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