Lib Dem call to tax rich more may be a poor pitch to its base

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Good morning. In a private meeting of Liberal Democrat MPs at their conference, party leader Ed Davey told parliamentarians they needed to make their voters feel they had gained something by backing Lib Dem.

At a local level, that means working hard and being better constituency MPs than the MPs whom they have replaced. This partly explains why the leadership is trying to impress upon the new intake the importance of establishing themselves in their patch before worrying too much about building a reputation in Westminster. So I wouldn’t expect too many sweeping changes when the party announces its new front bench.

But at a national level it means the Westminster party is able to point to things that it has done and achieved. Part of why Ed Davey included being “the responsible opposition” to the Labour government in his speech is that he sincerely believes it. But another element is that he thinks demonstrating that Lib Dems provide a better class of opposition will make voters feel good about having elected a Lib Dem MP.

To that end, he has laid down two markers ahead of Rachel Reeves’s first Budget on October 30. The first I think is politically smart and right in policy terms. The second, not so much. Some thoughts on both of those below.

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Yellowing edges

Ed Davey has called on Labour to “winterproof” the NHS and to invest more in turning the service around in its first Budget: something he made the centre of his speech but also his pre-conference interview with the Observer.

A good political trick is to call for something that is definitely going to happen, and one Budget announcement that you can be certain of is that the NHS will get more money. Strategy chief Morgan McSweeney’s presentations to the cabinet have made it clear that improving the health service is the biggest thing that voters expect from Labour. The NHS was also one of the top issues that the Liberal Democrats campaigned on.

So that’s the smart thing that Davey did. But what seems altogether less wise to me is his suggestion for how Labour should finance that extra spending. George Parker and Anna Gross have the details:

Ed Davey has said he will press Rachel Reeves to use her Budget next month to raise taxes on banks, entrepreneurs and the wealthy to fund a transformation of Britain’s health and social care systems.

Thanks to a series of increases in the threshold at which people in the UK pay income tax — one of the few negative contributions the Lib Dems made to the 2010 to 2015 coalition government in my view — the UK tax burden is now more “progressive” (the highest earners pay more) than it was 14 years ago. But this has come at the cost of a smaller tax base and less money for public services. While the tax burden is higher as a proportion of GDP than it was in 2010, the average taxpayer pays less, but they also get less. Nor can it be said that it was good politics for the Lib Dems: the loss of tax revenue from the policy led to cuts to public spending they didn’t like and they didn’t get any political credit for the policy, either.

In autumn 2022, Jeremy Hunt further increased the amount of tax paid by the UK’s highest earners by dropping the additional rate threshold to £125,140 from £150,000.

But the problem with taxing “the few” is right there in the title — there aren’t very many of them! There are limits on what you can raise to spend on public services if you are getting all of your tax increases from the highest earners, whether you are doing it through income tax, carried interest, levies on the banks, or entrepreneurs. (There are also, I think, hard trade-offs for your hopes for economic growth and investment if you take that approach.) Indeed, as Vince Cable said in his final speech to the Lib Dem conference back in 2019:

Labour is kidding us their promises will be paid for by someone else. The few, not the many, will pay. The Tories, too, now believe in the magic money tree: more spending, less tax. Liberal Democrats are clear: the richer few should pay more but the many will also have to pay something extra.

In many ways, the only thing that has changed when it comes to tax and spend since he delivered that line is the Lib Dems are now also saying that the few, not the many, will pay.

Now, of course, I could be completely wrong and there could be much more that Reeves is able to raise painlessly — both economically, and, for Labour, politically — from the wealthy at the Budget. I’m very often wrong! But I really doubt that she is going to be able to do it in ways that are economically pain-free and don’t have a political impact on both Labour and Lib Dem constituencies! The Lib Dems hold — and at the next election will be targeting — seats in some of the wealthiest parts of the country.

The big risk that Davey is taking is that, just as he will be able to say that Reeves has listened to him when she increases spending on the NHS, the Conservatives will be able to say that Reeves has listened to him when she increases taxes on people in the former Tory strongholds that the Lib Dems seized in July.

Now try this

This week, I mostly listened to Kate Bush’s terrific record Hounds of Love while writing my column. It’s a perfect album, and I very much enjoyed the FT’s Life of a Song on “Running Up That Hill”, though the track I keep coming back to at the moment is “Hello Earth”.