The government needs a new fiscal policy and it should be built on investment in the people
The post referendum chaos has provided the cover for Chancellor George Osborne to abandon one of the government’s coveted economic policies – to generate a budget surplus by 2020.
This policy was the excuse for unprecedented austerity measures and cuts in public expenditure and failed to deliver tangible results. The expected rise in corporate investment, leading to higher wages and tax revenues did not materialise.
The most recent figure of the public sector debt of £1.6 trillion, equivalent of 83.7 per cent of GDP, provided ample evidence of the failure of government policies.
The government needs a new economic policy. That would mean investment in infrastructure, progressive taxation, a refined industrial policy and addressing skills shortages.
However, that is not what is on offer. Instead, the government is seeking to make UK a tax haven for corporations and the wealthy. The rate of corporation tax is to be reduced to 15 per cent, bringing the UK rate in line with that in Albania, Georgia, Iraq, Latvia, Lithuania and Serbia.
This is accompanied by a policy of selling household silver at knockdown prices. The latest example is the privatisation of Land Registry. None of this can address deep-seated economic problems.
There is plenty of evidence to show that cuts in corporation taxes are accompanied by tax rises elsewhere or public expenditure cuts and have a negative effect on the economy.
The cuts enable companies to pay higher executive salaries and dividends to shareholders are effectively a transfer of wealth from the less well-off to the wealthy.
Excessive cuts in corporate taxes do not produce new jobs or investment because businesses flourish when there is a good social infrastructure, an educated and healthy workforce, investment in new technologies and increase in the purchasing power of people.
Long term investment is not going to come from corporations as they are mired in short-termism. FTSE 100 companies are sitting on a cash pile of around £138 billion.
With Brexit uncertainties, corporations will be even more reluctant to invest as they await the outcome of negotiations with the EU and the rest of the world. The UK’s economic growth has been low because people’s purchasing power has been eroded.
For example, for the first quarter of 2016 the UK workers’ share of GDP stands at 49.9 per cent compared to 65.1 per cent in 1976. With less money in their pocket, people are likely to spend less.
The government needs a new fiscal policy and it needs to be built on investment in the people, the most durable asset of any nation.
It can do this, boost people’s spending power and address skills shortages by abolishing university tuition fees. Business costs can be reduced by a programme of filling potholes and providing replacement roads at a cost of £12 billion.
The additional investment in bridges, transport, housing, schools and apprenticeships can provided the much needed stimulus. It is a real irony that the UK companies are sitting on mountains of cash, but the government has to look to companies owned by the Chinese government to provide funds for long-term investment to build reactors at Hinkley Point to secure electricity supplies.
Of course, none of this comes cheap, or is without financial and political risks. Yet even this has not encouraged any new economic thinking.
So how do we find the resources to reinvigorate the economy? The government should cancel all corporate tax cuts and reverse the income tax cuts for the wealthy. £15 billion can be secured by simply reversing the corporate tax cuts announced in the March 2016 budget alone.
It can bring test cases to challenge corporate tax avoidance and change laws and collect tax revenues. It can reduce wealth inequalities and increase tax revenues for investment by changing the way capital gains are taxed.
For example, the March 2016 budget announced that from 6 April 2016, the higher rate of Capital Gains Tax (CGT) will be reduced from 28 per cent to 20 per cent.
This encourages wealthy to engage in paper transactions to convert income, which might be taxed at the marginal rate of 45 per cent, to capital gains.
Capital gains are essentially windfalls and are not solely generated by the efforts of the individuals involved. The gains should be added to the income of the individuals and taxed at the relevant marginal rates. This could be 45 per cent for some individuals.
The government hands out billions in corporate subsidies without any tangible returns. This free money should be replaced by loans and equity stake to ensure that taxpayers get something back and that can be invested in the infrastructure.
Then there is continuing scandal of the Private Finance Initiative (PFI), a scheme under which companies rather than the government build schools, roads, hospitals, offices and prisons at exorbitant cost, and the government then promises even higher returns to companies.
Companies have invested around £57 billion but will receive £307 billion in return. Interest rate calculations are an integral part of the PFI projects. Many of the projects started before the interest rates were reduced to 0.5 per cent.
Bankers have freely admitted that the interest rates were also rigged. So the returns on PFI projects are based on fraud. An investigation of the projects can recoup billions for public investment.
There are plenty of opportunities for government to change its economic course, but it is unlikely to as it lacks vision.
Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability
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