Red lines for a progressive PBR

Left Foot Forward sets out five red lines for a progressive Pre-Budget Report. We will assess the PBR against these criteria on the day of the report.

Government receipts have fallen to 35 per cent over the course of the recession

The pre-Budget report (PBR) will take place on Wednesday, December 9th. With under two weeks to go, Left Foot Forward sets out five red lines that the Government must not cross. We will assess the report against these criteria on the day of the report.

1. The PBR must make the Keynesian case for budget deficits

Saturday’s New York Times outlined that:

“with roughly a quarter of the stimulus money out the door after nine months, the accumulation of hard data and real-life experience has allowed more dispassionate analysts to reach a consensus that the stimulus package, messy as it is, is working…

“In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do.”

Meanwhile, IMF Managing Director Dominique Strauss-Kahn told the CBI conference on Monday, “We recommend erring on the side of caution, as exiting [from stimulus plans] too early is costlier than exiting too late.”

The alternative position – as expressed by David Cameron – that “Dealing with this deficit is not an alternative to economic growth – the two go hand in hand” must be exposed for its economic illiteracy.

The Government should therefore set out the risks to the recovery of bringing down the deficit too quickly by slashing public spending. For example, they should estimate the output gap under different reduction speeds. This should be used to calculate likely losses in tax receipts and increased unemployment benefits that would increase the deficit as took place in the 1980s.

After the investment vs. cuts debacle of the summer, it is crucial that the argument is framed as sustained recovery vs. “double dip” recession.

2. Any deficit reduction plan must be flexible and based on cautious growth projections

As long as gilt yields and interest payments remain low and threats to Britain’s AAA credit ratings are little more than Tory scare stories, any deficit reduction plan must be flexible and not put the recovery at risk.

If there has to be a plan to halve the deficit by 2014-15, then to be credible it will have to be based on cautious economic and revenue projections, and not on growth numbers that can be criticised as too optimistic in the press on the day after the PBR. The implication then would be that if growth turned out to be higher than forecast, then the deficit could be reduced more quickly. But if the recovery is slower than anticipated then the pace of deficit reduction should be slowed.

3. The Government must outline how it will return tax receipts to at least 38 per cent of GDP over the medium term

As this blog has shown, the deficit has been caused by both an increase in public spending and a massive reduction in tax receipts. As this Chart shows – using data from Budget 2009 (Table C7) – Government receipts are currently 3 per cent below their long run level of 38 per cent of GDP. Tax increases should be focused on those responsible for the economic crisis, those who can pay, and those who pollute.

The proposals published earlier this week by Compass to raise £45.8 billion in extra fiscal revenue amount to 3.2 per cent of GDP next year. These proposals enjoy public support while other measures such as a windfall tax on banks are now supported by Martin Wolf.

Any further efficiency drives in public service provision must involve full consultation and involvement of staff and unions, and positive training and redeployment opportunities. Where necessary, managed workforce reductions should avoid compulsory redundancies.

4. The PBR must help those most in need by finding the £4 billion needed to meet the 2010 child poverty target and protecting the labour market interventions already in place

Kate Green of the Campaign to End Child Poverty has written on Left Foot Forward urging the Government to implement their ‘Recession Recovery Package.’ They estimate that, “Around £4 billion – an addition of around £12.50 to Child Tax Credit for each child from low income families – would ensure that the 2010 target to halve child poverty is met.”

Labour market interventions including the £1 billion Future Jobs Fund have put in place investment to prevent long-term youth unemployment. These programmes have been endorsed by Professor Paul Gregg’s report on ‘Personalised Conditionality and Support‘ (p.87-91). Professor Richard Layard has recently called for their extension to over-25s while others have called for earlier access for 18-25 year olds. These policies would require modest additional funds which should be found.

Since £142 billion has already been invested in financial sector interventions, the Government must not shirk from these priorities and should find this money ahead of all other spending commitments. They should challenge other parties to support these measures.

5. Growth policies must be geared towards investment

The PBR under this Government has traditionally been an opportunity to set out new measures to encourage enterprise and growth. Any new policies this year should look to bolster investment, particularly in sectors of the economy where there is growth potential.

With business investment falling by 21.7 per cent year-on-year in the 3rd quarter, the Government should outline how it will target support using capital allowances and encourage other parties to do the same.

24 Responses to “Red lines for a progressive PBR”

  1. Left Foot Forward

    Red lines for a progressive PBR. What the Government must do: http://bit.ly/5ZAeFy

  2. Tim Nicholls

    RT @leftfootfwd Red lines for a progressive PBR. What the Government must do: http://bit.ly/5ZAeFy — great piece… fingers crossed

  3. sophiaparker

    i like this RT @leftfootfwd Red lines for a progressive PBR. What the Government must do: http://bit.ly/5ZAeFy

  4. Jessica Asato

    RT @leftfootfwd Red lines for a progressive PBR. What the Government must do: http://bit.ly/5ZAeFy <agree with most of this

  5. MarkHanson

    Excellent! Crowd-sourced economic analysis from @leftfootfwd for a progressive PBR. What the Government must do: http://bit.ly/5ZAeFy

  6. Tax Research UK » Red lines for a progressive PBR

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  7. Tim Worstall

    “The proposals published earlier this week by Compass to raise £45.8 billion in extra fiscal revenue amount to 3.2 per cent of GDP next year. These proposals enjoy public support while other measures such as a windfall tax on banks are now supported by Martin Wolf.”

    Marvellous. Wolf has not advocated a windfall tax on the banks. He actually says in that piece you link to that he doesn’t advocate that. He muses rather about a windfall tax on bonuses….which is a tax on bankers, not banks.

    And as to Richard Murphy’s ideas about tax: you do realise that he’s assuming that higher tax rates will lead to more people going to work and more work from those already working?

    No, really, that is the core of his proposals about tax on the top 10% of households. That a rise in tax rates will lead more “second partners” to go out to work. Rather in defiance of received wisdom on the effects of higher tax rates on the working patterns of married women it must be said: but then that’s Our Ritchie, ever willing to leap to unwarranted conclusions.

  8. Cityunslicker

    No tax cuts then to spur growth. A little fiddling with capital allowances should do it.

    Do you have any idea how the BOE calculates the mythical ‘output gap.’ No neither do they it is the economic equivalent of guessing the effect of global warming.

    So no tax cuts, but plenty of rises, fo r those who can pay; well targeting those who can’t would not achive very much would it? have you noted the record emmigration stats this year – do you think any of those might be the don’t want to pay category?

    Finally, let’s not worry about the deficit. it is only our children who haev to pay it after all – keep the credit card going until the bond market has its revenge seems to be your idea. The real reason the market is allowing the UK any leeway at all (and look t the currency crash, this is not a free ride) is that it fully expects a Conservative win. If Labour were to win with your platform interest rates would treble within months.

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  10. willstraw

    Tim,

    Did we read the same article or did you miss the irony?

    Wolf: “Windfall taxes are a ghastly idea. They are a sop to prejudice, a burden on risk-taking and a form of arbitrary confiscation. No sensible person should support them. So why do I now find the idea of a windfall tax on banks so appealing? Well, this time, it really does look different.

    As to Richard’s excellent tax policy paper, there are several proposals including a rebasing of the tax system so that the rich pay a higher proportion of their income in tax than the poorest. You may disagree, but then you probably wouldn’t describe yourself as a “progressive”.

    Best wishes,

    Will

  11. Tim Worstall

    “there are several proposals including a rebasing of the tax system so that the rich pay a higher proportion of their income in tax than the poorest. You may disagree, but then you probably wouldn’t describe yourself as a “progressive”.”

    My disagreement is nothing to do with whether the tax system he describes aspires to be more progressive. It’s about the sums which underlie it.

    In order to raise the sums stated Murphy is relying upon the idea that with higher tax rates *more* people will go out to work from those top decile families. That is certainly a possible outcome but it’s an extremely heroic assumption. We normally think of a tax change as having two separate influences: some people (most/all/few, to taste) will have a target income. Raise taxes and they will work more in order to earn that post tax income. Thus a tax rise can lead to more labour supply and thus a rise in tax received over and above a straight line calculation. Others (some/few/all/ to taste) will look at the marginal revenue to be earned after the higher tax rate and will reduce the amount of market labour they offer. Choosing more household production or leisure instead. This will result in a lowering of tax revenues from the straight line projection of the the change.

    The total effect upon revenues of a tax change is of course the sum of the two effects across the population.

    There’s nothing right or left, progressive or conservative about this analysis. It’s simply the way the world is.

    Murphy, to make his sums add up, assumes that effect 1) will not only p+redominate but there will be no effect 2) at all (at least, since he won’t release his calculations, judging by what he’s said this is what he assumes).

    As I say, that’s an heroic assumption and one that doesn’t really pass muster.

    So, the problem with Murphy’s proposals is not that they are progressive in design or desire: it’s that they don’t add up. He’s not accounting properly for the behavioural changes that will come from 75% marginal tax rates, from a rise of 60% in average tax rates on that top decile of families.

    A more realistic caluclation (using, say, the empirically derived measures that we have of effects 1) and 2)) would say that the tax changes will raise a great deal less that Murphy claims and possible less revenue than the current system.

  12. J. Edouard F. G. (London Expat)

    The Compass/Murphy tax papaer is so retarded that a 5-year old would see through it (unless that 5-year old is union-affliated of course).

    If it is true that raising taxes increases both tax revenues AND productivity, why stop at 55% for the top decile of earners. Surely we all would better off taxing the bastards to 99% (I am ignoring the small matterr of marginal tax rates in excess of 100%, but that does not seem to have bothered the Murphy brigade either).

    And why only apply this to high-earners; surely anyone should be taxed at 99% and I am sure Murphy and his crowd would have no problem finding some overseas aid or other left-wing pet project to spend these almost infinite tax revenues.

  13. Will Straw

    Tim – I don’t think you can have read the Compass report. There are £46bn of savings and net £14.8bn (under a third) comes from the income tax policies. So even if your assumptions are more accurate than Richard’s and there is some combination of behaviour (1) and (2) taking place, there are still significant savings from pursuing these policies. These proposals are also inherently fair since the line in Fig. 4 does not run from bottom left to bottom right, which is what you would expect of a progressive tax system.

    City Slicker – It’s worth reading the ONS report which came out on Thursday . The emigration is primarily of Polish and other Central/Eastern Europeans returning home because there is a recession and they can’t find work. The scare stories about rich people leaving are just that. As to future generations, they would face a larger bill if we slashed public spending and caused a “double dip” recession. If we get the recovery right then we can grow our way of out the debt (as we did during the 1990s in eroding the debt caused by Thatcher’s recessions).

    J. Edouard – I’m not sure you’ve properly identified who is being retarded. There is clearly a tipping point beyond which people are demotivated from working and 99% is certainly above that. But 50% for the (very few) people who earn over £100k seems about right – they are clearly motivated by money so are more likely to work that little bit harder.

  14. J. Edouard F. G. (London Expat)

    Will – I think that a five year of would agree that there is a tipping point, but not Richard Murphy and his colleagues at the Pyongyang School of Economics.

    If there is a tipping point, then there IS some correlation between the rates of taxes, the supply of labor, and the level of tax revenues. You can call this relationship the Laffer Curve or something else; the point is that it exists.

    Murphy denies that (like others denied that the Earth is round or that daylight follows darkness) on the highly scientific theory that all high-earning bastards’ trophy wives will take jobs as toilet cleaners or grocery baggers to pay the school fees. Amazing how we did not think about it earlier, no?

    Now that with your help we have conclusively identified the retard, could we move on to the more interesting question of determining where the tipping point is?

  15. Tim Worstall

    “Tim – I don’t think you can have read the Compass report. There are £46bn of savings and net £14.8bn (under a third) comes from the income tax policies. So even if your assumptions are more accurate than Richard’s and there is some combination of behaviour (1) and (2) taking place, there are still significant savings from pursuing these policies.”

    I’m not arguing at all about the rest of the paper here (indeed, at one point on my blog I praise part of it. For they’ve used a proposal that the Adam Smith Institute has been pushing for years, that the personal allowance should be raised to the full time full year minimum wage, ie, £13k or so….although, of course, they don’t acknowledge where they got it from). Here I am arguing solely about the assumptions used to argue that the proposed rise in income tax on the top decile of families will bring in x billions of pounds.

    Assumptions which are so far out of the mainstream that it’s entirely justified to question them.

  16. AJ

    Hey Will

    You’re not setting the bar for success in the PBR very high.

    On (1), it would be the turnaround of the century if Labour suddenly announced in the PBR that it considered the current projected level of deficits was a real danger and had therefore decided to accelerate the inevitable cuts in spending. That would mean Labour had started using Tory language, the probability of which I put at about 0 given both the main parties have settled into their respective positions across this dividing line for the forthcoming election. (Whether that dividing line is about anything more than language isn’t clear to me – nobody uses any numbers when they do their posturing on the fiscal position and when to tighten, yourself included.)

    Reading this entry – and much else on the site – it does read a bit like a party line pretending not to be one. Do you actually support the Compass tax proposals, including where they run counter to Labour policy? What do you think of progressive proposals from parties other than Labour, for instance the Lib Dems’ proposal for taxing million pound homes?

  17. Clifford Singer

    RT @leftfootfwd: Red lines for a progressive PBR. What the Government must do: http://bit.ly/5ZAeFy

  18. willstraw

    J. Edouard, Tim – intuitively I would agree that there is a Laffer curve but Richard Murphy would be right if he said that an empirical relationship had never been proved. This points to the top of the Laffer curve taking place where the marginal rate is >60% (given that it was this level until the early-80s). If that’s the case then a 50% rate is fine as a revenue raising measure.

    AJ – Thanks for your question. As you’ll see from my other comments, I agree with the totality of the Compass report except that (i) I would prefer the Lib Dem’s “Mansion Tax” to Compass’ council tax policy (this would avoid capturing the many people who have seen the value of their properties rise to c.£300k-£900k without any increase in income; and (ii) I would favour a domestic Tobin tax on currency transactions involving sterling, rather than on all bank payments (which would affect people receiving pay cheques or paying bill. What else would you like to see in the PBR?

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  20. AJ

    Hey Will

    Here are a couple of progressive ideas I’d most like to see in the PBR
    – a new focus on capital taxation, in particular on property. If it must be through Council Tax because Labour never grasped the nettle and changed it when they had the opportunity, then so be it. Who are all these people in the UK who own property equity worth £0.9 million (or even £0.5 million) but can’t afford a few thousand pounds of tax on their assets every year? I don’t believe they exist other than in the Daily Mail/ Express. And I struggle to understand how it is progressive to protect the owners of such assets from tax rather than those earning £20k with no assets
    – some serious proposals to tackle inflation in executive pay. It is one of the most corrosive forces in our society, and far from being the product of market forces it is the product of a lack of market discipline and disfunctional institutions. Also, now is the only chance we will have to do anything about it until the next recession (which will probably be presided over by the Tories). New Labour has always exhibited a childlike fascination for and fawning attitude towards the rich so this is the last thing they will do anything about.

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  22. J. Edouard F. G. (London Expat)

    Will – I am not sure that this blog is till open, but if it is, may I point out to the following:

    a. Richard Murphy does not believe in the existence of the Laffer curve, at all, in any circumstance. Empirical eveidence does not really interest him.

    b. In order, as Compass/Murphy suggest, to raise the total tax rate on top earners from 34% to 55%, marginal rates well in excess of 60% will be required. Do you stick to your view that this is a sensible revenue-raising measure?

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