There are alternatives to the government’s slash and burn policies

There are alternative ways of managing public finances that aren't reliant on more savage cuts.

There are alternative ways of managing public finances that aren’t reliant on more savage cuts

Never-ending austerity is the dominant vision of the Conservative-led coalition government. Last week it promised further cuts of around £55 billion to public expenditure. However contrary to the government’s claims, there are alternative ways of addressing public finances. Here are just a few examples.

Mega rich

Britain’s 1,000 richest people are estimated to be worth £519 billion, an increase of 15.4 per cent on the previous year. The wealthy elites can’t spend or consume their entire fortune, often built with the blood, sweat, brain and brawn of other people. They could even voluntarily forego 10 per cent of their wealth and it will hardly make a difference to their lifestyle.

Alternatively, the government could levy a 10 per cent wealth tax on the super-rich.

Tax avoidance

An estimated £120 billion of tax revenues go uncollected each year because of organised tax avoidance, evasion and arrears. Even by just collecting 25 per cent of the tax lost each year, government can make a massive improvement to public finances.

Yet the political will is not there. Chasing tax avoiders is a labour-intensive task, but due to austerity programmes some 34000 jobs have disappeared at HMRC.

Rather than firm action, the government is engaged in gestures. A good example of this is the proposals for a Diverted Profit Tax, or what is popularly known as ‘Google Tax’, which might raise £1 billion over five years.

This is optimistic as in the absence of a fundamental reform corporations are adept at creating complex structures to shift profits. In any case, the legislation is unlikely to be enacted before the next general election.

Pension contributions tax relief

The UK’s richest 1 per cent own about the same as the poorest 55 per cent of population. Inequalities and the demands of public purse can be addressed through reform of tax relief given on contributions to pension schemes.

Currently, tax relief is based on the marginal rates of income tax applicable to each taxpayer. If someone liable to the basic tax rate of 20 per cent puts £1,000 in to an approved pension scheme, this results in a pension contribution of £1,250. The same £1,000 results in a pension contribution of £1,667 and £1,818 for those paying income tax at marginal rates of 40 per cent and 45 per cent.

The total tax relief on pension contributions is about £35 billion a year. Employers receive another £15.2 billion tax relief on pension related National Insurance payments, making a total tax relief of around £50 billion. The UK has 29.9 million income tax payers . Of this, 25 million individuals pay tax at the basic rate of income tax or less, and 4.9 pay tax at higher marginal rates.

The government admits that only one-third of the tax relief on pension contributions goes to basic rate tax payers and the remainder goes to higher rate taxpayers. Others say that only about 25 per cent relates to basic taxpayers.

This is a massive subsidy for the well-off. By fixing the tax relief at the basic rate of income tax government can generate revenues of about £25 billion each year.

Corporate welfare

The government wants to be tougher on welfare cuts but there is complete silence on rolling-back the rampant corporate welfare programme.

Private Finance Initiative (PFI) has been promoted as a panacea for providing schools, hospitals and a variety of public services. The 725 current PFI projects have a capital outlay of £54.2 billion, but the government is committed to repaying about £238 billion.

This is a massive drain on public funds, especially as the government itself could have borrowed the money cheaply. The government should renegotiate all PFI contracts.

Railways were privatised in 1996, but the UK train fares are almost the highest in the western world. Train companies have picked up nearly £60 billion in subsidies since privatisation and pay generous dividends to their shareholders. More subsidies are on the way for the Crossrail and HS2 projects. This gravy train should be halted.


The above list is by no means exhaustive but shows that there are alternative ways of managing public finances than more savage cuts.

Prem Sikka is Professor of accounting at the University of Essex

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