WASHINGTON, April 17 (UPI) -- "Old Labor" governments in Britain put up middle class taxes, managed the economy badly, engaged in a weak foreign policy and lost elections. New Labor wins elections, engages in a relatively strong foreign policy, manages the economy well and keeps taxes level.
There have been signs of change, but Wednesday, with Gordon Brown's 2002 budget, the first twinges of Labor government arthritis appeared -- 'New Labor' is growing older by the minute.
For those who haven't been following British politics, there was a reason Margaret Thatcher kept getting re-elected in the 1980s, and it wasn't the sunny charm of her personality or the wild popularity of her politics. Four Labor governments, in 1929-31, 1945-51, 1964-70 and 1974-79, had shown themselves incapable of running the British economy in a stable, non-inflationary and welfare-increasing way.
The 1929-31 government collapsed in a huge financial crisis, largely not of its making, when Britain went off the Gold Standard. The 1945-51 government subjected Britain to six years of "austerity" and by remorselessly expanding the public sector prevented an "economic miracle" such as took place in Germany after World War II. The 1964-70 government, which came in promising "the white heat of the technological revolution," presided over a futile three-year deflationary struggle to maintain the sterling/dollar exchange rate while again increasing government spending. After sterling devaluation, the "moderate" chancellor of the Exchequer, Roy Jenkins, pursued policies that included, in one dreadful year, 1967-8, a top marginal rate of income tax of 135 percent. The 1974-79 government entered in crisis, with Chancellor Denis Healey promising to "squeeze the rich until the pips squeak" -- with a top rate of income tax of 98 percent throughout their period in power it certainly did that, but by 1979 everybody else was squeaking as well, after five years of record inflation and the "Winter of Discontent."
The Blair government was supposed to be different, and for a number of years, aided by an expanding, if partly bubble, economy it was. It had campaigned in the 1997 election on a pledge to stick to the Conservatives' relatively loose public spending plans for two years, and it did so. In the 1998 budget, Chancellor Gordon Brown won his reputation as a tight controller of public finances by putting up taxes without increasing spending -- in this case, by adjusting the taxation of dividends to normally tax-free pension funds. Labor thus gained a reputation for "stealth taxes," but in reality the increases were not very great, nor very damaging.
The issue that began to "age" the Blair government was of course the funding of the National Health Service. Blair had promised to improve the service by increasing its funding before being elected, but by 2000 it had become clear that the moderate increases possible within existing fiscal targets had brought little or no benefit. In the 2000 budget, Brown promised to increase NHS spending by a third in real terms over a five-year period. The following year, a commission was set up to determine what the level of NHS spending should be in order for Britain's health indicators to equal those in the more health-successful countries of Western Europe (currently, British life expectancy at birth, for example is around 5-6 years lower than that of the world leader, Japan.)
The report, published Wednesday morning, concluded as expected that NHS expenditure needed to expand very sharply as a percentage of gross domestic product over the next twenty years, doubling in real terms. Of course, since the report had taken as axiomatic the NHS's structure of free-at-the-point-of-service patient care and centralized public sector administration, this was hardly surprising. In the budget, the Chancellor ruled out American- or French-style insurance schemes, instead preferring to expand expenditure through the budget process, at a real rate of 7.4 percent per annum in real terms, to 9.4 percent of GDP by 2007-8 compared with 6.5 percent currently and an EU average of 8 percent.
Given that Labor party dogma ruled out an insurance based scheme, and that Labor party support from the health unions ruled out privatization of health services, if the Blair government wanted to improve the NHS it had little alternative but to throw money at it. That the government has certainly done. It remains to be seen, however, whether the improvement in health services generated by the time of the next election in 2005-6 will seem to the electorate to justify increases in taxation which are substantial in this budget, and likely to be still more substantial hereafter.
There is no question that the increases in taxation announced Wednesday are going to hurt. The principal measure is an increase in National Insurance contributions, for both employees and employers, of 1 percent each, for a total for employed persons of 2 percent of salary. Ominously for the higher paid, the increase will apply not just to salary below the higher earnings limit of around $45,000 but also to all salary without limit. Adding the two contributions together, the National Insurance "wedge," the percentage paid by employees and employers together on salaries up to $46,450 is about 21.9 percent of gross salary plus employer's national insurance, up from 20.0 percent. This is still below continental European levels, but well above the U.S. social security "wedge" of 13.8 percent.
The tax increase is the equivalent of 2 pence in the pound increase in income tax, part to be hidden from employees. The downside of putting the tax increase in this form is that it will increase the cost to employers of providing jobs, and will hence increase unemployment, as has been shown to be the case in European countries such as France, Spain and Germany. While the initial out of pocket effect to the electorate is less than that of a direct income tax increase, the hidden effect may therefore be greater, as jobs are lost -- a hidden "stealth" tax again.
Even with this very substantial tax increase -- about $10.9 billion per annum before modest offsetting reductions -- Brown is only able to make the books balance, or rather, remain no more unbalanced than in his 2001 budget, by assuming that British long-term growth has been unexpectedly increased from 2.25 percent to 2.5 percent per annum, and that growth in 2003 will for unexplained reasons be even higher than this, at 3.5 percent. Even at these growth rates, the budget moves from surplus in 2001 to a deficit of $14-28 billion from 2003 on. This is not surprising -- public expenditure is to increase by 7.7 percent in nominal terms in 2003-4, or 5.0 percent in real terms, well in excess of GDP growth.
Of course, all things are possible. However, in what still remains a fairly serious world recession, and one that may become more serious, the risks of British growth rates failing to match Brown's optimism must be substantial. Particularly is this the case given the National Insurance increases, which must inevitably prove damaging to economic growth beyond simply their Keynesian contractionary effect, because of their drag on employment.
Hence it is likely that the budgets to come in 2003, 2004 and 2005 will see further tax increases or a spiraling budget deficit or most probably a mixture of the two. In this context, therefore, the British electorate in 2005 will be asked to vote, not on New Labor, but on a Labor government that has followed policies very similar to those of previous Labor governments, and with very much the same results in terms of an ever expanding public sector, recalcitrant unions, and higher taxation. Only in foreign policy, if Blair maintains Britain's alliance with the United States and opposes further European integration, will Labor remain largely "New."
The 2001 election rewarded New Labor with another huge majority. The 2005-6 election may well, in these circumstances, reward Senescent Labor with ouster from office.
