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.
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”
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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.
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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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