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Sensemaker: Back to the big state

Friday 10 September 2021

What just happened

Long stories short

  • 18-year-old Emma Raducanu became the first qualifier ever to reach a grand slam tennis final, beating Greece’s Maria Sakkari in straight sets at the US Open (more below).
  • The Biden administration sued Texas over an anti-abortion law it called “clearly unconstitutional”.
  • The first flight out of Afghanistan since the US withdrawal carried about 200 foreign nationals to Qatar.

Back to the big state

Britain is running an experiment. The prime minister and chancellor of the exchequer, pulling in largely opposite directions, are trying to find out if you can dig out from under a pandemic, fund the NHS and social care, control deficits and stick to old Tory nostrums about sound money, all at the same time. The answer is no. 

Yesterday the UK’s health secretary, Sajid Javid, insisted that despite tax increases announced on Wednesday – and others in the March budget – the Conservatives remain “the party of low taxation”. In their dreams. Or, as Isabel Stockton of the Institute for Fiscal Studies (IFS) puts it more diplomatically, “that depends on what you aspire to”. In the meantime, to say the Conservatives are currently a party of low taxation is untrue compared with precedent, untrue if you’re a recent graduate or indeed anyone in employment, and arguable compared with other countries.

What Boris Johnson has delivered is a strange mixture that is likely to prove uncomfortable for taxpayers and politically: a return to the big state, which British voters tend to associate with Labour, and a simultaneous return to personal austerity – because measures pitched as a reform of funding for health and social care are also the first in the rich North to attempt to tackle the ballooning debts incurred as a result of Covid.

The geography. Britain’s tax burden is “still lower than France, Italy and Germany,” says Javid. This is true, but for a Tory it’s not saying much. France, Italy and Germany tax the heck out of their citizens and have done so for decades. It’s a defining feature of their economies, as are high expectations of public services and infrastructure – expectations generally met in France and Germany if not in Italy. But in terms of tax take as a share of GDP the UK has moved sharply up the table.

In 2019 the UK was 23rd out of 37 OECD countries for total tax revenue as a share of GDP. At 33 per cent it was below every big EU economy plus some of the smaller ones, and above Japan (32) and the US (24.5).

This year, taking into account corporation and income tax increases announced in March, Britain has leapfrogged Estonia, Canada, Spain, the Slovak Republic, Portugal, the Czech Republic and Poland. They will probably adjust tax rates in due course because of Covid too, but based on this week’s news the UK has moved up seven places to 16th on the table, at 35.5 per cent. That compares with about 45 per cent for France, 42 for Italy, 38 for Germany. 

The history. When this week’s 1.25 per cent increase in National Insurance rates kick in next year the UK’s overall tax burden will be:

  • its highest in more than 70 years;
  • higher than at any time since Labour’s Clement Attlee set about paying for World War Two;
  • higher than the OECD average for the first time since 2011;
  • likely to remain high, because this is about an ageing population. As Stockton from the IFS says: “Long-term challenges around rising costs of health and social care mean this increase in the size of the state is likely here to stay.”

The alternative. Extremely low costs of borrowing make continued deficit spending a realistic option that the EU has so far pursued, while the UK tries not to. “The UK is on the cutting edge of that conversation globally,” Mujtaba Rahman of the Eurasia Group tells Bloomberg (£). “First out of the gates in terms of unwinding some of the [Covid] spending [while] the narrative for Europe next year is: support the recovery through additional spending.”

Rishi Sunak, the chancellor, is aiming to cut the deficit from 12 per cent of GDP last year to 4.5 next. Japan and the Euro area are more relaxed about their overdrafts, not least because they’re not as big. Japan hopes to trim its deficit from 10 to 5.5 per cent between 2020 and 2022; Euro countries from 7.2 per cent to 4.

Given where the burden of this week’s NI increases will fall, this aggressive deficit cutting is a big risk for Johnson. 

It was a de facto blue rinse budget. 

  • These NI increases will hit working age people harder than pensioners because the only pension-age people who’ll be affected are those still working. Just 2 per cent of the extra money raised will come from households in which the oldest person is 66 or older, compared with 14 per cent if the money had been raised through income tax.
  • They’ll hit employees harder than the self-employed, because they’re levied on employers too, who will tend to pass that on in parsimonious pay rises.
  • They’ll hit new graduates especially hard. Those starting to pay off student loans will face an effective 50 per cent tax rate on any extra money they’re paid after the increases come into effect. 

Someone had to find a way to channel more money to health and social care, but the approach taken by this government favours the old and propertied at the expense of the young and renting, and it expands the state in a way future governments will find hard to reverse.

Belonging identity, society, beliefs, countries

Emma Raducanu, the 18-year-old British tennis player who last month received her A-level results (A* in Maths, A in Economics), became the first ever qualifier to reach a grand slam final and the first British woman to reach a grand slam final in 44 years. Raducanu hasn’t dropped a single set in the US Open tournament, thrashing her semi-final opponent on Thursday night. Two months ago she was ranked 361st in the world, and even coming into the tournament she was only ranked 150th. Her run is scarcely believable, not least given it comes two months after a fourth-round withdrawal from Wimbledon that left one well-known internet commentator saying that she “couldn’t handle the pressure”. Pride in Raducanu can be shared across continents: her father is from Romania, her mother is from China, and she was born in Canada. Raducanu moved to England in 2004 when she was two. She will face Leylah Annie Fernandez in the final, who was also born in 2002. By the time Raducanu was born, Serena Williams was already a four-time grand slam winner.

New things technology, science, engineering

Brazil v social media
President Jair Bolsonaro has been looking for ways to win back supporters as polls show he might lose next year’s elections. His most recent move has been to issue new rules that temporarily ban social media companies from removing certain content – such as his own, often wildly misleading, tweets about Covid and how it’s spread. Under the new rules, social media companies in Brazil can now only remove posts that encourage violence or include nudity, drugs and violence. To take down anything else, including misinformation, they’ll need a court order. Bolsonaro is learning from other populists’ misfortune. What would Trump have given for the power to force Twitter and Facebook not to muzzle him?

The 100-year life health, education, living, public poliCY

Biden on the jab
Biden’s patience is wearing thin with Covid vaccine refusers. He plans to make the jab compulsory for federal employees and those of private sector companies with more than 100 staff. He was promptly accused by the Republican governor of South Carolina of thumbing his nose at the constitution, but Biden insisted in a speech at the White House that the new measures, mainly in the form of executive orders, weren’t about freedom or personal choice but protecting the vaccinated from the unvaccinated. Nearly 1,500 people are dying every day from Covid in the US, up from a few hundred in July. 

Our planet environment, natural resources, geopolitics

Swimming camels
The BBC has lovely footage of rare kharai camels swimming along the Indian coast in Gujarat to get to mangrove forests where they like to graze. Salt manufacturers are making life hard for them by interfering with tidal flows and drying up the mangroves. This isn’t a new story but it’s beautiful and sad and the manufacturers in question seem impervious to shame. So, as a public service, here is a link to the members’ page on the website of the Indian Salt Manufacturers Association. The waters where the camels swim are in the Gulf of Kutch, north of Mumbai, and the Jakhau Salt Company and the Mahamaya Salt Works are both listed as operating in Kutch. Come on guys. There’s plenty of salt water in the world.

Wealth investment, fairness, prosperity

Cost does for ICE 
“If in 10 years American buyers insist on any Mercedes-Benz with a tailpipe, they will pay more for a product whose technology is a decade old.” Thus Dan Neil, for many years the WSJ’s resident petrolhead and before that a writer on cars for the LA Times. Neil is not just calling time on internal combustion engines on simple financial grounds (they are of course more than a century old; we think he’s talking about their latest and last iteration) – he’s becoming downright enthusiastic ($) about the electric drivetrains that are so rapidly replacing them. He’s in Munich for a German car show utterly dominated by electric vehicles, with petrol-powered dinosaurs “relegated to the shadows”. What’s interesting about his report is his forecast that EVs will beat ICEs soon on cost grounds, never mind performance, and his inability to disguise the fun he’s having saying goodbye to the bad old days: “The future ain’t so bad after all.”

Thanks for reading, and do share this around.

Giles Whittell

Xavier Greenwood

Nimo Omer

Produced by Sophia Sun and edited by Xavier Greenwood. 

Photographs Andrew Parsons / No 10 Downing Street, Getty Images