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Mick Foster: economist, drummer, and would-be author

Thanks for visiting my site. I am an economist with more years of experience than I care to admit to, most of it in overseas development, though I have also worked as Chief Economist in the UK Home Office, and had a brief stint in the Cabinet Office. The site contains:-

i. My research and consultancy work on economic development – most of this is available on researchgate.net, but not everyone has access to that.

ii. Discussion of policy issues that interest me, trying to push back against the avalanche of lies and distortions that seem increasingly to taint our politics and our media coverage.

iii. Some of my fiction writing while I figure out how best to get it either published or self-published. Short stories under the heading ‘Lives in Development’ can be seen here https://mickfoster.blog/wp-content/uploads/2015/10/lives-in-development.pdf

iv.  I will also have a theme for the various bands and music events I am involved in, with a few links to where our music can be heard.

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Why is there so little empathy in the world?

The question in the title was prompted by the apparent indifference of Western Governments to the appalling plight of people living in Gaza, and the grotesquely different values placed on human life depending on nationality, religion and ethnicity.

My May 2003 article on how to assess the case for overseas aid1 developed some criteria for analysing the circumstances in which it was reasonable for a Government to tax its own citizens in order to benefit non- citizens. In addition to some rather dry technical analysis, this developed the idea that the value that citizens place on the lives of specific groups of noncitizens depends on the perceived distance between the donor population and the intended beneficiaries. The concept of distance encompasses not just geographical distance but also perceived cultural differences and differences in time ( how much will today’s citizens pay to benefit future generations?).

The interesting point is that this concept of ‘distance’ is not absolute but is influenced by knowledge. Our willingness to deny or ignore the common humanity of others responds to how much we know about them. The response to Band Aid reflected the fact that we were watching the distress every night on news bulletins. The great Tsunami reinforced our sense of common humanity because Europeans and Asians were impacted and were seen helping and supporting each other.

It is not difficult to find reasons why we might be less able to recognise our common humanity in 2025. Our consumption of news has become fragmented and more partisan. Foreign coverage has reduced, with the BBC for example focusing on a very narrow range of subjects and reflecting a strong Western perspective that does not give much space to other viewpoints. Many people elect to avoid news coverage and, with the relative decline in terrestrial channels and national newspaper readership, they can easily do so.
A Labour Government could choose to promote empathy for our fellow human beings, and between different populations, wherever they live. That sounds like an idealistic fantasy, but the previous Labour Government achieved a lot through the exercise of soft power, and might have done more if it had not wrecked its reputation by joining the Iraq war. The previous Labour Government spearheaded global efforts to resolve the debt problems of many low income countries. It was central in persuading donors to signup to the millennium development goals, and to commit the necessary funding to achieve them. The Department for International Development established a strong reputation for competence and leadership on development issues. Most remarkably, it was the first Government to make the objective of reducing Global Poverty sufficiently popular to gather the support of both parties for a commitment to higher aid flows to help achieve it. Explaining what it was doing and why were key elements of this.

The Government could also choose to rebuild other aspects of our soft power. Al Jazeera has shown how investment in a trusted news source can give a country as small as Qatar disproportionate influence in the world . It has taken that role away from a much diminished BBC. The BBC did much to train Al Jazeera but has now been eclipsed by the Qatar station which has far better coverage of the world, far deeper analysis, and reflects a far wider range of views.

Government can also choose to distance itself from a belligerent and unreliable USA and its genocidal ally Israel and work instead with others to rebuild the multilateral system. We have in the past refused direct requests from the USA for support without wrecking our relationship with the Americans. A bit of distance from them and their genocidal ally might help us to establish a reputation for fair dealing and for seeing both sides of an issue. The use of aid, cultural ties, our educational institutions and a genuine commitment to a free press and the rule of law could win us more influence.

This could be reinforced by a commitment to explaining the policy to our own population and thereby educating empathy into our politics. When shown suffering, normal people want to alleviate it.
Sadly, it seems that our Government is even more indifferent to foreign suffering than to the poverty of our own population. It has chosen to cut aid and other sources of soft power in order to spend more on lethal weapons. It is choosing to do this in order to counter a paranoid fantasy about the extent of the threat from Russia, an economy smaller than ours. It is bizarre to believe that the very expensive nuclear armed aircraft we are proposing to buy will be at all useful in any realistic conflict- but the defence lobby is brilliant at persuading gullible Governments to spend billions on toys to fight non existent threats. The Government waves the threat of Russia at us while ignoring the unspeakable evil being done by our friend and ally Israel to the population of Gaza.

Far better value would be achieved at far less cost if we spent it instead on soft power. This would require an end to the double standards that reflect Israeli and US views that place a near zero value on Palestinian lives, and not much more on poor populations living elsewhere. We could make a real contribution by seeking to reduce the distance between nations and populations, rather than reinforcing it by ramping up spending on weapons of doubtful utility.

  1. Mick Foster, Criteria for Assessing the Case for Overseas Aid, a note, Development Policy Review, Vol 21 Number 3, May 2003 ↩︎

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UK Spending Review: promoting the wrong type of growth to benefit the wrong people in the least effective way

The stated aim of the Government is to boost economic growth through investment while maintaining a sound economy by bearing down on other forms of spending to keep within fiscal rules. This is intended to allow us to grow out of our difficulties by generating enough income to gradually reduce the debt burden and generate the revenue to improve living standards in the medium term.
The assumption is that higher economic growth requires a tight focus on higher investment including public investment. After 15 years of neglect of all public services this assumption is clearly wrong. The most valuable public infrastructure in any country is the infrastructure that already exists. That is why it was built first. In the UK, public infrastructure is crumbling through years of neglect, and is performing poorly due to inadequate operating funds and insufficient and poorly trained staff. The biggest impact on growth will come by remedying those problems. This will have a much quicker and more visible impact than grandiose investments that will take years to complete. It involves providing a substantial real increase in funding for local government. It also requires a shelving of the hugely disruptive reform of local Government structure that is currently planned, and that is a major distraction at a time when local authorities are in acute financial distress. We also need action to address the expensive legacy of Tory privatisation of natural monopolies in water, energy and transport.

The Government appears to think of private sector growth in terms of big firms investing huge amounts in mega projects. The kind of growth that will happen more quickly and will transform more lives is about unlocking the potential of millions of people through practical improvements in local infrastructure and in the incentives to work and to invest.

The benefit system for example at present places obstacles in the way of people wishing to work or to work longer hours, and actually encourages people to stay on disability benefits for fear that any work they take might prove temporary. If the work doesn’t last, they are exposed to debt, uncertainty and the risk of extreme poverty while waiting for benefits to be reinstated.

Spending more money to alleviate poverty and raise living standards is not only good because it improves lives but will also have a positive impact on economic growth. Unlike the wealthy who currently benefit from unnecessary tax breaks, the less well off actually spend their income, and they spend more of it locally. Transfers of cash to people who need it help to support hundreds of thousands of local businesses providing shops and services in their local area, and providing employment at a fraction of the cost of larger scale enterprises. Because it is spent, and spent locally, a larger share of the expenditure will flow back to the treasury in revenue from VAT, national insurance and income taxes.

This more local approach to raising the economic growth rate can also support the innovation and investment in new technologies that Government is keen to see. Entrepreneurs want to live and therefore invest in a pleasant and peaceful country with well maintained roads, good education and health services, pleasant parks and libraries and museums. They want access to a skilled workforce- which means allowing our universities to continue welcoming foreign students and researchers as well as a more relaxed attitude to immigration and allowing our young people to travel freely. It would help if we also committed wholeheartedly to a closer relationship with Europe- with the aim of eventually rejoining.

Where is the money for higher spending in these areas to come from? I think there’s scope for reducing the investment spending ambitions. The more ambitious large scale projects could be postponed with little short term harm. It seems absurd for a country as strapped for cash as we are to be discussing new runways at Heathrow and major investments in nuclear power. Whatever the rationale, these will not deliver in a time frame we should be discussing when the population is faced with so many short term problems. There’s definitely scope for altering the tax system in ways that place more of the burden on the better off. This needs to focus on taxation of capital and reforming the financing of local Government.

We should also be very wary of calls for us to spend more money that we don’t have on totally unproductive defence spending. The MOD has a long and inglorious history of spending huge amounts of money on kit that proves to be ludicrously expensive and entirely redundant for the tasks they are required to undertake. Our Governments in recent years have also shown an unpleasant tendency to use lethal force against civilians and often in conflicts for which there’s no public support. Continuing to sell arms to genocidal Israel is just the latest example where we are clearly on the wrong side. The idea of spending further billions on nuclear weapons is particularly obnoxious. We should resist calls for more defence spending, and slow down any response we are forced to make. We don’t need it, can’t afford it. Trump (and probably Putin) will be gone long before it makes any difference.
In summary: let’s have a more efficient and equitable tax system, and focus our spending on fixing up what already exists and on alleviating the suffering of so many in our population. This will not only improve living standards more quickly, it will also be a more effective way to generate the GDP growth that Government says it wants.


Turning to the debt and the consequent

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Rachel Reeves’ Economic Policies

The Guardian leader on 30 th January rightly says that Ms Reeves approach lacks ‘compassion or moral purpose.’ This is because it confuses means with ends. GDP growth only matters if it makes life better- a point also made by the heckler quoted by Aditya Chakraborti’s piece in the same edition (‘That’s your bloody GDP. Not ours.’)

The short term goals of Labour economic policy should be to improve the living standards of those who are struggling, and to rebuild our public services. The medium term goal should be to build a society and economy in which improvement in living standards and in public services is continuous and sustainable- environmentally and economically.

The two short term goals require a lot more money than Labour currently plans to spend, and a significant change in how it is raised. The current proposals, partly inherited from the previous government, include an increase in taxation paid by those on relatively low incomes and a decline in the real value of benefits. 

Raising the revenue needed without further harming those who are already struggling requires abandoning the foolish commitment not to use the most efficient and equitable methods of raising more revenue. We need income and corporation tax increases, a serious effort to end the over generous treatment of capital gains, and a reform of our property taxes.

It will be argued that a big, redistributive tax package to fund public expenditure increases and increased welfare provision will discourage private investment, and might reduce overall GDP growth. However, it also puts a lot more money in the pockets of people in every region of the country, people who will spend that money locally. That will boost ‘our  bloody GDP’, rather than further inflating the London economy. Untangling means from ends, it may be worth trading off a a slightly slower economic growth rate for a better distribution of that growth across the country.

There is also an argument that a large tax hike now to fund fundamental improvements would be preferable to a timid reform that leaves the economy struggling into the indefinite future with a mountain of debt, sluggish growth, terrible public services, collapsing infrastructure and stagnant living standards. Our tax burden is high by UK standards, but is still far short of some successful European countries. The private sector might be persuaded that bold measures today will create a better environment for future investment than the endless dreary trudge set out by the Government.

Two complementary measures would make a positive private sector response more likely. The first is an unequivocal commitment to a close relationship with the EU, preferably  including a commitment to seek to rejoin the single market. This is the one measure that would unequivocally deliver the increase in economic growth that the Government wants to see. The second is increased financial support to enable local authorities to provide the services they are required to, preferably combined with far less interference in how they spend it. Local people are those best placed to decide how best to use limited resources. 

My final point is that this agenda is hard enough, and the Government needs to stop inventing new and challenging tasks that are costly and difficult and do not contribute to the main goals. This is not the time to ask local authorities or Government Departments to plan for major re-organisation and reform. It is definitely not the time to embark on discussions about a third London Heathrow runway that will not see aircraft flying until long after this Government has departed. 

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Fund Raiser for Gaza

I am organising a gig and jam to raise some money for the Oxfam Gaza appeal and for Doctors Without Borders work in Palestine. It isn’t much, but I feel like I should do something. You don’t need to come to the gig to donate, though it would be great if you do. The link to the JustGiving page is below

https://www.justgiving.com/team/musicforgaza?utm_medium=proxy_team&utm_content=team%2Fmusicforgaza&utm_source=copyLink&utm_campaign=pfp-share
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Gaza, anti-Semitism, and Israeli racism towards Palestinians

We in the West are hyper sensitive to anti- semitism, and rightly so. However, we have been blind to the often fatal consequences of the long standing and widespread racism of Israeli Jews towards Arabs.
The most recent and shocking manifestation of this is the confirmed slaughter of over 23000 Palestinians in Gaza, with a further 7000 missing presumed dead. This is before counting the additional deaths that will occur due to disease, hunger, and the wanton destruction of health facilities. The vast majority of the casualties have been civilians, 70% of them women and children.
This harsh response to the Hamas action in which about 1200 Israelis were killed is supported by 98% of Israeli Jews according to a poll in November, with 57% believing that the IDF were using too little firepower while less than 2% thought that they were using too much. The implication is that innocent Palestinian lives are regarded as virtually worthless compared to the lives of Israeli Jews. Indeed, according to Al Jazeera’s Listening Post programme, such a view is increasingly reflected in reporting in mainstream media in Israel.
An attitude that places little value on Palestinian lives was explicit from the beginning of the Zionist project. How else can the establishment in 1948 of an explicitly Jewish state by violently evicting the Arab population from their land and homes be explained?
Each stage in the conflict has seen further encroachment on Arab land, livelihoods and rights, while the Arab death toll has greatly exceeded Israeli casualties. To quote just one chilling statistic among many , Israeli defence forces and settlers killed 2187 Palestinian children in this century up to October 6th, before the start of the current conflict in Gaza.
The West has not reacted to Israeli savagery with anything approaching the appalled response to the Hamas action on October 7th. In the UK, Israel continues to be regarded as an ally, with both major parties having within their ranks important groups describing themselves as ‘friends of Israel.’ Within the Labour Party, expressing friendship for the country that has perpetuated an illegal and increasingly brutal occupation since 1967 attracts little criticism whereas those expressing sympathy for the Palestinian cause have been accused of anti semitism and expelled. Our own version of anti-Palestinian racism is that killing Palestinian children causes less outrage than using the wrong language to describe it.


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How Labour can rescue the UK:is Keir Starmer taking the wrong lessons from history?

In 1997, the Blair/Brown Government famously committed to stick to the spending limits set out by the preceding Tory Government- the aim being to reassure markets and media that Labour could be trusted with the public finances. Keir Starmer has done something similar, refusing to rule out a Labour government keeping to planned Tory cuts to public spending. However, the 1997 context was very different.

In 2024, the UK is in a far worse state than in 1997. After 14 years of Tory rule, we have become one of the most unequal countries in Europe, while continuing austerity has left public services and infrastructure in all sectors and all parts of the union in a state of imminent collapse. We have seen a widespread return of levels of poverty not seen since the 1930s, with households unable to meet the most basic needs for food shelter and warmth. Buildings including schools and hospitals are collapsing, roads are full of potholes, dangerous nuclear waste is leaking from dilapidated buildings at Sellafield, almost all local authorities are heading towards bankruptcy and inability to meet statutory requirements, while prisons are a disgrace, our once wonderful health service is starved of funds and unable to cope with waiting lists , while privatised utilities provide poor services while extracting billions and despoiling the countryside by discharging sewage into our rivers. Rather than deal with the dire legacy, Tory spending plans envisage further deep cuts in public spending to pay for promised tax reductions- though those tax ‘reductions’ are actually no more than a partial rollback of stealth tax increases. The conservatives can offer these completely unrealistic tax and spending plans in the secure knowledge that they will be out of Government and not required to implement them.

The conservatives have set a trap that Starmer is in danger of falling into. If Starmer rules out significant public expenditure increases funded by higher taxes , he has guaranteed that little will be achieved in a first Labour term, and thereby increased the likelihood of an early return of the Tories.

I do not deny that the outlook for the public finances is extremely difficult. Keir Starmer is right to say that the debt burden is too high and there is little scope for borrowing more to pay for more public spending. He is also correct to argue that, at least in the medium to long term, economic growth needs to increase in order to enable us to afford the living standards and public services we aspire to. However, he is wrong to argue against tax increases in the short term. Our entire public realm is in crisis and needs an urgent response. That immediate response is entirely compatible with a focus on increasing our dire economic growth rate, and I would argue that sustainable economic growth is dependent on us addressing the many issues being faced across the public sector.
The biggest drags on UK economic growth are stagnation in living standards, the increasing difficulty of international trade post BREXIT, and the poor state of public services and infrastructure. Although the tax burden is high by UK standards, it is not high compared to other major European countries, and is not a significant factor in explaining our growth performance. Paul Johnson in his recent book’ Follow the Money’ has set out ways in which our tax system could be improved and significantly more revenue raised in ways that are both equitable and economically efficient.

Higher taxation need not be a drag on economic growth if it is appropriately targeted. It is also worth emphasising that the composition of economic growth really matters. The Tory path of lower taxes is likely to further increase inequality between London and the rest of the economy, with further pressure on housing and other asset costs and little benefit to ordinary households. By contrast, growth based on higher public spending and more cash in the pockets of those who need it most will be far more widely distributed, and will build the foundations for sustained improvement into the future. Research into economic growth repeatedly shows the importance of a healthy and well educated population living in a country with low inequality and good infrastructure and public services. As the climate crisis worsens, we will also find that those countries that invest in a green future will be those that succeed in improving the lot of their populations. Labour have recognised this- but have restricted what they can achieve by ruling out tax increases.

The biggest question is whether Labour can win an election based on promising higher taxes and higher expenditure. I think that it can. The extent of the crisis we are in is widely recognised and I think a strategy that recognises the need for bold but fair steps to tackle it would stand a better chance of success than one based on an approach perceived as little different from the Tories. The extent of the problems will in practice inevitably force whichever party is in power to both tax and spend far more than is currently envisaged. It is better to explain this now and place the blame where it belongs, rather than to be forced to row back on promises immediately after the election.

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UK Inflation- Wrong Target, Wrong Tool

At 8.7%p.a., inflation in the UK is higher than in other high income countries. It is driving a steep decline in living standards, a further decline in public services, and continued increases in already high levels of inequality. It is these consequences of inflation that need to be addressed. It is therefore strange that the only tools being used to tackle the problem are measures that will only have an impact on inflation by making each of these more fundamental problems worse.

Inflation is caused when demand for goods and services exceeds the capacity of the market to supply them, enabling producers to charge higher prices. Increased interest rates are supposed to slow inflation by taking money out of the economy and thereby reducing demand. This makes it harder for firms to raise prices or pay higher wages.

Interest rate increases are the only policy instrument available to the Bank of England for reducing inflation to the Government target of 2% per annum. If the only tool you have is a hammer, then everything looks like a nail. Interest rate rises are hurting everyone with a mortgage, everyone who rents and finds the cost and availability of accommodation suddenly much reduced, everyone who is struggling with debt, everyone who finds their wages buy less and their jobs are at risk as employers also struggle with increasing debt service. The current Bank of England Governor has said that a recession is an acceptable cost for reducing inflation.

The logic of this ‘Sado-monetarist’ approach is questionable in current circumstances. The high inflation was caused by supply shocks, and the persistence of inflation is not due to excessive monetary growth. The Government should not end the independence of the BoE, but it might re-frame the inflation target in less absolute terms, perhaps in reference to rates in competitor countries or as a direction of travel rather than as something to be achieved irrespective of cost or circumstances.


Even if the prescription were sound, the way it is being implemented should not be. Those who are hardest hit by interest rate rises and public expenditure cuts did not cause the problems but are those least able to bear the cost of fixing them.

Ideally, it would be preferable to close the gap by increasing supply through higher economic growth, rather than by squeezing demand. We need an approach that puts a lot more emphasis on protecting people from the harms that inflation causes in the short term, while building stronger and more sustainable growth that will begin to reduce it. This is easier said than done. It will require increased Government spending.

The starting point is not great . Government debt of 100% of GDP and taxation headed towards 38.5% of GDP are high by UK historical standards, reflecting the legacy of unrestrained spending to cope with the pandemic, especially the furlough scheme. In these circumstances, the Government strategy envisages reducing the Government deficit and the debt burden in the medium term through ‘stealth taxes’ ( not adjusting allowances for inflation) while planning for further steep cuts in public spending. These measures were intended to have their main impact after the next general election. Higher than anticipated inflation has brought forward the pain, creating a political problem for the conservatives. The Government faces pressure to use any spare revenue for tax cuts for potential Tory voters.

Using Government revenue to improve public services and provide help to those in need will have a far greater and more immediate impact on economic growth than tax cuts. The money will be spent, not saved, thereby stimulating output and investment. With economic growth still sluggish it is unlikely to cause inflation to accelerate, though measures such as pay increases for public sector workers may limit the speed at which it is reduced.

Our current tax take of about 38.5% of GDP is not especially high compared to other wealthy EU countries. If we want European standards of public services we will need to accept European levels of taxation to pay for them. Inflation raises the cost of everything the Government spends money on- but it also sharply increases Government tax revenues. The Government decided to freeze income tax allowances when inflation was far lower. These stealth taxes are now likely to raise more than four times as much revenue as was originally expected. They are not the best way to raise the extra revenue we will need: there are plenty of other ideas out there for raising extra revenue in ways that are efficient and fair. Paul Johnson’s excellent new book‘Follow the Money’ reviews most of them. He also makes the point that, even after making use of windfall taxes and the potential for imposing higher taxes on capital, the sums required can not be raised just from the very wealthy.

A policy focused on minimising the negative effects of inflation rather than just the headline rate might result in inflation coming down more slowly. That would be preferable to the catastrophic collapse in living standards that is in prospect if current policies persist.

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How do the Tories keep winning elections?

The conservatives won a 66 seat majority in 2019, but less than 30 % of the electorate voted for them. They received just 44% of the votes of the two thirds of us who bothered to vote.

This is not unusual. Since 1945, not a single Government in the UK has taken power with a majority of the votes cast, and none has had the votes of more than 40% of the electorate. Ironically the party that came closest was Labour in 1951, when they received the votes of 40 % of the electorate and 49% of those cast- despite which they lost the election to the Conservatives who had a 17 seat majority.

The percentage of the electorate who voted for the winners has been less than 30 % in every election this century. This has happened for two reasons.

Firstly, turnout has fallen from an average of 76% in the 1945-1999 period to just 65% in the current century. The lowest turnout was 2001 when less than 60% of people voted and Tony Blair won a 167 seat majority with the votes of just 24% of the electorate.

The second reason why Governments can win power with a lower share of the vote is that the two main parties no longer command the loyalty of nearly all of the population. Until 1970, the combined share of the vote taken by the conservative and Labour parties averaged over 90%. The rise of the SNP and other nationalist parties and later of UKIP have split the vote. The share of the two main parties fell to 65% in 2010 before recovering to 83% in 2019 as BREXIT and the coalition dimmed the appeal of UKIP and the Liberal Democrats. More fundamentally, the drastic decline in manufacturing jobs and in trade union membership has eroded the class basis of political parties in the UK. The main dividing lines in voting patterns in the UK are no longer social class but are instead age and education- with younger and better educated people more inclined to vote for Labour and other left and centre parties, though unfortunately they have lower turnout. The Tory bias in policy in favour of the elderly is no accident.

The situation would be bad enough if parties only had to gain the support of 30 % of the population, but in practice they need to influence even fewer voters. Over 500 of the 650 seats in parliament were won with majorities of more than 10%, and 68 seats had majorities of more than 45%. This means that the votes of many of us simply don’t matter- the incumbent party is very unlikely to be ousted. It also means that parties can achieve power by appealing to the interests and prejudices of a very narrow group of voters in a fairly small number of relatively marginal constituencies. The scope for unethical and even corrupt practices in order to sway the vote is obvious, and can be seen in the politically biased allocation of levelling up funds, and the dog- whistle policies of scapegoating refugees to name just two policy areas.

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UK Economic Growth Performance since 1960

A 2015 post on this blog looked at economic performance under Labour and Tory Governments and concluded that there wasn’t much difference overall, but that Labour distributed the gains of economic growth more equitably and was a better custodian of public services. This post provides a partial update focusing on economic growth.

I compared UK economic growth with the average of all of the wealthy countries that are members of the OECD using data on the World Bank web site accessed on 11th March 2023. This reveals:-

I. The UK has been falling behind the average of OECD countries for most of the last 60 years. The average OECD country had a GDP that was nearly six times larger in 2021 than in 1960 whereas UK GDP had increased less than fourfold ( OECD average 588% of 1960 level, UK just 388%).

2. The UK economy did keep pace with the average of the OECD countries over the period from 1992-2010, the improvement having started under the Conservatives from about 1993 but being maintained under Labour from 1997-2010, with the financial crisis of 2008 resulting in only a modest dip in relative performance. The performance under Labour is all the more impressive because improvements in economic growth were successfully used to reduce poverty and improve public services.

3. The period of conservative Government since 2010 has seen a return to relative decline. The UK economy was only 10% larger in 2021 than in 2010, whereas the rich countries as a group had grown by 20% – twice as much.

4. As documented in other posts on this blog, the Tory Government has not only performed poorly on economic growth. It has also presided over a collapse in the quality and availability of public services, and a massive increase in poverty and inequality, while it’s BREXIT policies have significantly increased the difficulty and cost of investing in and trading with the UK, reducing our future growth potential.

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Alternatives to Hunt/Sunak Strategy

This note roughly costs some policy alternatives to the Sunak/Hunt approach .  It supplements my previous post that examined the implications of the Chancellor’s autumn statement. That included some suggestions for an alternative strategy. This post tries to put some rough numbers on their potential impact, looking specifically at:-

  1. A closer relationship with the EU, broadly equivalent to re-joining the single market.
  2. A set of tax changes along the lines proposed by TaxJustice.UK.

Estimates of the impact of BREXIT on the UK economy vary widely though most economists acknowledge that it has been negative and significant. The OBR estimates that the UK economy by the end of the decade will be 4% smaller because of BREXIT. I have assumed that a decision to re-join the single market would boost GDP growth sufficiently to recover this, reaching a level of GDP in 2007-8 that is 4% above the level forecast by the OBR if the Sunak/Hunt proposals are implemented. The boost amounts to an average increase of 0.75% p.a. over the five-year period. The implicit assumption is that any costs of re-joining have been netted out from this figure. That is not unreasonable given the very high cost of additional administration to undertake roles that were not required when we were members.

With tax: GDP unchanged from the OBR forecast, the higher GDP growth from a decision to re-join the single market would on these assumptions raise Government revenue by amounts rising to £47 bn by the final year of the forecast (see Table).

TaxJustice.UK estimate that the UK could raise £37bn per annum from a range of tax measures primarily aimed at the better off, and particularly at wealth and at capital gains. These include introducing a wealth tax (raising £10 billion per year), taxing capital gains at the same rate as income tax (£14bn), applying national insurance to investment income (£8.6bn), reforming non-dom status (£3.2bn) and closing inheritance tax loopholes (£1.2bn). I have assumed that the additional taxes would be implemented in full by 2024-25, and revenue would then grow in line with nominal GDP. The TaxJustice.UK analysis usefully illustrates that increased revenue raising from those who could most easily bear the burden is feasible on broadly the scale proposed.

Revenue Impact of Re-Joining the Single Market and Implementing TaxJustice.UK Proposals

£ Billions, Cash

Financial Year ending2425262728
Re-join EU single market: Additional tax revenues from increased GDP growth4.7512.3622.9934.5746.96
Additional Revenue from Tax Justice proposals18.0037.0038.5540.4642.47
Total increase in Government revenues (£Bns)22.7549.3661.5475.0389.43
Equivalent to a % increase in Government spending of:1.9%4.2%5.1%6.1%7.0%

The additional revenues could be used to fund any combination of higher public spending, reduced taxes on the lower paid, or faster progress towards reducing the deficit and hence the cost of servicing it. The additional revenue builds up to be equivalent to 7% of the currently proposed level of public expenditure in 2027-28.

The analysis is very crude. It will doubtless be argued that the assumed growth boost is on the high side. On the other hand, the estimate does not take account of some other significant positive impacts. For example, higher growth will reduce pressure on the benefits system, releasing resources for other spending. The post also ignores the potential impact on the cost of Government borrowing. It could be plausibly argued that markets would be reassured by a commitment to policies that will raise economic growth and do away with the need for public expenditure cuts that are economically damaging and politically unrealistic. A 0.5% cut in borrowing costs would save an additional £14 bns per year but would still leave HMG borrowing costs above those of Germany and France.  

Though crude, the post illustrates that resources could be generated that would be sufficient to transform the miserable outlook currently facing those on middle and lower incomes. We could improve the safety net, shield them from increased taxation, and still have resources left to begin to address the need for higher public spending.