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
John77
Stop it, stop it, stop it, for the sake of the NHS stop it!!!
I am in danger of laughing myself to an early grave.
Consequently in no particular reverse order:
The schoolboy howler was mine — I mentioned Hapsburgs instead of Bourbons.
Income distribution data has been schewed by the appearance of 3% of the population who seem to have little income but a quite high level of consumption. Add in the Top 1% who have shot through the roof and the real world TB/GB record is quite good.
Audacious class aircraft carriers — the Treasury didn’t want to pay for the new dry docks and the work needed to tart up Devonport and Portsmouth harbours.
Next up @ 1.42:
Corporation tax, any deficit reduction programme starts there. Any thoughts on the PLC’s wanting to move to tax havens?
And again @ 1.24:
Sane people have lent to us, sane people are lending to us and sane people will lend to us in the future. AD had a plan to get the deficit down to a manageable level without provoking riots on the streets. The big issue here is political Treasury forecasts, breaking the link between GDP and tax to magnify future deficits – interesting, very interesting.
Structural deficit now at 8% within an 11.1% overall deficit after an 80 year financial event – interesting very interesting.
Deep recession with little or no bounceback in a growing global economy – interesting, very interesting.
The deficit has ballooned because of the Credit Crunch – GB/AD had planned for a fiscal tightening that was blindsided by global events.
Golden rule = Borrow to invest, no issue I will even be as bold as to include the word “net”.
And again @ 12.53
We seemingly have moved on to resource based accounting.
The concept of depreciation has entered into the national accounts.
74/75 Hyperinflation – Try post colonial raw material inflation amplified by a war, it is a better fit and AB’s input to the inflation of the mid 70’s should never be forgotten.
Wilson inspired DTI changes to pension company funding – Don’t know enough to comment.
IMF rescue – Treasury inspired financial coup more like, interesting, very interesting.
And again @ 12.28
GB = 80/20 rule, happy with his overall contribution to Labour party politics and his role in government.
I do have reservations over his ability as a politician, the Dunf West by-election was a particular shambles.
However I do think that history will be very good to him.
Finally, are there a team of you wring under the name John77 or do you like talking to yourself in print?
John77
Brown’s real world record on income distribution is bad and is worse than you think because the Gini coefficient that the ONS use is based on taxable income and ignores the greatly increased amount of tax-free income from ISAs (greatly increased over the last 13 years through growth of old PEPs/ISAs and additions of new ISAs), SIPPs and the conversion of taxable income in capital gains, taxable at a lower rate and excluded from their analysis of income. You only realise how bad it is when you look at the changes in wealth distribution – the numbers are impossible unless a lot of the rich had negative spending. I was actually quoting the two-thirds fall in the share of wealth owned by the lower 50% of the population. Oh, and that is after the homeless are excluded from the stats as well as being excluded from unemployment and every other benefit.
Re-armament – at the beginning of 1937 the Baldwin government decided on a rearmament programme costing £1,500 million over five years which they would mostly meet out of taxation would require them to borrow £400m and in the debate on 17th and 18th February Attlee and the Labour party opposed it. While you may be right that the Treasury didn’t want to pay for work at Portsmouth and Devonport (I don’t have any data on that), the main opposition to rearmament came from the Labour Party, not the Treasury.
Corporation tax – there are so many companies moving some operations to lower-tax areas that I have lost count. The bit that sticks in my memory is that more than half the quoted companies underwriting at Lloyd’s of London have redomiciled to Bermuda! Another has gone to Dublin and BRiT insurance, despite its name to Holland. A lot of companies (not just British ones) have gone to Dublin. So using corporation tax to reduce the deficit involves calculating the trade-off between tax rates and companies relocating in or out of the UK.
The obvious place to start o deficit reduction is simplifying the tax system and charging capital gains at income tax rates.
“Structural deficit now at 8% within an 11.1% overall deficit after an 80 year financial event – interesting very interesting.” No, not very interesting: the structural deficit should be zero and if it was the total deficit would be manageable. The 8% is what the deficit would be without a financial crisis and the 3% is the effect of the financial crisis (even if as Darling said 6.9% and 4% that still means that the structural deficit is WORSE than the effect of the financial crisis. So Brown’s contribution is worse than the effect of something you compare with the 1930s slump – on the OBR’s calculation it is more than twice as bad. “The deficit has ballooned because of the Credit Crunch – GB/AD had planned for a fiscal tightening that was blindsided by global events.” No, the credit crunch has made the deficit more visible – previously the tax on imaginary bank profits, windfalls from stamp duty on house sales at bubble prices and Brown’s continual borrowing from the future by bringing forward tax receipts had concealed the size of the deficit, which was worrying enough at the stated figures. “history will be very good to him” – only if it chooses to forget everything he has done.
Resource-based accounting – which nobody understands – is not relevant to PSBR figures.
The 74/5 hyperinflation was caused by the massive pay award to the miners and other public sector trade unions. The oil price rise contributed a small amount but that of cocoa so little that it can be ignored. “post colonial raw material inflation amplified by a war,” is just tripe – the only post-colonial raw materials were tea, coffee (except that most of our coffee came from S America not Sri Lanka or Kenya) and cocoa – unless you include American wheat (Nigeria supplies very little of our oil and had no impact on the oil price, which was determined by Arabs and Iranians, both former imperial powers) and we were not at war. Gold and diamonds are not raw materials to anyone except a jeweller.
Sane people will lend to us in the future if they think that we shall repay them, but not if we stick to Brown’s policies. The BoE was buying gilts by the bucketfull for a year because the desire to lend to us spiralled down when Darling admitted that we had a structural deficit – previously Brown’s spin doctors and their media allies/lackeys had pretended that the deficit didn’t really exist or was just a consequence of the economic cycle that Brown had claimed to abolish. The BoE purchase programme led enough investors to assume that they could get their money back by selling to the BoE to avoid a Greece-style collapse in gilt prices. Following the election confidence has partially returned because the new government is committed to eliminating the deficit by 2015 as against halving it. A 6.9% structural deficit with a target of 3.5% and a 2% growth rate in real GDP is a formula for disaster.
Brown’s “Golden Rule” was iron pyrites. Even if he had only borrowed for net investment it would have been too lax but he pretended to be prudent while running a fiscal policy that increased debt every year (or would do before cyclical revenue boosts at the top of an economic cycle). Then he compounded the damage by pretending that his policy was meeting this fiscally unsound basis when it was even worse.
John77
There’s only one of me but there is a limit to the amount of explanation I can give at a go, especially after midnight after a long day.
“Wilson inspired DTI changes to pension company funding – Don’t know enough to comment.” Since I didn’t mention this because I thought it too difficult to explain, I suspect that you do know something. The depth of the 1974 bear market was caused by new DTI regulations that effectively forced life assurance companies to sell equities when the price went down – when they became more attractive investments to anyone with an IQ bigger than his/her shoe size – and switch into gilts which gave a negative real return. The rebound in January 1975 came because once some share prices rose the insurers could buy more equities and this had the same self-feeding effect as the late-1974 decline.
Are you accusing the ex-communist Denis Healey of a coup against his own party on behalf of the Treasury? The IMF rescue came because the UK could not pay its external debts and have enough left over to pay for its food and raw material imports. You appear to be as blind as Brown to the need to pay our bills if we want to get anyone to supply us in the future.
Do you know what a deep recession feels like?
OK you just don’t understand that the GDP growth figures under New Labour are distorted by the increase in public sector pay rates and the inclusion of payments for child care that was previously unpaid/not recorded/undertaken by the mother and similar items. That is forgiveable – most people got fooled. There is no way of reliably calculating the value to the householder of a Bobby on the beat outside his/her house to deter burglars and vandals – it is actually quite a lot more than the policeman’s wages. So the formula for GDP includes public services by government employees (librarians to refuse collectors) that have no direct charge to the beneficiaries at cost. That is, in itself, a perfectly reasonable attempt to provide an honest answer. However if you increase public sector pay faster than inflation (or, more relevantly public sector productivity plus inflation) you generate a completely spurious increase in reported GDP. Under New Labour public sector pay has risen not only significantly faster than private sector pay so that crude public sector average pay is higher than that in the private sector (much higher when you adjust for the differential pension costs) but also MUCH faster than inflation plus productivity so using their GDP figures not only flatters GDP growth but also significantly understates the rise in debt:GDP since 1997. Both under Wilson*in the 1970s and Blair/Brown the workers in the unions that financed Labour reaped rewards not given to other public sector workers (except in 1997-2010 top civil servants whose pay was used to calculate a “fair” salary for MPs)
*Callaghan was less bad which is why the public sector unions tried to blackmail him and found themselves with Thatcher instead
“The schoolboy howler was mine” – so are you going to apologise for “Your howlers are too good to miss.” when you have still failed to produce a single example?
Fat Bloke on Tour
John77
Thanks for all your effort.
However it wasn’t so much an answer but a cry for help.
Your answers on the income distribution issue only proved one thing:
You are a good shot — one bullet, both feet.
You try to do down GB’s legacy and only end up highlighting the skims and scams that the middle class use to disguise income.
You then move onto wealth distribution and then seem to forget about the effect of asset price inflation in generating returns for the wealthy without the need for their income to rise. I fear you have put forward the best defence of Child Trust Funds I have yet heard.
Consequently will you be writing to Dave the Rave / Sniffy / Cleggy / the poisoned dwarf to complain?
Regarding the structural deficit, I could just about believe the AD split — 6.9% Cyclically adjusted / 4% caused by the recession.
Given that the 6.9% figure includes 3.5% of net investment then the remaining 3.4%, large though I think it is, can be sorted out without causing riots on the streets.
The move to put the figure up to 8.0% is a case of the blind leading the deaf. The Treasury struggles to understand the concept of the structural deficit and the output gap and the OBR strugles to put forward a rational case for using the Treasury methodoligy and data.
I think dog’s breakfast from a coterie of dog boilers would be the best way of putting it.
I take your point about sorting out the various rates of CGT / IT / CorpT.
However I do wonder what you think of Dublin:
Tax haven that needs sorting out?
Giant tax avoidance centre to aid US companies “smuggle” profits out of the EU?
Over-priced green theme park selling its soul for the tourist dollar?
The issue of companies which generate large amounts of excess funds in the UK and then refusing to pat tax on them by way of some fancy footwork by their accountant needs to be looked at, publicity at first, then law changes and finally direct action if required.
A good quality public humiliation would be a good first step to keep the sharp end of business practise honest.
I will finish on the issue of depreciation and resource based accounting. You claimed that depreciation was not part of the UK budgeting process and that the accounts were expressed on a cash only basis.
Well depreciation is part of the UK buget process and resource based accounting is now the norm. KC published a white paper on the issue and GB implemented it.
John77
Fat Bloke on Tour
Cut out the ignorant smears – it just shows you are ignorant. To avoid distortion from the housing bubble I was using data published by HM Treasury on wealth excluding value of houses and the same result – that the share owned by the lower 50% fell by two-thirds to 2% – comes from taking wealth at the end of 2003 when the stock market was within a few %age points of the bottom of the bear market. (The fall was presumable more than two-thirds by the end of the Brown era but the data is only shown to the nearest 1% so a further fall of less than 25% doesn’t show up). Asset price inflation for investors from 1997 to the end of 2008 – the last published figures was less than inflation. An early Child Trust Fund invested in the stock market is worth less now in ‘real terms’ (adjusted for inflation) than when it started: the All-Share index has risen by less than 20% since mid-1997 while the RPI has risen by 42%; if it is invested in cash it is losing value steadily. You think that is an argument for CTF?
Either you are stupid, too lazy to check the data, or you are deliberately lying.
You quote a figure for net investment when HM Treasury do not have the means to calculate the correct figure for depreciation on public sector infrastructure because they know neither the expected lifetime of most items nor the cost of replacing them. A figure of 3.5% of GDP for net investment by the public sector is just not plausible when the NHS is closing hospitals faster than opening them and a figure for depreciation for 2009/10 fiscal year that is one-ninth of capital investment implies either a massive public works programme that we should be able to see from our windows – nine year’s worth of capital spending in one year – or the depreciation figure is wrong. The capital investment is mostly just plans for future spending, so I wouldn’t trust that depreciation figure – more New Labour spin to make their spendthrift ways look prudent.
HM Treasury publish figures on their web site in cash terms. The PSBR figures that I quoted are in cash terms. The National Debt is (negative) cash. I said that “*for comparisons over time* only the inflation-adjusted cash figure makes sense because public sector accounts are on a cash basis and no-one has data that would convert them onto a UK GAAP basis”. You claim that I am wrong because a (fictitious) figure is used for depreciation in current accounts. That does not enable you to convert 1970s or 1980s accounts onto a UK GAAP basis. So for comparison purposes you can only use a cash basis (preferably adjusted for inflation). Incidentally, if they could calculate depreciation (which I don’t believe they can at any acceptable cost) the public sector accounts would still not be on a UK GAAP basis. Do you even know what UK GAAP involves? Also depreciation charges wouldn’t affect the PSBR or National Debt figures even if they could be calculated properly.
You have carelessly (or carefully) misquoted me.
Your series of insults are merely a cover for your inability to provide a valid defence for Brown – “skims and scams” are mostly a result of his obsessional tinkering with the tax system for political or PR ends without caring about the economic effect e.g. the tax break for film production that enabled the likes of Wayne Rooney to claim tax relief on three times their net investment.