Tax and spend is Britain’s way to battle inequality

Published : 28 Oct 2021 08:41 PM | Updated : 30 Oct 2021 09:50 AM

Boris Johnson didn’t just resurrect the idea of “leveling up” as a campaign slogan. (The idea of redressing imbalances in the economy long predates him.) He expanded it, made it a central theme to the Queen’s Speech, delivered his own speech on the matter and even appointed a leveling-up minister.

Leveling up has been called “the defining mission” of his government. Only it’s a slippery concept. Some Tories suspect the term is a euphemism for taxing wealthier parts of the country to buy votes in the less-affluent north, which delivered Johnson’s 2019 majority. Others see it as a vague label that can be slapped on any giveaway. Can the prime minister level up the country while funding the National Health Service, cutting taxes and reducing borrowing? Fiscal conservatives suspect not. 

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Chancellor Rishi Sunak’s spending review on Wednesday answered some of the questions about where the government will focus its energies. It announced (or re-announced) public investments in infrastructure, innovation, skills training and local regeneration. But it also laid bare the limits and risks of the rebalancing agenda.

For Sunak’s immediate purposes, it helped that the Office for Budget Responsibility revised down its borrowing for 2021-22 by nearly 40 billion pounds ($54.9 billion). That relief allowed the chancellor to spend 10 billion pounds more in 2024-2025 than pre-pandemic plans made room for. It also probably gives Sunak enough room to meet his new fiscal rules (a falling debt level as a percentage of GDP and borrowing only to invest during “normal times”) in the spring.

Much of the theater of budget announcements entails warming up what’s already been served or dressing up small parcels in fancy packages. Sunak boasted record increases in real-term annual spending for public services. And yet a lot of those hikes merely return spending to 2010 levels, before the Conservatives took over and austerity hit the same local governments that are now relied on for everything from social care to skills training.

Spending is planned to increase by 3.3% per year over the next three years, but that’s a slower rate than in the 2000s or even the most recent two spending reviews, notes the Institute for Fiscal Studies. And inflation — predicted to peak at 4.4.% in 2022 — will reduce real wages and lead many people to wonder where all the new spending is going. 

But what’s important is that Sunak is aiming firepower at the leveling up priorities — defined by Tory minister Neil O’Brien as empowering local leaders and communities, growing the private sector and raising living standards, and improving public services and restoring local pride. Past governments have arguably done less with more, so Johnson’s success boils down to the promise that it will spend (or rather invest) better. 

Sunak warned Britons (and reassured Tory backbenchers), that government was not the answer to every question. “Government should have limits,” the chancellor intoned. “The moments that make life worth living are not created by government.” And yet, Sunak’s budget, and the government’s whole vision, rest on the notion that a state that occupies half the size of the economy can channel all that taxpayer money efficiently enough to boost private sector investment.

One cautionary note comes from Parliament’s Committee of Public Accounts, which has just released a damning report on the U.K.’s Covid test-and-trace system, which managed to chew through 37 billion pounds over two years but was racked with failings. Government spending on personal protective equipment during the pandemic also brought allegations of cronyism and waste. And there’s a long history of poor delivery on infrastructure projects that attests to how hard it is to execute plans for state-directed investment.

Sunak, who has already raised some taxes, is preparing the country for a fiscal diet when the pandemic is over; but when the state grows by leaps and bounds, it rarely retreats to its previous size. 

The state emerged larger after major spending increases during both World Wars I and II.

Inefficiencies and waste aren’t the only obstacles facing the government’s leveling up agenda. You won’t hear it from Sunak, but the impact of Brexit turns out to be twice as bad as the scarring from Covid. Goods trade with the European Union is down 15% below 2019 levels (goods trade with the rest of the world also dipped sharply during the pandemic but is now only 7% below 2019 levels), the OBR notes. It projects the loss of trade will reduce productivity — which filters through to living standards — by 4%.

The prime minister is right that a return to higher levels of growth will require better skills, infrastructure and more innovation. Parts of the U.K., particularly in the north, lag the rest of the country on a range of measures, from life expectancy to skills levels and productivity. 

In some places, those disparities are bigger than those between east and west Germany when the Berlin Wall was standing. These aren’t just small pockets of the “left behind” — they’re a huge swathe of the country.

Tackling this disparity will likely require far more decentralization than the government has been willing to embrace so far. And yet Johnson has proved capable of radical change. He has marshaled the full force of the state behind a project that will determine his legacy at least as much as Brexit. 

It will take more than a single election cycle to know how successful the leveling up agenda will prove to be and whether it can set an example for other countries looking to reduce regional inequalities. One thing is clear: Success rests not just on how much the government is willing to spend (it will never be enough), but on how effective that spending proves to be. 

Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe. 

Source: Bloomberg