gone as a system - and a new kind of transformative, just and sustainable future opens up for Britain.