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.
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24 Responses to “Red lines for a progressive PBR”
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.
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.
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.
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?
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.