"Overall, the government is unlikely to charter a new course for the economy or provide relief for millions of households though with an eye on next year’s general election it may throw a crumb or two to bribe the electorate."
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
Next week, the UK Chancellor Jeremy Hunt will present his Autumn Statement or the Budget on the state of the economy and the government’s tax and spending decisions. What should the government do and what will it actually do?
The UK economy is stagnant and growth prospects are lagging well behind the G7 countries. Economic rejuvenation can’t be achieved without redistribution of income and wealth and improving the purchasing power of the masses.
For the last 13 years, the government has done the opposite. Since 2010, the UK economy has grown by 24%, but the gains have not trickled-down to most of the population. In 2022, the poorest fifth of society had only 8% of the total income, compared to 36% for top fifth. The average real wage has returned to the 2007 level. In October 2023 median monthly pay was £2,276 or £27,312 a year, utterly inadequate to support a family or buy a home. With the relative absence of public housing, people are forced to enter the private rental market and are paying 40% or more of the salary in rents.
The government led assault on wages and public services has forced 14.4m people to live in poverty. Last year, 3.8m people experienced destitution, including around one million children. This is nearly two-and-a-half times the number of people in 2017, and nearly triples the number of children. The Trussell Trust, the UK’s largest food bank network, has handed out 116% more food parcels than five years ago. The government’s own data shows that homelessness has increased by more than 10% in a year.
Low incomes deny people access to good food, housing, education, pension, healthcare and lead to greater pressures on the National Health Service (NHS), social care and mental health and support services. Some 7.8m people in England are waiting for a hospital appointment. 2.6m are chronically ill to work and nearly 500,000 have dropped out of the labour market altogether due to prolonged health problems, leading to labour shortages. Most of the maternity units in NHS hospitals are not safe enough. Child death rates are rising, with the steepest rise in deaths for children under five.
Such social squalor cannot provide the foundations for a sustainable economy. Major political parties are not showing any enthusiasm for creation of money, as advocated by supporters of Modern Monetary Theory (MMT), or a new round of quantitative easing to increase investment in productive assets. They also oppose increases in the public debt. That leaves recalibration of taxation policies as the only major tool for economic rejuvenation.
A key part of the government’s discourse on taxation is that corporations and the rich need incentives and lower tax rates, and this will somehow stimulate the economy. This has not delivered the requisite investment. For example, the headline corporate tax rate declined from 30% in 1983 to 19% in 2002, and oscillated around 19% until 2022. This was accompanied by numerous tax reliefs, ultra low interest rates and low inflation rates, but did not stimulate private sector investment in productive assets. The UK is ranked 27th out of 30 OECD countries. A key lesson from Scandinavian countries is that businesses thrive when the state provides good transport, education; healthcare, pension and social infrastructure and masses have good purchasing power. Such aspects have been neglected in the UK.
The government policy has been to incentivise the rich. Therefore, chargeable capital gains are taxed at rates ranging from 10%-28% and dividends at rates between 8.75% and 39.35%. However, there is never a talk about incentivising workers who invest their brains and brawn to generate wealth.
Wages above £12,570 a year are taxed at rates of 20% to 45%. Workers also pay national insurance contributions (NIC) at the rate of 12% on income between £12,570 and £50,270, and 2% on income above £50,271, but no NIC is levied on investment income even though its recipients use the NHS, social care and can claim various benefits. One study estimated that aligning capital gains tax with the rates of income tax can raise £17bn a year more in tax revenues. Another £8bn can probably be raised by levying NIC on capital gains. Aligning taxes on dividends with wages and charging NIC on the same can raise another £6bn-£10bn.
The government urges people to make private provision for pensions, but hands extra privileges to the rich. In 2020-21, the government handed £67.3bn of tax relief on pension contributions. Nearly 58% of this went to 4.7m individuals paying income tax at marginal rates of 40% and 45%; and 48% is shared by 27m basic rate (20%) taxpayers. Those with incomes of less than £12,570 receive no tax relief. By giving everyone tax relief/credit at the rate of 20%, government can generate additional £14.5bn a year.
The above is a small sample of reforms that eliminate tax anomalies and can generate £45bn-£50bn for redistribution and rebalance the tax system which currently privileges wealth.
Taxing the wealthy is appropriate because they have been major beneficiaries of government policies. For example, governments have handed £895bn of quantitative easing (QE) to speculators. This pushed up asset prices and financial returns. One study estimates that QE boosted the wealth of the richest 10% household by between £128,000 and £322,000. Bailouts of banks and energy companies have conferred substantial benefits on their shareholders. Higher interest rates have inflicted misery on millions, but have enriched the rich. Government policies have increased concentration of wealth and the richest 1% of Britons has now more wealth than 70% of the population combined. Patriotic Millionaires, some of the richest persons in the UK, are openly urging the government to increase their taxes. A wealth tax of 2% on those with assets over £10m, about 20,000 people, could generate up to £22bn a year.
The additional revenues can be used for investment in new industries, exempt minimum wage earners from income tax; abolish VAT on domestic fuel, provide free school meals, inflation-proof social security benefits and more. Higher spending power of the less well-off has a greater multiplier effect on the local economy as they tend to spend on everyday things and stimulate production of goods and services.
However, a government addicted to squeezing the less well-off is targeting tax cuts for the rich, especially inheritance tax. This is to be funded by cutting welfare spending which involves forcing the sick and disabled to work, with the threat that if they refuse their benefits would be cut. Former Conservative Prime Minister Liz Truss has called for income tax cuts for the highest earners, accompanied by cuts in the minimum wage, workers’ redundancy pay and rights, paid holidays and reversal of sickness benefits, already the lowest in OECD countries
Overall, the government is unlikely to charter a new course for the economy or provide relief for millions of households though with an eye on next year’s general election it may throw a crumb or two to bribe the electorate.
Image credit: Andrew Parsons – Creative Commons