In today's Guardian, Will Straw argues that Labour must "pick what it thinks is the right size of the public sector." A wealth tax is one way to protect against cuts.
Alongside a group of “leading leftwing thinkers” including a number of Left Foot Forward contributors, I have a short piece in today’s Guardian outlining where I think “the Labour party should go from here”. I argue:
“The Labour party has to pick what it thinks is the right size of the public sector. Since 1997, public spending has gone up from 36% of national income to 48%. (Before the recession, it was at 42%.) But tax revenues have always been at around 38%, and during the recession fell to around 35%. The reason we’ve got a structural deficit is because Gordon Brown won the argument for investment in public services, but never took on the argument for increasing taxes to pay for it.”
The point is perhaps best made by this graph from the Institute for Fiscal Studies. Where the black and green lines end up is key to what the future of Britain will look like. The Lib-Cons with their series of tax cutting proposals want a smaller state, less redistribution, and a pared down welfare state. If Labour gets its act together, it can limit this scaling back.
This week’s Economist sets out the key strategic challenge facing the Labour party:
“For nothing will make or break the next leader of the opposition like his response to the government’s austerity programme. Oppose it all, and Labour will look incredible. Back it in grown-up fashion, and the coalition will have an easy ride. The tempting third way—supporting “good” cuts but not “bad” ones—will work only if Labour agrees on which bits of spending should go. Underlying this tactical dilemma is the more strategic question of what the left is for when there is no money to spend. Labour’s narrative was once devastatingly clear: the revenues from a buoyant economy should correct the historic underspend on public services. What is it now?”
The Social Market Foundation are on the right track today with a new report titled, “Axing and Taxing” covered in today’s FT. They recommend reducing the deficit with £39.0 billion of spending cuts and £25.3 billion of tax increases. This protects more public spending than under Labour’s plans to reduce the deficit with a 2:1 ratio of spending to tax. Indeed, if one removes from the SMF baseline the Lib-Con measures such as the £6.2 billion cuts to pay for scrapping the £6 billion employer NICs rise, their proposals would mean £32.8 billion in cuts and £31.3 billion of tax increases – close to the 1:1 ratio used by Ken Clarke and Norman Lamont in the early 1990s.
No doubt the SMF’s proposals to means-test child benefit and raise VAT will concern many on the left. But if not these we have to pick something else instead or say how taxes would go up further. In which spirit, instead of the VAT rise, which would be deeply regressive, I would instead pick a wealth tax. As the Political Climate blog points out, “recent data from the ONS show that the top 10% of households own more wealth than the rest put together”. Right-wing blogger Tim Worstall kindly points out the risks of capital flight. One way around this is to target the tax at land, which is hard to move. In an article for Prospect earlier this year, Philippe Legrain called it the “only efficient and fair way to bring Britain’s finances back into line”. After all, 0.3 per cent of Britain’s population owns 69 per cent of its land.
UPDATE 14.06
Alex Barker at FT Westminster picks out an intriguing graph from the SMF report to argue that a modest rise in VAT would actually be progressive if measure on an expenditure basis. It is certainly true that many in the bottom income decile are not the poorest in society since they are students, those on sabbatical, or self-employed people suffering from a bad year who are able to smooth their expenditure by borrowing or using savings. But there are arguably more people at the bottom of the income scale who bolster their expenditure by borrowing beyond their means. Expenditure rankings also say nothing about miserly Mr Scrooges at the top of the income scale. The SMF graph which caught Alex Barker’s eye is actually from an IFS report. They are careful to say only that the expenditure analysis gives a “different picture” rather than a better one.
And while we’re on the subject, this graph from the IFS shows that whichever way you cut it, removing exemptions to VAT – another SMF idea – would be regressive.
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48 Responses to “To defend the cuts, Labour must be clear about the size of government”
Fat Bloke on Tour
Will
The poisoned dwarf was the shooting star in coalition politics.
Currently spending more time with his mother.
Probably more right wing economically than Sniffy.
Andrea Gill
RT @leftfootfwd: To defend the cuts, Labour must be clear about the size of government http://bit.ly/9eMcVD << Too right!
Mark M
“The reason we’ve got a structural deficit is because Gordon Brown won the argument for investment in public services, but never took on the argument for increasing taxes to pay for it.”
That about sums it up. The only thing I would add is that the fact that they are not separate arguments, and we have a deficit because they are treated as such.
Think about it this way. I come up to you and say “I’ll take £10 off you and will spend £10 on you”. Someone else says “I’ll take £10 off you and spend £20 on you”. Who are you going to listen to? I can complain all I want about the fact that he needs to borrow money, you’re still going to listen the the other person.
Jacquie Martin
Mr Sensible and Donpaskini – fully agree on the increased HMRC role in this.
I’ve already outed myself as a former HMIT involved in investigation. Due to Tory myopia, I took vol redundancy in 1996. Complete waste of taxpayer’s money – very expensive career training coupled with 17 years experience.
Completely oversubscribed offer – 3:1 – too. Remember – job for life, so why would so many of us want to go? Because we were never allowed to do the job properly. Example: don’t take on anything too complicated (bigger yield) as it takes too long to settle. When you’re on performance pay (inflation proof bag of Dolly Mixtures) it matters.
Will
Increased VAT affects women (mothers) disproportionately – OECD evidence of this. As well as reduced child benefits. Plus women use, and are employed more in the, public sector. Any cuts which impact on these services destroy any commitment to equality for all. I simply cannot accept this and if Labour do, they’re morons.
Mumsnet were, allegedly, influential in the run up to the elections. I’m not a mum but I do look at the site to see what they’re talking about – they have significant web presence as do you – and I think you’d be surprised at the level of debate there (I was). Don’t underestimate their ability to appreciate the problems involved with welfare to work, for example. I read some of their posts yesterday, and they sound a bit down in the mouth now. You need to get them on board and you won’t do this unless you start looking at ways to distribute the tax burden more fairly. Sod immigration. Tax is the issue.
Richard Murphy at Tax Research UK and his pals estimate £100bn pa is lost through evasion, avoidance and unpaid tax. No increase in tax needed if we concentrate on that then.
28bn of unpaid tax debt was reported by a Treasury Select Committee in November 2009. This is money HMRC has agreed or formally assessed but hasn’t been collected. So what are we waiting for? Give HMRC more power to agdressively collect.
25bn a year is currently lost through tax avoidance schemes. Labour had announced initiatives to deal with some of this. If the tories cut staff, this will be lost – it’s not high priority. This is quite technical work so requires highly trained inspectors. Graduates for example, who will be wasting their lives if there’s a ban on recruitment when they could be contributing to the tax system, personally, rather than collecting benefits and subscribing to the ‘dependency culture’.
Tax evasion is more like £70bn a year. This is non-declaration or fraudulent claims which I used to work on. Easily a reasonable estimate, but again we need to collect it. As an inspector, it was a paper exercise for me. It means nothing without good collection practice. Too much of what I worked on was written off without a robust approach to collection.
More HMRC staff wil rake in a steady stream of tax, plus the buildings they’re vacating through redundancy programmes, are left empty despite being on non-cancellable PFI contracts. Despite some skewed views, we also paid tax and NIC and most of us turned up for work every day too.
Not all increases in tax are unpopular. Most people believe the tax burden should be more fairly distributed and that higher taxes, for the very well off, are acceptable. But they don’t understand the myriad of reliefs/exemptions/schemes available to the same well off which stops even the current tax levels being met. Stamp on them and explain why in the mainstream press, if they’ll print an article that is.
There’s a lot of excellent research at Richard’s site including the paper I think Donpaskini is talking about. Please take a look before formulating a paper.
John77
Fat Bloke on Tour = Brown fan or economically illiterate
Golden Rule – borrow for capital expenditure.
So every time you build a new house or school you increase borrowing, every time a capital item wears out you increase borrowing to replace it. When you have borrowed more than you can repay sane people stop lending to you.
The Credit Crunch is a result of a few sane people saying “we don’t want to lend you money if you’re not going to pay it back”. It is a bit different from WWII where we paid everyone cash and sold assets to do so until Pearl Harbour and thereafter bought overpriced American armaments on credit. Brown’s economic policy was grab money from raids on non-voting taxpayers (windfall tax, tax raid on Pension Funds, extra tax on North Sea Oil which resulted in a drastic fall in investment and, with a time lag production which is the largest single factor behind the fall in world production and the consequent rise in the oil price) and when you run out of ideas spend money that you don’t have and leave the next Chancellor but one (or, hopefully, two so that you can pass the buck) to pick up the bill. The budget deficit is actually larger than during either world war. Personal bankruptcy is at record levels – 27,358 in the first three months of 2010 (0.11m per annum) despite the introduction of IVAs which don’t count as bankruptcy although the creditors end up badly out of pocket.
“In addition the problems the Treasury has in accurately defoining the boundary between tax evasion and tax avoidance needs to be looked at.” The boundary is between that which is legal and that which is illegal. Any problems that anyone in the Treasury has in defining that boundary should be solved by sending them to a good primary school.
However I do agree that “Other areas should be a re-alignment of the CGT / incone tax / Corp Tax so that all those who are set up as one man bands can’t switch their income to suit the prevailing tax rates and regimes.”
Oil revenues have actually gone down because Brown was too greedy for short term revenue – he expected Blair to resign in less than 10 years so he did not worry about the long-term consequences of his actions.
Hapsburgs are not Bourbons!!
That is in line with his grasp of recent UK history. The government led by Mrs Thatcher reduced national debt, increased economic growth, started paying decent wages to nurses, significantly reduced the gap in income and wealth between the rich and the poor and won a war when attacked – all of which stand in stark contrast to the Blair-Brown and Brown governments (before you quibble, let me point out that a lot of new entrants to nursing have been downgraded to orderlies).
The drag on the re-armament programme in the early-mid 1930s was the opposition by George Lansbury who was leading the faction of the Labour Party that comprised the opposition to the National Government, not the Treasury under Philip Snowden