The Duncan Weldon economics column
In my first post on LabourList I set out some of the economic challenges that will be faced by the next government and noted how the solutions to these economic challenges must be informed as much by political values as economic sense.
The two key challenges will be plugging the budget deficit and rebalancing the economy away from finance, credit and property. The third issue, the large stock of national debt relative to GDP, is not a great concern, despite the high media profile it has attained. If the budget is once more balanced and the economy growing again, the level of debt to GDP (not especially high by international standards anyway) will fall.
There are several economically possible ways to meet these challenges, some more sensible than others. The Tories are of course correct that massive cuts in public expenditure (and these would have to be more than the axing of a few programmes and some ephemeral ‘cost savings’) are one way to rebalance the budget. This is where the politics comes in. I sill believe in the State. I believe it has the power to combat inequality, to drive social progress and to aid economic growth. Vital to these abilities are public spending, be it on health, education, welfare or support for industry.
The scary 12% of GDP current budget deficit will not last forever. As the economy recovers the tax take will rise and spending on benefits will fall. But I fully accept that over the past few years public spending has risen beyond tax revenue. In the absence of huge profits from the city and consumer spending boosted by credit cards, it is likely that Britain will still face a deficit in the region of 6-7% of GDP. That gap will have to be closed and I’d argue that most of the closing should come from rising taxes not cutting spending.
I want to be straightforward about this: a 50% rate alone is not enough. It is important though that a rise in tax revenue is as progressive as possible. Simply put those who can pay the most should. I’m afraid the basic rate of income tax will probably have to head back up to 22%. I’d raise the top rate (which only kicks at £43,875 – some 75% above median earnings!) from 40% to 45%. Inheritance should not be cut, it should be raised. I’d favour looking into the effects of a wealth tax. What I would not do is raise indirect taxes, as Thatcher in the early 1980’s, which hit lower earners harder.
There is an example of a state which not only enacts these policies but has also run a successful industrial policy for decades across the Channel, France.
Lord Mandelson has praised French industrial policy in recent months, whilst Howard Davies (Head of the LSE, former Head of the FSA and Deputy Governor of the Bank of England) has noted the lessons we can learn from France.
I do worry that there is a temptation for politicians to ‘cherry pick’ a few bits of the French model – especially industrial policy whilst refusing to contemplate a more radical change. I think we need a radical change. I think we need to accept that the Thatcherite experiment of deregulated financial markets has failed and Britain can no longer rely upon the finance industry to make the sums add up. Nor can we adopt the Irish approach of welcoming deflation in order to lower wages in search for ‘international competitiveness’ and ‘export led growth’. The model which looks most viable is staring us in the face. A more active state helping to guide the economy and rebalance towards comparative strengths, namely pharmaceuticals, communications, green technology, aerospace and advanced manufacturing. This will require public spending and hence higher taxes.
The French model is far from perfect. Unemployment has been stubbornly higher than in Britain (especially youth unemployment) and the economy has sometimes lacked the ‘dynamism’ of the UK/USA. But the blue print is a good one to start with and certainly more realistic than any policy based upon a return to a high consumer debt, high property price, finance led model.
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Job creation is the biggest single factor - don't see much in your piece about how and what sectors.
We need: extensive de-quango-fication and de-manger-isation.
"A more active state helping to guide the economy and rebalance towards comparative strengths, namely pharmaceuticals, communications, green technology, aerospace and advanced manufacturing."
Perhaps you should tell the Gorgon this...?
Fair does. The government and Gordon Brown are wrong to have raised indirect taxes rather than direct taxes.
You can talk all you like about models, but Labour have failed to deliver anything recognisable as any kind of 'model'.
That is what has been so damaging - a well functioning socialist government/country (were such a thing possible) would have many merits - but what we have in the UK is just a huge mess...
If Brown declared himself a communist (or even a Nazi) I wouldn't be too bothered, as I know he couldn't deliver on anything anyway... And he couldn't waste our money faster even if he tried...
Expenses are a symptom of *all* of us having to repair the levers of power before we argue about what to do with them.
I'm trying to outline a model for the future rather than debating the past. That's been enough.
I work in both France and England, and maintain houses in both countries. Inheritance tax is nothing like as punitive as in the UK, especially if the property is inherited by offspring, since there is a sliding scale of inheritance tax according to your relative distance from the dear departed.
Council tax is only a fraction of what it is here. My house in France - larger sq footage and garden - £567. House in UK - £1,800 in Band E. Contrary to what you might think, local communities have far more power over the spending of that money - hence the unpotholed roads, the even pavements, top notch primary schools and daily rubbish collection. In this aspect they're quite Thatcherite, and dislike interference from Big Government. If you've got a problem you wander down to the local Mairie and talk to the Mayor. Things are dealt with very quickly.
Top rate tax is lower than that in the UK and there are no proposals to change that.
The main problem experienced in France is the high cost of employing someone and the red tape associated with running a business. As a result the black economy is unbelievably large, especially in the the rural areas, where cash is king. High taxes on businesses and employment result in high avoidance, which hasn't been too much of a problem in the UK.
You mistake the French if you think they're living some sort of Socialist Utopia. In their dislike of central government, interference from outside, and in their independent thinking they're more American than we are!
As to the need to cut the debt here, it must be obvious that a punitive tax system is only going to drive the economy down as people have less to spend and go into frugality mode ie saving more, paying off mortgages.
I would think Cameron has a pretty good idea what he's going to cut, but daren't say it. Top of the list must be public sector pensions where the potential savings would be massive. Of my £1,800 council tax, £450 is going solely to pay the council's pension deficit. For income tax the proportion must be the same.
" Of my £1,800 council tax, £450 is going solely to pay the council's pension deficit. For income tax the proportion must be the same."
Not doubting what you say, but would love to see the sources.
I do actually smoke gauloises but I like to think that didn't influence my decision. I like to think I have a fairly good knowledge of european economics.
I am not advocating the UK becoming France. I am stating that the French model is better one to build upon (not exactly replicate).
The top band in France is 40%, although it kicks in at around £60k, a 30% band kicks in at about £22k. There is also a welath tax, although most people don't pay that.
The tax system I am describing is less 'punitave' than we had under Thatcher.
it is likely that Britain will still face a deficit in the region of 6-7% of GDP. That gap will have to be closed and I’d argue that most of the closing should come from rising taxes not cutting spending.
How does raising taxes encourage economic growth? Economic growth would close that gap by creating more revenue from a static tax take. If you want to preserve the size of the state then where is the growth going to come from?
Simply put those who can pay the most should. I’m afraid the basic rate of income tax will probably have to head back up to 22%. I’d raise the top rate (which only kicks at £43,875 – some 75% above median earnings!) from 40% to 45%. Inheritance should not be cut, it should be raised. I’d favour looking into the effects of a wealth tax. What I would not do is raise indirect taxes, as Thatcher in the early 1980’s, which hit lower earners harder.
Again, how do you propose to generate economic growth on the back of higher direct taxes?
You argue for no hike in indirect taxation, not just as Thatcher did but as Darling/Brown are going to do with the return of the fuel duty escalator and VAT at 20%.
As for the French model - you avoid to mention their high labour costs, French firms are heavily automated as a result and the historical norm for unemployment is 10%.
So for your 'model' we should choose one that would have 2.5m people permanately out of work, then again I see why - plenty of clients for Labour's social largesse.
I would reduce the size of the state by removing the 'low value add' so RDAs, LEAs and LHAs would go, as would many of the 'marketing boards' and quangocracy.
I'd simply cut out the middleman. Schools and PCTs to get their funding directly from Whitehall. ID Cards and ContactPoint would go. Trident II down from 4 to 3 subs and delayed 7 years.
NHS spending would increase at 1.5% above CPI inflation, ringfenced for 5 years. No frontline medical staff would lose their jobs either and would receive CPI inflation + productivity related bonus as a pay award.
As for the civil service; an external recruitment freeze for 5 years and a pay awards linked to a productivity reform process.
As for tax, I'd abolish tax credits and hike the tax threshold by the amount of money saved AND re-introduce a 10p tax rate. I'd leave the other tax rates alone and I'd cut NI to employers and corporation tax by 2% each.
I'd leave VAT at 20%; I'd put 35% on VAT for off sales of alcohol and reduce on-sales alcohol VAT to 10%. Child benefit payments would stop for any family with a joint income of £50,000.
I reckon that's about £30bn chopped off the State and a business friendly economic growth budget.
Not so hard this economic punditry is it?
I'd bring in a carbon tax to replace excise duty on fuel.
Then I'd get rid of VAT, Corporation tax, and taxes on dividends and replace them with a limited Liability Levy on gross corporate revenues.
I'd get rid of means tested benefits and replace with a National Dividend/ citizen's income. I'd also get rid of inheritance tax.
The above new taxes on privilege - rather than on people - would be collected at the clearing level and would sweep away HMRC and large chunks of other departments plus a massive amount of corporate and professional accounting and legal overhead, plus all ofthe tax evasion industry.
Those asset rich but cash poor individuals who could not afford LVT could run up a debit balance, subject to a reasonable simple interest charge.
Love your style. I would go massively further on tax cuts at the lower end though.
I recognise the problems with the French model, I just think a better starting place than what we have currently.
Mike - we are not returning to a finance led, consumer debt led economy. It's not happening. Even if we wanted to. So how do you propse to rebalance the economy? Let me guess, leave it to the market?
I'd still go to work if my tax burden rose and I'd still try and earn more money - wouldn't you?
You didn't recognise the problems with the French model because you didn't mention them. How about truculent unions? High social costs? Subsided industry? Race relations?
And of course - Napoleonic Law at complete odds to British Common Law.
We are still going to have finance and still have consumers - you speak as if they no longer exist. If we have to leave within our means; it is long, long overdue.
I would still go to work if my tax burden rose... question is - where would I go to work? Those with sought after skills and can-do attitude (i.e. the ones we need to get us out of this mess) are highly mobile, make it too unattractive; they will leave.
How is the economy going to perform when these entrepreneurs and skilled people decide to upsticks and go somewhere else? It's happened before 'when the pips squeaked' and it will happen again if the kind of regressive tax policy you advocate is carried out.
I'm sorry to have to tell you this, no-one is prepared to grasp this nettle. Hell would freeze over before anyone in the Labour Party had the temerity to ask this.
Who is going to provide the jobs, create the businesses, have the ideas to get this economy moving again? The poor or the rich? The less well off need people that are well off to provide the jobs they need.
Also, at the apex of the last boom, as Brown incessantly told us one of the longest in British history. Why were there so many unemployed whilst so many immigrants taking perfectly good jobs?
Work has to pay; welfare should be a safety net and not a way of life.
You cannot trade rich and poor off against the other any longer in the same way Government cannot simply russle up permanent, long term employment - only the market can.
Look at the operation of government; this government spends £615bn a year, so is it really impossible to reduce that by something like £80bn a year?
Bearing in mind that if Labour had stuck to the Tory spending plans (which was growing were 2% above RPI); government spending would have been £414bn a year NOT £615bn.
Here's what I don't understand about government. Take the cost of running HMRC (£4bn a year) and we have the largest tax code in the world. It spends £1bn a year chasing tax avoiders both VAT and income tax. The rest is spent running HMRC so that's £3bn a year to collect our taxes, why?
Why not just simplify the tax code, close the loopholes and avoid tax that way. We probably wouldn't need to spend £1bn chasing avoidance nor some of the other £3bn either.
I'd pare the tax code down to as few pages as possible and look to move from the 'olde world' of duty to a more transparent set of taxes for alcohol, tobacco and unhealthy foods (I would put 10% VAT on any food with more than 30% fat).
Also, taxes on the basis of polluter pays including proper taxation of aviation to reflect its cost and energy consumption taxes based on CO2/mile or CO2/KWh.
As for the quangocracy, £7bn just for an agency that procures weapons albeit many, many years late and often not up to the job? I'm sure another £30bn could be found there easily.
In terms of 'leave it to the market' - yes, to a degree government should stay well out. Government does not pick winners, instead, government should be there to encourage enterprise and create an environment where ideas can make it to marketplace without being subsumed in red tape and pointless regulation.
Low business taxes and much, much, much less pointless red tape. Pointless red tape that employs thousands and drains resources from the private sector.
Again, how is that like the French 'model' with its Napoleonic law other than a total contrast.
I find the problem most Keynesians have is they think the marginal cost of government intervention is less than the marginal cost of the market adjustment. It is never the case, government intervention in the market inevitably costs more money, jobs and is more damaging to the long term health of the economy.
Lastly, in terms of rebalancing the economy - who knows what the next innovation is, who knows where the next big idea is going to come from.
However, history has shown that those economies with low taxes, high educational attainment and a more transparent, business friendly environment are the ones that discover the innovations, discover the new advances and exploit them to the benefit of themselves and also others.
Big government does not achieve this and you should stop kidding yourself it does. Government has never invented anything, merely standardised. That is all.
In 600 words or so I praised what I like (industrial policy, public spending, use of the state) and pointed out the two biggest flaws - unemployment and potnetial lack of dynamism.
Ofcourse we'll still have finance and consumption - just not anywhere near as much. We need new drivers.
I fundamentally believe it is the role of government to help rebalance the economy. I've been exposed enough to financial markets on a daily basis to not trust them to handle this.
I'm all for taxes on pollution - but if they work (i.e. stop pollution) they don't rasie revenue.
As for things 'invented by government' - the computer, jet engine, helicopter, space programme... etc. Plus a load of r&d given tax breaks/support.
Instead, Flowers got £1,000 from a grateful nation which didn't even cover the cost of the equipment he himself bought and the UK gave up it giant lead in computing. Alan Turing, the man who did much to create the architecture of the computer - prosecuted for homosexuality by a grateful government, committed suicide.
The Jet Engine - Frank Whittle patented this in 1930 and the Air Ministry could not contain their contempt for 'propellerless' aircraft. Whittle was so broke didn't renew the patent in 1935. It was entirely conceivable that jet aircraft could have entered WW2 at the Battle of Britain. The Germans got the first jet planes in the air. Most of the early work was done with his own firm Power Jets, his own money and two nervous breakdowns. The Air Ministry finally saw sense in 1941 to provide funding with Rover and Rolls Royce productionising it. Whittle got £100,000 from a grateful nation, he was so incensed at UK Government bungling from 1930 to 1944 (when they nationalised his own business - Power Jets) he left to becoming an eminent jet proplusion expert in the US.
Helicopter - Igor Sikorsky and the Sikorsky Aircraft Corporation. US, no government money except for orders.
Space Programme - A government vision but all the manufactured products - private enterprise. Have we been back since? Hardly an invented product is it?
Again, not really great examples, in the case of Flowers and Whittle, the government were a massive hindrance - hardly a great advert for big government. Agreed, R&D as a tax break is a sensible stimulus, however, not one currently offered by the government.
I'd certainly like to see Britain move away from its argumentative and finger wagging culture, and all the asset stripping and selfishness that fuels and to being something a few degrees on the other side of positive. I don't have the ideological hangups of Labour or the Tories so don't get bogged down in the statist or free market mantras. I believe, the solution is something that recognises that success is made up of ability and opportunity, positive focus and consensus, freedom and keeping everything glued together.
If British management and public services where more investment and customer service inclined, or dropped their clinging of the management's right to manage and getting paid by how long they pumped BTUs into their chairs we might see a more productive and happier workforce, and better public services and less wastage. It's just a point of view and there's almost nothing to it but a mere change in perspective can have a serious impact on outcomes, trust, and the success that flows from that.
By focusing more on jobs creation, worker empowerment, and job security business will start to lean into tomorrow, a similar tomorrow that created the IBM's and Sony's of this world. In turn, this would help rebalance the economy and the rather scatty mindset people have developed since the Reagan-Thatcher days. As the economy rebalances there's more scope to avoid a big shock and improve in public services so they can slim down and free people up to get more fulfilling employment in more necessary work.
Bingo. Everyone's a winner.