Labour could not be more wrong to accept the general approach of 'cuts and realism'. But what alternative approach could be adopted this side of a revolutionary replacement of capitalism altogether? This article sets out the case for a transformational budget and suggests some of the elements it would include. We hope to develop the debate on what the UK’s economic government could be.
First, it is worth noting that George Osborne was quite wrong, as all intelligent economists predicted, in proposing in his emergency budget of June 2010 that he could cut back on the public finances and achieve growth thanks to private expansion. Today, as growth flatlines the government’s “expansionary fiscal contraction” is proving much better at contracting the economy than expanding it; Osborne will need to borrow an additional £158bn to fill the hole he himself has created, and it is believed the economy has already slid back into recession. That hole will only grow. What worked in Canada, riding the wave of a US boom, was always going to struggle in the UK context where our primary export market, the EU, was and is disintegrating. Toby Young’s argument that it may “have worked in a more favourable economic climate” rather misses the point: we didn’t have a more favourable climate and that was clear at the time. Now, by introducing subsidised loans for small firms and reallocating funds to public works, even the Chancellor himself has acknowledged the failure of Conservative austerity. The question is, what would a better government do?
In 1996, the last year before the Conservatives left office, national debt as a percentage of GDP was 41.2%. It fell as low as 30 % by 2002 before rising. In 2007, the last year before the financial crisis began in earnest, the Labour government oversaw an equivalent figure of 35.7%. Having successfully clung onto the line that public sector overspending is the root of our problems, its worth noting that, prior to meltdown, Labour had kept debt far lower than Major’s government. On the make-up of the debt, roughly 70% is UK owned; we are impoverishing the country and losing a generation largely over money we owe ourselves. Combined with Britain’s control of its own currency, and its issuance, and the longer maturity of our debt, comparisons with the likes of Greece are highly misleading. France and Germany’s average debt maturity is six or seven years, under eight for Greece, yet the UK’s averages fourteen years, making Britain far less vulnerable to market pressure.
There is a problem however in three areas: individual debt, bank debts and the deficit (for a quick reminder on knowing your debts from your deficits, see Tony Curzon Price’s explanation). Here the deficit poses a problem. A large amount of tax revenues under Labour came from the City and financial services – around £40bn in 2007/2008. These revenues collapsed while unemployment spending ballooned. The result was that while the UK’s deficit in 2007 was 5.7% of GDP, by 2010-2011 it was 11.7% of GDP, adding £143bn to the overall debt of now £1tn (excluding financial interventions), with annual interest payments alone costing over £40billion.
This is why it is wrong to say “No cuts” without saying what you would do. Because to retain the current rates of government expenditure that goes to on pay public sector workers including the military, welfare, education and the NHS, as well as paying the interest on the debt, all this costs significantly more than current income from taxes. The gap has to be covered by borrowing. No one is going to continue lending to cover an increasing proportion of a debtors’ ongoing expenditure.
Or perhaps I should say no one else. Because the present government has been printing money to buy its own debt. The point was made back in November by David Miliband when he attacked Chancellor Osborne:
…the biggest buyer of gilts in recent years has been not the international markets but the Bank of England. I will not dwell on the fact that the Chancellor denounced quantitative easing when he was shadow Chancellor, but he surely knows that for this financial year the Bank of England will have bought no less than 42% of gilt issuance. The Bank now owns more than 30% of the total gilt stock, compared with zero in 2008, while the proportion of international market ownership has barely changed. Interest rates are low in this country because of Bank purchasing policy, not because of Government fiscal policy.
Of course, this chicken too will have to come home to roost. The economic outlook is exceptionally bleak, without question. A severe crisis may be on the way, not least thanks to Coalition policies. But the fact that even this government wants to go ahead with a £32 billion high-speed rail project illustrates the fact that the UK remains one of the top ten richest countries in the world with great historic resources, however much these may have been abused and looted. Britain is not quite staring down the barrel. With imagination and political will plenty can be done.
The starting point is the need to address the right problems. Even were the economy to recover to full capacity, the degree of structural deficit – still unknown with any certainty – would dictate some semi-permanent reconfiguring of tax and expenditure. But we don’t have to return to the same structures that got us into the mess. All three main parties remain committed to restoring the old model with its costly levels of inequality, environmental unsustainability and lack of fairness in rewards and contributions.
Another critical problem, and one central to the current crisis, is the declining wage power of labour as more and more wealth is extracted by shareholders and senior management. Contrary to the ideologically motivated - and ineffective - supply-side tinkering of Westminster, Britain has a crisis of demand, not supply. Rather than returning to the old structure, we need to reconfigure our political economy in ways that are not just fairer, more sustainable and more equal, but ways that simultaneously deliver some real economic progress for the poor and less well-off. It’s an opportunity that should not be lost.
Drawing on suggestions from the OurKingdom network and beyond, to which you are welcome to critique and to add, these are some of the areas I’d make a start on. The aim is not to insist on any one suggestion too closely but to demonstrate that our political class is misleading the country. As a group, Britain’s politicians, media and public experts are telling us that there is no alternative to cuts and austerity. They are wrong.
QE – how to spend £265bn
There may be no money left for the disabled, but for the banks a sum of £275bn has been created via the Bank of England’s quantitative easing rounds, a sum expected to rise to £375bn by the end of 2012. Little to nothing has been done with it, save shoring up bank balance sheets. In the US, a QE injection of 110% of base money saw a meagre return of just 20% additional M1; the money is not being loaned, or “multiplied”, out (Keen, 2011, quoted in Monbiot). It’s worth considering what else could have been done with £275bn of fresh money. For instance:
- Substantial capital could have been supplied for a Green New Deal programme orchestrated either through central government or preferably by the creation of state-owned regional investment banks, delivering long term sustainability, jobs, manufacturing growth, regional rebalancing and return on investment, all of which the nation desperately needs. NEF’s 2009 report “forecasts that in the period to 2050 the cumulative cost associated with climate change will range from £1.6 and £2.6 trillion, while the cost of addressing social problems related to inequality will reach £4.5 trillion”. It’s the status quo that is unaffordable.
The role of state-owned investment banks is necessitated by the failure of private banking to deliver solid investment: from ’96 to 2008, throughout the boom, bank lending to productive business had declined from 30 to just 10 percent of bank business lending. They preferred instead the easy wins of lending to other financial firms and property developers inflating the asset bubble (After the Great Complacence, 2011, p.210). Lending must be harnessed for common and sustainable purposes.
- Alternatively, money could be given direct to all working adults, as Wadhwani advocates in the form of £300 per adult would still represent only 20% of just the latest round of QE at £15bn. If concerns persist over money pushed into savings rather than the economy, time limited spending vouchers are a straightforward remedy. Stuart Weir at OurKingdom has suggested limiting distribution, via child benefit, to families, many of whom are bearing the brunt of Coalition cuts and being sucked under the poverty line. The only drawback with direct cash injections is the potentially short lived gains of consumption boosts versus investment.
- Buy Britain its trains back: popular, credible, sensible, money saving and desperately overdue. Research published last year by the Transport for Quality of Life think-tank suggests renationalisation could save the public £1.2bn a year, while £300m could be saved just by taking the train operators back under public control. If British rail users paid the same as those in France, where rail is still nationalised, it is estimated they would save £4.6bn in fares – money that would largely be ploughed into the wider economy. Privatisation has delivered the highest fares in the world for the most crowded trains in Europe. Piling on the shame, it was revealed last month that British commuters pay up to ten times the fares of their European counterparts, while government subsidies have tripled since privatisation.
In all likelihood, renationalisation would vastly decrease the level of state subsidy (reducing the deficit), and see fares plummet closer to European levels; labour mobility increases, state expenditure falls, trains become affordable to all, and vast sums of money are transferred from train operating firms to the public to spend in the wider economy. For everyone but the current cartel operators, it’s a win on every front. The pillaging has to end, it’s a blight on national decency and economically indefensible.
- Another proposal, mentioned by Tony Curzon Price, is debt forgiveness up to, say, £30k per household to pay down mortgages and credit cards, driving down debt levels and freeing up enormous spending power. The numbers may need some tweaking but at root it’s got real potential. Banks are desperately deleveraging; the scheme would transform their balance sheets albeit at the expense of some long term profit. Freed from the enormous costs of servicing and paying down that level of debt, public consumption would boom while poverty declined. As Aditya Chakrabortty writes on the idea of a debt jubilee, “the longer we keep protecting the haves over the have-nots and honouring the past while destroying the future, the worse this debt crisis will get”.
Taxation – take it from where it can be afforded
- Reduce the 50% threshold on income tax to £115,000 on a provisional basis at least, perhaps 2 years. Alternatively reduce the top rate from 50% to 46-48% and lower the threshold further to £85,000-£100,000. We may, for psychological reasons largely, recoup more money at rates just below 50% than we are currently. Those who can contribute more should do so, not least because a large amount of higher earnings are saved rather than spent. The higher propensity to consume amongst the lower income levels is absolutely critical. To borrow a well-worn metaphor, we can actually make the national cake bigger by cutting it more fairly. Joseph Stiglitz, on the dual benefits of this approach, argues that “more progressive taxation, in effect redistributing income from the top to the middle and bottom, would simultaneously reduce inequality and increase employment by boosting total demand”.
- Remove higher rate pension relief – unwarranted and costly subsidy to the already wealthy. At times like this it simply isn’t tenable. The FT reports that the move would save the Treasury an estimated £7bn.
- Removal, or substantial increase, of upper earnings limit on NI contributions, currently at £42,475. Again, there is so much wealth at the top end that needs trimming, not as a punitive measure from the “politics of envy” but because the nation needs the money and, where we can, it should be taken from its least productive realm – the upper echelons.
- Reinstate the 2.5% VAT tax cut for a provisional 18 months; VAT hits the poor hard and its reduction would be a welcome boost to spending in the short term.
- Abolish the exemption from Capital Gains Tax (CGT) on primary homes to recoup some of the unearned windfalls made under Labour’s housing boom; taxes levied can be directly invested in social housing and schemes to assist first time buyers. Removing the Principal Private Residence exemption would save an estimated £120m a year.
- Bring CGT in line with income tax – there is no earthly reason why inanimate capital should be taxed at a lower rate than labour earnings. The current higher rate of 28% should be raised to mirror income tax brackets, despite the inevitable howls from City asset strippers.
- On Newsnight, Ken Loach suggested a one off tax on wealth, to the astonishment of Michael Heseltine who described it as “communism”. A lot of any such levee would fall on high-value properties, geographically weighted. The point is that owners would retain most of the astonishing gains made, largely unearned, under Labour’s house price boom; those earnings, albeit often unrealised, remain completely untaxed. The idea goes back to Greg Philo’s one off ‘wealth tax’ which was supported by 74% of those polled. His idea is simple: the richest 10% own £4,000bn in wealth. A one off tax of 20% would reap £800bn. At the time this would have eliminated all of the UK’s debt and interest payments at a stroke. Of course, a tax at this level would reduce the value of property as well as being hard to extract as property owners would have to borrow to pay it. But even a one-off 5% wealth tax to be paid over two or three years would significantly reduce the public debt and associated interest payments.
- A strong general anti-avoidance bill is essential to clawing back some of the estimated £25bn a year lost to tax avoidance. The Lib Dems have moved first on this but getting Conservative agreement will be a challenge. Ed Miliband has now stepped in to the debate, pushing for crown-dependencies like Guernsey and the Isle of Man to reveal details of British citizens with money tucked away in their jurisdictions. An estimated £2.4bn would be raised by the move but it could plausibly be much more.
- For many of the above, if less bold means are needed, a proportion of index linked ‘tax bonds’ could be allocated: like tax credits, in reverse, to be cashed in when the economy is back on its feet. Taking some of the sting out of targeted tax rises, they would allow those contributing most in dire times to receive some level of monetary reward in future through tax relief accrued.
Central government – end corporate handouts for inefficient idleness
- PFI – a blanket ban on all new projects, for starters. All existing deals to be renegotiated, the £1.5bn savings announced by the Treasury last year do not come close to making up for the inflated costs PFI has burdened the nation with, costs we can no longer afford. On top of the sheer costs of the scheme, its workings and contracts have to a large extent been hidden behind "commercial confidentiality" clauses (as I detailed in a 2010 report). Refinancing gains – money for nothing – should be split 80-85% in the public’s favour rather than the current 50%. Wherever possible PFI deals should be fully bought out. As even parliament itself concedes, PFI is a disastrous waste of money; what we spend upfront to buy out the deals would be handsomely rewarded in the long run with savings in the billions. Like private rail, PFI is a classic sham of crony capitalism whose time has come.
- Consultants – maximum departmental limits on consultancy expenditure should be introduced as well as making any contracts, including fees, available to the public to address the dismal state of transparency and accountability, not to mention propriety. Much consultancy spending has led to some of the most breathtaking debacles in the history of public life, such as the National Programme for IT - multi-billion pound disasters. What’s worse, consultants are increasingly plugging the gaps caused by cuts to public sector head count but at hugely inflated rates of pay. In the last two years alone, for instance, just one department, the MoD, spent £600m on consultants. Anyone acquainted with the MoD’s litany of failures must wonder what exactly this money is buying.
- NHS – the Conservatives privatisation of health will almost certainly see costs explode in the coming years as more and more money is sucked into the profit machine; the low-cost NHS is being remodelled on the exorbitantly expensive US system. Nearly three quarters of GPs now want the “GP led” bill withdrawn. If Labour can acknowledge their culpability in this madness and turn the page, a concrete pledge to reverse this destructive bill – with minimal compensation to the firms involved - would be an all but guaranteed money saver in the years to come.
Corporations – public interest must come first
- Tony Curzon Price has suggested changes to the law on limited liability to ensure the privileges it affords can be revoked if a firm is found negligent, fraudulent or guilty of evading tax. Others, such as Murphy and Prem Sikka, have called for public access to corporate tax returns in exchange for any limited liability privileges. Both of which would be positive moves; the public need some return on the benefits limited liability affords.
- A simple to read “traffic light” system for firm’s tax dealings to enable consumers to see what type of company they are dealing with at the point of purchase; knowledge is, after all, key to the efficiency of free markets, so lets improve it. Richard Murphy’s response to the idea is worth reading.
- Remuneration – though a direct shareholder veto on executive remuneration is welcome, its impact will be limited due to the structures of share ownership – substantially owned abroad (41.5%) and by various financial institutions - meaning interest in high pay will be minimal. Far better, on top of worker representation on remuneration committees, to give the workforce a share in the vote on executive pay, say 50%. Employee and employer interests need to be much more closely aligned.
- Introduce new tax incentives/penalties for firms meeting/missing ‘fair pay’ criteria, to be measured on income distribution within firm, ratio of highest salary to national median income and split of profits between shareholders and workforce. The stagnation of labour power as more and more wealth is consumed by shareholders and senior management has contributed to excessive consumer debt and weak domestic demand (burdened with both stagnating real wages and increasing interest payments), not to mention the social ills inequality can inflict (see The Spirit Level).
Increase labour earnings and state subsidies for low wages – such as tax credits – decline, shrinking the deficit. Flatter wealth distributions within firms will boost demand and employment, reduce inequality (and its costs), reduce the deficit and give a fairer, more cohesive society. Pay structures must be tackled with more than empty rhetoric and the government should make a serious commitment to remodelling UK business along co-operative lines.
- In conjunction with the debt forgiveness suggested by Curzon Price above, a substantial increase in bank reserve ratios might be achievable, up to, say, 50%. Post-2008, regulation must now also be extended to the shadow-banking sector. As argued in After the Great Complacence, if it quacks like a bank, regulate it like a bank. One of the prime causes of the financial implosion was the ability, via the shadow banking system, to avoid systemic safeguards leading to “a run on the shadow banking system”.
- Tobin tax – hugely popular, not just in the UK but globally, even at low rates it would bring in substantial funds from the treasury as well as cooling money flows. The UK remains the financial centre of the world, putting it in prime place to lead and exert pressure on others to follow; reformers and taxpayers around the world would be hugely bolstered by the move. If the UK leads it helps others to follow.
- Bonuses should be taxed heavily, at 50% or above – though the figures may have changed, in late 2010 the Bank of England found the banks in receipt of around £100bn of taxpayer support a year; they’re not in a great position to jump ship as they repeatedly threaten to do. City earning’s relation to performance is curious at best: whether bringing in millions in profits or multi-billion pound losses, remuneration seems to hover at the level of feudal princes. It’s a classic market failure.
- There should be much less fear in taking on finance, the City doesn’t contribute nearly as much as its supporters claim (though it is very generous in its political donations). In fact, even taking finance as a whole rather than just the City, in 2007-2008, finance contributed around £40bn in taxes, or 7.2% of government receipts. Manufacturing, by contrast, paid over £63bn in taxes, 11.6% of government receipts (After the Great Complacence, 2011, p.148). With the bailout taking into account, our 5 major banks are in fact a net drain on our finances. For the years 2001-2009, the cumulative state gains of £54bn were completely overshadowed by subsidies and costs of £105bn just in two years, 2008 and 2009; a net contribution of roughly -£50bn. Banking enjoys privileges on a scale unknown to any other industry and its high time they paid for them or had them removed.
The Westminster context
Lying at the heart of a transformative budget must be the principles of sustainability, growth and redistribution. Workers need to reclaim their slice of the pie: as a proportion of GDP, wages fell from 64.5 percent in the 70s to 53.2 percent in 2008. Boosting earning power is essential to any economic recovery, taking the burden of subsidy from the state, lowering the deficit, lowering inequality and its costs and improving employment levels and quality of life. Flatter pay ratios and a co-operative led ethos would transform the nation’s social and economic problems and some serious thought must be given to how the state can lead and direct this change; it lacks neither sticks nor carrots and it’s time they were used.
Clegg’s call for a “John Lewis economy” needs to go much further and push for mandatory levels of employee ownership and entitlement (if relevant criteria met) or reframe the tax structure to give co-ops a substantial helping hand in recognition of their wider social and economic contribution. In the long run, flatter wage distributions may well allow taxes to fall across the board as redistribution shifts to the pre-tax stage.
Labour’s announcement that they will be mirroring Coalition plans is particularly depressing and unimaginative.
“It's a hard choice, but when you are faced with the choice between protecting jobs or saying the money should go into pay rises I think it's right to protect jobs.”
Miliband’s endorsement of Balls’ position is correct in strict isolation but again rests on an unquestioned endorsement of our political economy as it stands, a decaying edifice crumbling by the day. Len McCluskey’s claim that we are left with something like “national government” is quite correct, but it has been so for long before Miliband’s U turn. Bar minor squabbling, the one-party state arrived with Blair and was consummated by Clegg. Westminster was united in delivering the deregulated take-what-you-can model, including Cameron’s backing of Labour spending levels until 2006 and cross-bench support for mass privatisation and PFI (a Tory invention). As for keeping the City in check, the Tories proposed the complete deregulation of mortgages before the crisis broke, a crisis ignited by… badly regulated mortgages. Westminster has now united again on who should clear up the mess: low to middle earners, the disabled, sick and the unemployed.
It is Maurice Glasman and Neal Lawson who are on the money this time: Labour messed up on a grand scale and it is no good Miliband pleading otherwise. Labour did overspend, it’s a fact by any sensible economic measure, but it was not the root of either the crisis or our current predicament. You lose credibility to make the latter point without acknowledging the former. Running deficits from 2002/2003 to 2007/2008, when the crisis began to break, total deficit for the period was around £71bn. In the current climate, that’s not that much. But how much should they have built up in surplus in those years? If they ran surpluses even of equal size to their deficits, total debt from Labour overspending would still only equal roughly £140bn. It’s hardly peanuts, but nor does it compare to our actual debt of nearly one trillion pounds, or the additional debt accrued from rescuing the banks: £1.3tn (much of which, in theory, we may get back).
“Endogenous growth, flexible labour-market reform, free movement of labour, the dominance of the City of London - it was all crap, and we need to say so.”
Glasman is bang on. New Labour’s assault on labour power was one of its chief crimes (in a competitive field), an assault obscured by the intellectual mess that found ‘progressives’ and the CBI united in defence of a globalised ‘McJob’ labour market. Rather than driving down wages and conditions labour must be much better protected if state assistance, and therefore the deficit, is to be reduced. There are some tough choices to be made here. In Lawson’s words,
“As Labour praised the city, deregulated labour markets, piled up personal debt and hoped that house prices would go on rising for ever after claiming to have ended boom and bust, it lost the people.”
Attacking “crony capitalism” from a New Labour angle is like the Vatican criticising Catholicism; even now the Blairites’ golden boy is busy tucking away his millions in painfully opaque accounting structures. They’re yesterday’s men. Miliband needs a credible model for fundamental restructuring of the British economy rather than quibbling over tax and spend within the failed paradigm we have now. Put the brakes on cuts to maintain demand, abandon QE to banks and use it instead to inject some short term consumption and long term investment, raise the tax contribution of those who can afford it – top earners, begin the direct encouragement of flatter pay structures and co-ops through the tax system, aggressively target tax avoidance, and then, when the economy is breathing again, reassess our situation.
The sad fact is reform has been driven neither by the government nor the Opposition but by civil society and the situation shows no sign of changing. Vested interests have dominated the post-2008 discourse and the result, as we are now seeing played out, is a double-dip recession and collapsing living standards. The next thing to occupy is Credibility; a return to a system that is delivering the worst economic collapse in nearly a century is not credible, and that’s the battle that needs to be won.
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