Labour policy should not be decided by trying to please neo-liberal think tanks

Despite the electoral success of Labour, a recent LabourList article by Andrew Harrop shows the anxiety of the left in that it seeks approval of neo-liberal think-tanks for its programme. Harrop wrote that “the IFS exposed that our fiscal maths did not add up, though their verdict came late in the campaign and no one really noticed”.

My argument is that rather than veneration, it is appropriate to ask whether the Institute for Fiscal Studies’ own analysis adds up. The left needs to dethrone think-tanks like this and create space for a progressive agenda. This can be done by highlighting their shortcomings. Here are a couple of examples.

Firstly, the IFS objected to Labour’s manifesto pledge to raise the minimum wage to £10 an hour. They claimed it would threaten jobs yet during the election campaign they said little about the massive income of people at the top or how a fairer distribution might be achieved.

The IFS’ reservations came against a bleak social landscape. In a comparatively rich country, despite the national minimum wage, 40 per cent of the working-age population have less than £100 in savings. Millions rely on food banks to secure their next meal. The poor also become victims of the payday loan industry and end up paying exorbitant interest rates. Personal debt now stands at record £1.529 trillion and an ordinary person’s ability to stimulate economic demand and investment is severely eroded. One response to this is to increase the purchasing power of workers, especially of those on low incomes.

Almost all of the research since the introduction of the national minimum wage shows that it had no negative effect on jobs. The most recent data published by the Office for National Statistics (ONS) shows that the businesses are reporting historically high rates of profits. Shouldn’t some of this be used to pay a decent wage? It is unacceptable that employees working on low wages for some of the most profitable companies need to be subsidised by taxpayers. Ever since John Maynard Keynes, we have all appreciated that people on the lower-end of the income distribution tend to spend most of the wages on everyday products and services and so have a greater multiplier effect on the local economy. Yet the IFS almost totally ignored the macroeconomic effects of a rise in the minimum wage.

Secondly, the IFS asserted that the reversal of recent corporation tax cuts, effectively a tool for redistribution, would threaten investment, jobs and wages. In contrast, the Financial Times has argued: “companies’ main worry now is whether investments they make in Britain will produce a profit at all, not the rate of tax they would pay on them. A corporate tax cut would do little to attract investment until the UK is in a position to resolve the acute uncertainty over its future trading relations with the EU. It would, however, probably lead to lower tax revenues”.

The IFS’ assertions were not supported by the evidence. One only has to look at Germany or Scandinavian countries to note that despite higher corporate taxes, workers enjoy higher wages and spending power to stimulate the economy. The IFS did not present any evidence to show that Britain is different. British firms are sitting on a cash mountain of £500bn and despite record low rates of corporation tax are somewhat reluctant to invest. Perhaps, they are waiting for improvements in social infrastructure or improvement in people’s purchasing power, which are unlikely to happen without direct state intervention.

In apparently opposing the Labour manifesto, the IFS claimed that “all taxes are paid by people and corporation tax is no different’ i.e. higher corporation taxes will result in higher prices for consumers and low wages. The IFS did not specify any of their assumptions in making this bizarre argument. If corporations can simply pass all corporate taxes on to consumers then we should not see companies concocting all kinds of tax avoidance schemes. The IFS claim also seems to assume that there is no effective competition in the market place, the regulators are ineffective, the demand for goods and services is inelastic, there are no substitute goods and services and that consumers will somehow insist on buying the same items at higher prices or that the people are passive. In short, the IFS claims rest on weak economic theory, analysis and evidence.

In their eagerness to advance neo-liberal views, the IFS have not considered the reverse position i.e. lower corporation tax rate should boost workers’ wages. For example, the British corporation tax rate was 52 per cent in 1976 and is currently 19 per cent.

If the IFS claim about the link between corporate taxes and wages had any substance then workers should have seen a real rise in their share of the economy. It is hard to find any evidence to support that contention. If anything workers’ share of gross domestic product (GDP) has shrunk dramatically. In 1976, workers’ share of GDP in the form of salaries and wages stood at 65.per cent, but by 2016 it shrank to 49.5 per cent (see Table D of the UK quarterly national accounts). Between 2007 and 2015, the real wages of UK employees fell by over 10 per cent, almost the largest fall among major industrialised nations. None of this lends any credibility to the IFS claims about the direct link between rates of corporation tax and wages of ordinary workers.

The IFS’ comments bring into question their status as the all-knowing arbiter of election manifestos. They draw attention to a damaging neo-liberal streak in their pronouncements and demand robust engagement to show they are not based on sound and progressive economic theory, analysis or evidence. Seeking approval from neo-liberal think-tanks is an unacceptable constraint on the political process and will not facilitate the emancipatory change sought by the reinvigorated Labour party. More importantly, political party manifestos need to consider social justice, something sorely missing from economic theories.