Zoe Gannon of Compass reports on the Coalition’s £100 billion gamble on growth without the state.
At the weekend Compass launched a new report which calculated the extent of this Government’s reckless gamble on our economy. The report estimates that the government is making the equivalent of a £100 billion gamble on growing while the public sector is cut, which is supported by “no reputable economic theory”.
If the coalition government loses this gamble then nearly £100 billion could be lost from the economy over the course of just one parliament.
As the report argues everyone is agreed that growth is the only way out of this economic situation, but the government’s hope is that this will come about by simply creating ‘space’ for private initiative. The Chancellor believes that the public sector is crowding out private growth – yet all the evidence suggests that far from crowding it out, public spending is propping up anemic private sector growth.
The economic recovery is still fragile, as demonstrated by falling house prices, high unemployment, and low consumer confidence levels. In this environment the cuts agenda of this government will ensure we experience a lost decade – much like Japan did in the 1990s.
Such an economic policy has no sound economic basis and as the report shows the government’s economic agenda can and must be challenged. Chancellor George Osborne argues that the state is the problem, that we must deal with the deficit immediately, that if the state is cut back the private sector will flourish and that cuts can be progressive.
The report contests each of these with economic facts and evidence showing that opposition to the cuts is essential. In the short term growth must be the priority and in the medium to long term there is an alternative to the cuts involving a renewed fiscal stimulus to encourage growth and a long term fiscal policy designed to reduce the deficit through a fairer tax regime.
A fairer tax regime in the medium to long term could include the following measures:
50% Income Tax band at £100,000 £2.3 billion
Uncap NICs and make them payable on investment income £9.1billion
Introduce minimum income tax bands £14.9 billion
Reintroduce 10% tax band and 22p basic rate -£11.5 billion
Abolish tax havens and tax ‘non-doms’ £10.0 billion
Introduce a sterling Financial Transactions Tax £10.2 billion
Public sector Cost cutting measures (Trident/Titan Prisons) £5.3 billion
Total £40.3 billion
There is a growing consensus that the Chancellor’s cuts will not promote growth and will jeopardize the future of our economy. As the report shows, this is not just coming from the left or the unions, but can be seen on the pages of the Financial Times and that hot bed of left wing radicalism, the City.
Mr Osborne argues that cuts and growth aren’t an either-or situation and that he can scalpel away somewhere between a quarter and half of departmental budgets without effecting growth. This is a false economy – this government has an agenda for cuts but not for growth.
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16 Responses to “The Coalition’s £100bn gamble on growth without the state”
John Moss
Ash, the dirty little secret in our tax an benefit system – which you cannot consider separately – is that we have an almost entirely regressive system.
If you move from earning nothing to earning a little, you will lose almost all you earn. As you move to the level at which you start to pay NI, then Income Tax, you lose bit less, until you reach the heady heights of not paying NI anymore and just paying 40% income tax. There is a small upward kick at the end with the 50p rate.
This is of course exactly the right way to organise incentives, ignoring the the 50p rate), with people paying a smaller portion of their income the more they earn, so incentivising them to work harder and earn more.
A flat tax, with a chunk of free pay and a sort of “negative income tax” below the threshold for paying tax, might produce a more “progressive” system, but it wouldn’t raise anywhere near as much as the system we have so the reduction in the role of the state would be even greater.
Let’s hope we can get there some time soon!
Christian Wilcox ( ctg )
http://www.theyworkforyou.com/debates/?id=2010-09-13b.599.0#g607.0
Ms Lucas ( All hail! ) has spotted something there. We’ve just had the tax puters updated as well, which is where recent stories in the papers of ‘you’ve paid too much/ not enough’ have appeared. As the errors are corrected.
The deficit, including a repayment figure, is about 200 billion per annum. 170 billion, plus 30 billion as an installment to pay off that 1.2 Trillion we are projected to owe ( eeekkk!!! ). So if Ms Lucas is right that may only cost 1 Billion in Tax Hunters etc etc to recoup 120 Billion.
Which leaves 80 Billion to rustle up, with current expenditure. So take off that 40 Billion and you’re down to 40 Billion to find. He’s put up VAT as of next year, and there is also Capital Gains Tax equality now being carried out ( up to 18% if I remember correctly ), so…
Without those public colleges to train people as the job markets adjust we’re screwed. And yes, that is obviously money out of the kitty. But even so. It may be enough for a couple of years to only borrow 40 billion, and buy time to swing it round sooner.
And that’s 2 years of the colleges still being there so the populace can adapt.
The Public Sector was bloated sure, but leaving a skeleton service will do a lot of damage as well.
In summary: A bit more data, and I agree with your points that it is very risky without that big push on training to help people adjust.
Christian Wilcox ( ctg )
Although I do feel we’ll get some Direct Taxes back.
I think Ali Darlings 1p on NI for those earning over 20k pa was a good idea. Double bubble, and the poor not taking the whack. You may need to roll that out later though as the recovery starts proper.
We be still in those woods at this stage. But those tax rises have to be spread or we’ll get unfairness. Spread the load.
Ash
John
I don’t understand why if hitting the 50p rate represents an ‘upward kick’ in the proportion of tax you’re paying, hitting the 40p rate doesn’t also represent an ‘upward kick’ (given that it’s substantially higher than the amount of income tax & NI you’re paying before you hit it)?
And I don’t understand this either:
“This is of course exactly the right way to organise incentives, ignoring the the 50p rate), with people paying a smaller portion of their income the more they earn, so incentivising them to work harder and earn more.”
I can see how a low marginal tax rate makes working that bit harder more worthwhile for anyone, at any income level; but how does it incentivise hard work to recognise that people way up the income scale from you pay less tax as a proportion of their income? (I think that’s what you’re suggesting?)
Why is a bus driver who one day realises that he pays proportionately more tax than a barrister is going to be spurred on to work harder? If anything, surely he’ll reason that working harder is a comparatively worthless thing for him to do.
Or are you pushing a sort of ‘anyone can make a million dollars, all it takes is guts and determination’ idea according to which the skills, qualifications, work history etc you have make no difference to your earning prospects, so anyone can just jump way up the income scale if they only put their mind to it? I don’t get it.
Matthew Lloyd
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