In Place of Cuts: Tax reform to build a fairer society

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Inexplicably Britain has moved from a credit crunch and an economic recession caused in large part by the excesses of bankers to a public expenditure and public services crisis. Those at the top have been bailed out by the public, while those at the bottom will have pay and benefits frozen and services cut. We simply cannot allow this to happen.

Across the three main parties there is a Dutch auction about spending cuts. The Tories and Liberal Democrats are the worst but Labour is not sufficiently differentiating itself. This report directly challenges this sort of Micawberesque economics which bizarrely and quickly has become the new orthodoxy. In this report we show not merely that cuts in spending in the midst of a recession is a bad idea, but also that any ‘hole’ can more sensibly be financed through tax reform which makes the current system fairer.

Britain urgently needs tax reform. Overall tax incidence in Britain is currently regressive: taxes fall more heavily on the very poor than on the very rich, so contributing to growing income inequality. Regressive taxation – together with relatively low social benefits – places Britain close to the bottom of the EU league table in terms of fairness.

Tax reform is also needed to finance public spending. As many commentators have noted, Britain cannot have high level Nordic-style public services with low level US rates of taxation. Yes, bailing out the banks has added billions to the public borrowing requirement (PBR), doubling our indebtedness. But priority must be given to modernising public services and to major investment in a newer and greener economic and social infrastructure. Far from ‘crowding out’ privatesector growth, such investment is an essential prerequisite for sustainable future growth.

Cutting public expenditure by 8% of GDP (by £120 billion over the period 2011–2014) as advocated by some politicians would be a disaster. Far from restoring prosperity, such a move would condemn Britain to a ‘lost decade’ much like Japan in the 1990s. Private investment demand depends on aggregate demand – including both public investment and public consumption – rather than simply the rate of interest, and balancing the budget would shrink aggregate demand.

Increased investment for sustainable growth – ‘green Keynesianism’ under current conditions – requires progressive tax reform for another important reason. Many green taxes are indirect (for example, those on fuel or on congestion) and thus regressive. Gaining public support for the introduction of green taxes means making direct taxation more progressive. If only to offset this effect, tax reform is an essential component of a green new deal.

Finally, we show how tax reform could finance Britain’s structural deficit in the medium term, by which is meant between now and 2014, assuming the UK emerges from recession in the coming year.

The quantified reforms proposed in this report more than cover the estimate by the Institute for Fiscal Studies (IFS) of an annual structural budget gap of £39 billion per annum for 2011–2014, or about 3% of current GDP.2 The IFS says that only by radical cuts to public spending, tax rises or some combination of the two can the ‘structural’ deficit be resolved.

We oppose spending cuts of the sort announced by the Chancellor in April 2009 for the period 2011–14, cuts likely to be extended in his upcoming pre-budget statement in autumn 2009. Moreover, we think that tax reform would alleviate the need for further cuts recommended to plug the £45 billion gap forecast by IFS for the period 2014–18.

Our recommendations would raise additional revenue equivalent to roughly £47 billion (all figures are annual) over the next four years (Table 1). This is enough both to reduce the government deficit (although we strongly oppose ‘balancing the budget’) and, more importantly, to finance a major green investment programme. Crucially, the cumulative impact of these reforms helps the bottom 90% of income earners as only those who can afford it, the top 10%, are asked to contribute more.

There are nine key measures for 2011–14:

1 Introduce a 50% Income Tax band for gross incomes above £100,000. This raises £4.7 billion compared with the current (2009/10) tax system, or an extra £2.3 billion compared with introducing this band at £150,000 as proposed by the Chancellor.

2 Uncap National Insurance Contributions (NICs) such that they are paid at 11% all the way up the income scale (although pensioners would continue to be exempt); make NICs payable on investment income. This results in further revenue of £9.1 billion.

3 In addition to (1) above, introduce minimum tax rates of 40% and 50% on incomes of above £100,000 and £150,000 respectively; these raise an additional £14.9 billion.

4 Introduce a special lower tax band of 10% below the poverty line (below £13,500 per annum), while restoring the ‘basic rate’ to 22%. This costs £11.5 billion.

5 Increase the tax payable (higher multipliers) for houses in Council Tax bands E through H (while awaiting a thorough overhaul of property valuation and local authority taxation) raising a further £1.7 billion.

6 Minimise personal and corporate tax avoidance by requiring tax havens to disclose information fully and changing the definition of ‘tax residence’; these two reforms are estimated minimally to yield £10 billion.

7 Introduce a Financial Transactions Tax (FTT) at a rate of 0.1%, applicable to all transactions. This would raise a further £4.2 billion.

8 Immediately scrap a number of government spending programmes (including ID cards, Trident, new aircraft carriers, PFI schemes), reforms totalling £15.1 billion.

9 Urge that all current small limited companies be re-registered as limited liability partnerships to simplify their administration and reduce opportunities for tax avoidance……..

for more download at Compass Publications

It is disheartening and short-sighted to abandon this incentive to save

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I came full circle about the child trust fund, swinging behind it as I realised its sheer impact, never mind elegance, a fortnight before they canned it. The CTF cost far less than tax breaks on pensions and Isas, and yet its takeup was far higher (40% of people have a pension scheme; 29% have an Isa; 75% of children have a CTF, half of those have people regularly topping it up).

The number of people saving monthly, long-term, for their children, went up threefold, and the amount they were saving went up by 60% since the trust fund’s introduction. It was, said David White, the CEO of the Children’s Mutual, “the most successful savings initiative there has ever been”.

On the level of social justice, its scrappage is dispiriting. Intuitively, I imagined that the people saving into the funds were in the higher income brackets, and the people failing to take up the accounts were poorer. In fact research by the Children’s Mutual shows this not to be the case (40% of those who don’t take up the fund are in affluent categories).

In low-income households there’s been a sea change – one-third of children whose parents have a combined income of £19,000 (this is substantially below the median) are having £19 put away for their futures each month. Children in that band would have no prospect of a lump sum at 18 without this fund. That would probably count them out of university, certainly if fees go up, as they are bound to.

For those who don’t go to university, and 57% of people don’t, a lump sum as modest as two grand could mean driving lessons, and a skill that catapults them into employability.

For middle-income families meanwhile, a well-managed fund, topped up to its limits, could yield £35,000. This is easily the difference between taking a degree and being discouraged by the size of a student loan.

The Child Poverty Action Group (CPAG), along with other similar organisations, wrote to the three main parties before the election, asking if they were prepared to sign up to a fairness impact study. This was to be a rigorously devised document against which new policies could be tested for their impact on inequality – of income, assets or access to services. Clegg said yes, Cameron and Brown gave positive but non-committal responses.

When the coalition was finalised, this request was made again: and while the CPAG waited for the response, this announcement came yesterday. What a disheartening statement of intent. In terms of changing behaviour – encouraging people to engage with financial products, to see themselves as savers, the success of the CTF was peerless.

So much of the conversation since the financial crash has been about the demise of personal saving, the ready acceptance of personal debt, and how important it is for the financial health of the nation that this is redressed. Now the one initiative that made a demonstrable, relatively inexpensive nudge in the right direction is to be axed. It is putatively in the name of responsible stewardship of the national debt. It is so incredibly short-sighted.

Social democracy or Thatcherism: which is better for the public finances?

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Posted at 12:12 pm on 24 May 10 by Adam Lent

Lovely presentations of data on the UK public finances since the war by The Guardian here.  Scroll down to the table near the bottom and you notice something interesting: the period between 1946 and 1979, when the post-war social democratic consensus reined, saw only five years when the public finances were in deficit.  However, since 1979  there have only been seven years when the public finances weren’t in deficit.

Unlike orthodox neo-classical economists, I prefer empirical evidence and history to theoretical models and I think that counts as a pretty strong data set. It suggests two things:

  • firstly, the Thatcherite consensus has been far worse than the social democratic consensus at generating a sound fiscal position (pretty poor show given this was the Iron Lady’s big schtick in 1979);
  • secondly, that the current European and UK obsession with New Right style austerity cuts will not deliver the long term fiscal stability the politicians claim.

The reason for both is the same – fiscal health is delivered by economic health not vice versa.  The period after the war was characterised by economic stability and growth with only one minor recession. Since Mrs. Thatcher reshaped the UK economy we have suffered three recessions and a series of collapses in the financial sector. There is little chance of sound public finances when they are repeatedly buffeted by the volatility of a free market.  But humanity’s (and economists’) capacity to ignore history is sadly infinite.

Left must call for sanity on spending cuts

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Progressive political forces in Europe need to act in concert to battle the austerity measures threatening economic nightmares

It is undoubtedly right that the Labour party goes through a period of self-analysis and debate before electing its new leader but the timing could not be worse. Just as the British left retreats into months of introspection, a mammoth crisis emerges across Europe which screams out for protest and mobilisation.

The £6.25bn of savings for the UK announced today are potentially damaging enough but when set in a wider context of the cuts-mania gripping the European Union they become positively terrifying. £6.25bn may not look like a vast amount in the context of overall spending but as a recent analysis revealed, cutting that amount will lead to thousands of job losses and damage growth. And this is, of course, just the beginning, with a full comprehensive spending review planned for the autumn.

Alongside cuts to local services, today’s announcement also included cuts in areas specifically designed to help the economy: such as employment programmes for young people and regional development. And there are rumours of cuts to be announced in industrial investment. It is looking as though a big proportion of these measures that Labour put in place to support the economy through uncertain times is facing the chop.

These plans alongside similar announcements being made across Europe put the future of the UK and the continent at risk. This is not just an economic concern, unpalatable political forces could well flourish in the resulting downturn. Angela Merkel may be under enormous political pressure at home but by leading the calls for eye-watering cuts, the German chancellor is at great risk of repeating historical mistakes that damaged the advanced economies incalculably in the 1930s and the developing economies in the 1970s, 1980s and 1990s. The political consequences in both cases were rarely pretty.

The really tragic part is the austerity packages being unveiled across Europe will not work. Cuts in one country are dangerous enough for a national economy close to recession but simultaneous cuts across a continent still reeling from the biggest financial crisis and recession in decades is absurdly risky.

The damage done to European economies and hence to tax revenues and the public finances could be huge. Deficits will widen and the markets will continue to panic. Indeed, for all the Tory talk of how the bond markets want to see deep and urgent cuts, there are clear signs that the markets are equally worried about the impact of austerity packages on the European and global economies.

The senior politician one might have expected to have intervened early in this situation with some good sense, Vince Cable, is clearly not in a position to speak out. It is only the opposition and wider progressive forces, hopefully supported by a wider movement, that can urgently start calling for some sanity. Alistair Darling has made a typically understatedintervention along these lines but something much noisier is required.

Progressive forces must demand that the EU acts closely together to take the necessary action to restimulate and rebalance the whole European economy. Yes, that will mean richer nations, particularly Germany, stumping up the cash and honestly acknowledging that their economic model is as much to blame for the problems afflicting the EU as any other. And if some restructuring of sovereign debt is required, so be it. The alternative route of deep austerity is to risk a leap into a fiscal, economic and political nightmare. The right may be happy to see Europe sleepwalk into this, the left must shake the continent awake.

Guardian 24 May 2010

New warning coalition could split the Lib Dems

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As the new coalition government unveiled its full programme this morning, David Cameron’s old politics tutor and leading constitutional expert Vernon Bogdanorwarned that the Liberal Democrats risked being split and “swallowed up” – as happened during all previous coalitions between the old parties – and that coalition government had “always benefited the Conservatives”.

David-Cameron-Nick-Clegg-front-benchWriting in this week’s New Statesman, Professor Bogdanor sets out the historical context in outlining one possible scenario:

“Coalitions have been of less benefit to the Liberals. In fact, they have always led to, or have been the product of, a party split – for example, with the Liberal Unionists, who split from the Liberals over Home Rule in 1886, and the Liberal Nationals in the 1930s. One wing of the party would subsequently be swallowed up by the Conservatives, while the other wing remained independent.

“In 1932, when one group of Liberals left the National Government over free trade, the Liberal Nationals (later National Liberals) remained, and, under the leadership of Sir John Simon, became even more enthu siastic appeasers of Nazi Germany than the Conservatives.

“A similar split could easily occur today, with the right wing of the Liberal Democrats under David Laws merging with the Conservatives, while the left, under Vince Cable and Simon Hughes, deserts the coalition, perhaps to seek an arrangement with Labour.”

Professor Bogdanor also calls Nick Clegg’s campaign “tactically shrewd” for not stressing which way he would jump in the event of a hung parliament, enabling the Lib Dems to take votes off Labour to ‘keep the Tories out’ and vice versa off Tory voters:

“Nick Clegg was tactically shrewd in not making his preference known; had he done so, the Lib Dems would have secured fewer than the 57 seats they won. But in Oxford West and Abingdon, the seat lost by Dr Evan Harris, leaflets were delivered to electors telling them that voting Liberal Democrat was the only way to keep the Conservatives out, given that Labour, a distant third, had no chance.

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