This election is about delivering a major policy overhaul, which will profoundly change the lives of millions of UK residents and citizens for years to come. No, I am not talking about Brexit, but about the rebuilding of social infrastructure through a boost in public spending. All major political parties have promised to raise government expenditure in some form, from targeted pledges for the NHS and social care promised by the Conservative Party and investment in teachers and free childcare proposed by the Liberal Democrats, to nationalising of entire industries put forward by Labour.

Labour’s economic reform

Out of these political parties, Labour has promised some of the most far-reaching changes in economic policy. Think-tank The Resolution Foundation estimates that under Labour’s public spending plans, over 4% of output produced in the UK (measured by the Gross Domestic Product, or GDP) would be invested in the public sector. This is one percentage point more than the estimated levels of public investment under the Conservative proposals. While these projections are still below the highest observed levels of public investment in the mid-1960s, they are substantially larger than the trends recorded since the early-2010s.

Labour’s economic proposals would effectively double the levels of public spending observed today. Hence, it is not surprising that the party’s manifesto has come under close scrutiny from experts and the media – and the verdict is mixed. Analysis of the think-tank The Institute for Fiscal Studies (IFS) states that “Labour would not be able to deliver investment spending increases on the scale they promise”. Many media and business pundits hail Labour’s spending plans as “unaffordable”, “reckless” and “impossible”.

Conversely, in a widely shared letter to the Financial Times, 163 economists, including myself, expressed support for Labour’s manifesto. We argue that Labour’s policies mark a much-needed shift in the economic priorities of the country, tilting the balance of power towards workers and other members of society who have been at a disadvantage under the policies of the past few decades. As experts in this field, we see Labour’s spending plans as the most effective and sustainable way of reducing inequality and promoting economic and social prosperity. As one of the signatories, I believe that Labour’s proposals are the most economically sound towards such reform.

Towards a green new future

Given the conflicting outlook on the Labour Party’s manifesto, what exactly are Labour’s plans for the UK economy and how viable are they?

Labour’s economic plans echo the large-scale plan of government investment in public services and infrastructure which was implemented by the US president Franklin D Roosevelt to revive the economy after the Great Depression.

Labour’s Green New Deal would involve raising the minimum wage to £10 per hour and creating a million jobs across the UK in a way that does not exacerbate climate change. Labour also plans to deliver free broadband to all households and bring into public ownership several industries providing vital services to the society, including energy, water, rail and mail. In addition, Labour wants to develop a National Education Service to provide equal and free access to education – with a particular focus on a progressive curriculum – and to expand funding for the National Health Service, as well as deliver free personal care for the elderly.

These plans are ambitious and go against the economic policy trends of the past four decades. Since the late-1970s, the government has actively reduced its role in the economy, believing that competition among private, profit-oriented firms leads to a better and more cost-effective production and allocation of economic resources. It implemented market-oriented policies according to which many areas of economic activity have been deregulated, while policies supporting wages (such as trade unions laws) have been restricted. After the Great Recession in 2007, the government has also pursued a budget surplus through reducing public spending in hope that such austerity policies would keep public finances in check and help restore economic growth.

Evidence suggests that the deregulation and privatisation policies have been costlier than government provision, and made the economy more unstable, contributing to climate change. Austerity has not boosted the economy as GDP growth has been slow, and the policy has made inequality worse. The broken social infrastructure is a result of ideologically – rather than evidence-driven – economic policies, which were initiated by the Thatcher government and have continued under subsequent governments, both New Labour and the Conservatives. Mainstream economics is also responsible, presenting misleading research as “objective” evidence for what are deeply ideological policy decisions. For instance, reductions in public spending that underpin austerity have been partly motivated by the infamous paper by two Harvard economists, Carmen Reinhart and Kenneth Rogoff, who manipulated data to argue for a maximum permissible threshold for government debt.

The policies of the status quo have proven to be ineffective in delivering economic prosperity and detrimental to social justice and the natural environment. Hence, both populist politicians, promising a return to the “good old days”, and centrists, who claim that free market solutions are the panacea for the current social and economic ills, are adding insult to injury. Social tensions, so evident in the Brexit debate, highlight the need for a true reform of the UK’s policy priorities.

Public spending plans

The large-scale investment in public services proposed by Labour is radical enough to break away from the ineffective market-oriented policies of the past four decades, re-thinking the way in which economic resources are produced and allocated among people. It is backed by a long standing body of evidence produced by economists outside of the profession’s mainstream, which shows that higher government spending raises economic output by more than the amount of the initial investment and reduces income and wealth disparities in society across space and over time, improving the material situation of women and people of colour. Government regulation is also indispensable in reigning in the negative effects of climate change. According to this evidence, Labour’s spending plans are by no means “impossible”.

Neither are Labour’s proposals “unaffordable” or “reckless”. Economist Laurie Macfarlane gives an insightful analysis of the misleading nature of cost estimates which headline critical evaluations of Labour’s policy proposals. Economic evidence is never objective because economics is a social, rather than natural, science. The decision on what to analyse, how, and based on what data, is a subjective choice on the part of the given economist. This is crucial because analyses by experts are often presented as objective and unbiased in the media. But in fact, all estimates have a substantial margin of error embedded in them because they cannot measure directly all potential benefits that a progressive policy, such as a public spending increase, may have in the long term. For instance, MacFarlane notes that the existing estimates of the costs of implementing a four-day working week in the UK ignore the potential benefits to the quality of work which may arise if fewer working hours improve employees’ physical and mental health.

Progressive tax reforms

Labour’s radical public spending plans are backed by equally radical proposals for a progressive tax reform. Current tax structure in the UK is one of the most generous in the world when it comes to high earners. A marginal tax rate on personal income means that tax is only paid on income above a certain threshold – those earning more pay a higher amount in taxes on incomes above the tax-free personal allowance. However, other forms of taxes do not take into account the taxpayer’s income level. For example, the size of the national insurance contributions (NI) and the value-added tax (VAT) are the same for all employees and consumers respectively. These types of taxes have been increasing systematically, which, together with rising costs of living and sluggish income growth for the majority of the population, has put a great burden on finances of low- and middle-income people.

A progressive tax structure like the one proposed by Labour could reverse this trend. In addition to higher taxes on corporate profits, Labour proposes to increase marginal tax rates on the richest earners while freezing NI contributions and tax rates on lower incomes. This means that those earning up to £80,000 a year would not pay any more in taxes than they do now, and could even see their tax burden reduce if public services become more affordable and wages increase. At the same time, someone earning £100,000 a year would pay just £19 more a week (or £83 a month) in personal taxes.

It’s no secret that raising taxes on corporations and the highest earners is not easy, because their profits and savings can easily be moved to lower-tax jurisdictions elsewhere in the world. There is a limit on how much individual countries can mitigate tax avoidance, but several ideas have been put forward by economists on how to effectively design taxes at the national level. Arguments against raising taxes come from the same ideological conviction as arguments against increasing public spending, namely, that the government’s involvement is bound to “distort” the “efficient” free market outcomes. But there is no clear-cut evidence that higher taxes reduce economic growth, and it has been shown that raising taxes may actually boost economic performance.

A transformative government

In sum, Labour’s economic proposals are viable and necessary to reduce some of the social and economic tensions experienced in the UK. The proposals are backed by ample economic evidence and represent a true step towards a fairer and more sustainable economy. In fact, many of Labour’s proposals have already been successfully implemented in other countries. For example, free broadband is provided to almost all households in South Korea, while the marginal tax rate on highest earners is nearly 60% in Sweden. Together with its plans for a taxation reform, Labour’s economic policies are a change that the UK society can afford – and deserves.

Photo Credit: Jeremy Corbyn via Flickr