Ok – that’s not the UK.
That’s what is forecast for Jersey as the inevitable consequence of the fact that – as I’ve been saying for a long time – they were bound the be going bust right now.
But it’s an indication of two things. One what is actually coming here – because just as Jersey has found it really can’t cut so will we and second, that this blog has proved an accurate predictor of these things.
New report proposes tax-based alternative to spending cuts – and calls for massive investment in job-creation
Green Party leader Caroline Lucas MP will this week tell the coalition government there is “no good reason for any cuts in public expenditure during the life of this parliament.”
On Monday 21 June Britain’s first Green MP is to issue a new report – Cuts: the callous con trick – in which she will make the case that cuts are unnecessary “because the economy could instead be rebalanced using additional tax revenues.”
The report, written jointly with tax expert Richard Murphy and Colin Hines of Finance for the Future, condemns the government “for failing to put to the electorate the option of fair tax instead of cuts,” and accuses ministers of increasing the likelihood of a double-dip recession.
Cuts “are not an economic inevitability but an ideological choice”
Caroline Lucas said today:
“Cuts are not an economic inevitability. They are an ideological choice. Politicians of all parties are now sharpening their axes to slash public spending, forcing those on lower incomes, who depend on public services the most, to pay the highest price for the recent excesses of the bankers.
“There is a choice. We should ask those best able to pay to foot the bill through fairer taxation. That’s the challenge I’m issuing: for that political choice to be made. It must be clearly asserted that we are not all in this together: that some had more responsibility for this crisis than others, and some benefited more from the boom that preceded it. Those who enjoyed the largest benefits must pay up now. For that to happen, fair taxes, not cuts, must become the new big idea to replace today’s callous and uncaring cuts fanaticism.”
Tax avoidance and evasion “truly staggering” – could be as high as £100bn a year
The Brighton Pavilion MP continued:
“The UK is currently one of the most unequal societies in Europe. But the financial crisis offers us an opportunity to rebalance the tax system. We could do it, for example, by applying the 50% tax rate to incomes above £100,000, abolishing the upper limit for national insurance contributions, raising capital gains tax to the recipient’s highest income tax rate, and helping lower earners by reintroducing the 10% tax band.
“Moreover, the huge extent of tax avoidance, tax evasion and unpaid tax in the UK economy is truly staggering. HM Revenue & Customs themselves admit that tax evasion and avoidance together come to at least £40 billion a year, whilst in November 2009 they also admitted there was £28 billion of unpaid tax owing to them. Shocking as these numbers are, some experts have suggested that tax evasion – that’s deliberately breaking the law to not pay tax – might be as high as £70 billion a year, and tax avoidance – in other words, exploiting loopholes in tax law – might be £25 billion a year. That would take the total target for necessary action to collect tax due and owing to more than £100 billion a year”
Cut tax abuse, not tax-collectors’ jobs
Caroline Lucas continued:
“Whilst these appalling losses to the nation’s coffers are occurring, HM Revenue & Customs are pursuing a programme of job cuts which will ultimately reduce their own staff by 20,000 – close to one quarter of the total. This makes absolutely no sense. This programme should be reversed, staff re-employed, and local tax offices re-opened in order to tackle tax abuse. It has been calculated that at least £15 billion of extra tax could be collected each year as a result. That could prevent a massive range of cuts”.
Richard Murphy, tax expert, chartered accountant and co-author of the report said :
“Our report sets out a range of additional options for changing the tax rules for the UK so that more than £40 billion of additional taxes could be raised each year by the end of the life of this parliament. That, together with the tax collecting efficiency savings already noted, would together deliver more than £60 billion of tax revenues for the UK – so preventing the need for any cuts at all.”
Richard Murphy added:
“A government really can spend to save the economy when in a recession. During this one, borrowing has been smaller and unemployment lower than forecast because of the measures taken by the last government to stimulate the economy. This report argues that a Green New Deal involving public and private investment in a massive labour intensive UK wide energy saving programme and a rapid shift to renewables should be the basis for continuing that programme of support for our economy. This would ensure that we come out of the recession better equipped for the future we’re going to face.”
Caroline Lucas concluded:
“Fairer tax not cuts must become the real battleground of this new Parliament. It is the debate the Coalition and Labour alike must embrace. As the full ghastliness and unfairness of the cuts become ever clearer, the public clamour for fairer taxes rather than cuts can only grow.”
Note
The report can be read at: http://www.financeforthefuture.com/TaxBriefing.pdf.
A commentator on this blog has asked if I really think the Tories are stupid.
My answer is that all the evidence is that they are. Take as example a piece in the Telegraph today – the favourite read in the Tory shires. They say:
David Cameron was embarrassed after being accused of planning "brutish" cuts by the Left-wing economist he appointed to head a pay review only a month ago.
Will Hutton, a leading liberal commentator, was a surprise choice to head the commission – which will look at ways to close the gap between the highest and lowest-paid public sector workers – given his long-term antipathy to the market economy.
Will Hutton is, I guess, what might fairly be called centre-left. That means in broad terms pretty much in the middle of the Labour party, even if not a member of the party. In other words he’s a proponent of mixed economy. As I am. As, incidentally, all Tory governments have been in living memory.
And yet there is now a collective right wing madness out there in Toryland that is gripping it like a fever – and driving it into the far right – into a world that believes the state is the enemy, that all who believe it has any role are to be subject to McCarthyesque abuse, and who seem, I admit genuinely, to believe that anyone to the left of Ken Clarke has to be treated as being an advocate of state central planning (actually, they probably think Ken does that too – which is why he got sent to the Ministry of Justice).
The madness in question is, of course, much like that which grips many of the Republican think tanks to be found in Washington DC. It is absurd, out of touch with reality, driven mainly by young staffers who have never done a real job (who go on to be Chancellor and Prime Minister in the case of Osborne and Cameron) and is entirely dogmatically driven. That dogma in question emanates from Chicago but predates the 1930s crash. It has a basic premise, which is that Say’s Law works. Says Law, in essence says that the total supply of goods and services in a market economy will equal the total demand during any given time period. As Keynes therefore concluded from it, large scale involuntary unemployment cannot, according to this law, happen. Except, of course, it did.
The logic of Say’s law flows into neo-classical economics, where as David Ruccio has recently written that “neoclassical microeconomists assume that prices move to clear markets and that the auctioneer calls out price vectors until general equilibrium is achieved”. What is more, the Chicago school assumes that this happens without any time delay. Neo_Keynesians assume this happens with a time delay (broadly speaking). Keynesians simply assume this does not happen.
Put in plain language the neoclassical assumption is that the economy will go back to full employment after a shock, all by itself. The market will solve the problem. True Keynesians don’t believe that.
And that this logic is what underpins Osborne’s thinking is apparent. Take this from the FT, which says today:
Official forecasts will show George Osborne’s emergency Budget hitting growth and costing jobs in the short term, government sources said last night, but the austerity measures will also create a brighter climate for the economy by the end of the parliament.
In a tough Budget that seeks to overachieve on plans to eliminate the deficit, Treasury ministers accept that the new and independent Office for Budget Responsibility will mark down the growth and jobs forecasts as government spending falls and taxes rise.
But insiders who have seen the forecasts said that because the OBR will assume this is just a temporary shortfall of growth, the effect will be to increase spare capacity in the economy, creating room for a faster growth forecast just before the next election.
In other words: the market will automatically correct for the mayhem caused now. And the pain during the correction will be worthwhile. 1.5 million extra unemployed, 4 million in all: that pain is worthwhile. Massive poverty: that is worthwhile. Blighted education: that is worthwhile. Needless deaths as health care will suffer: that is worthwhile. Social disorder due to cuts in policing: that is worthwhile.
Of course, none of it is worthwhile. There are two reasons for saying that. First, there is no evidence that markets do correct for imbalances. Say’s Law does not work: the market does not ensure the economy balance at full employment and there is absolutely no reason ion earth why it should. So the assumption behind this pain is completely wrong. There will just be pain, but no gain. And the mayhem will be enduring.
Second, there is no evidence that the ‚Äògrowth’ the market might generate will meet need. People want law and order, health care, good education, and all those other things the state provides and which no market mechanism could provide with anything like the same efficient. Remember, US health care costs twice as much as UK healthcare for overall worse outcomes, although it is fantastic at promoting the social inequalities the right wing really desire. In other words: there is no evidence at all people would be better off if services are cut and market growth could fill the void.
So, let’s think what all this is about. It’s about the right wing think tanks having their one and only moment to inflict the change towards a more unfair society on the UK. They’ll never get a second chance. Osborne knows that. As the FT also notes this morning:
Mr Osborne [may cut heavily] in the Budget on Tuesday so he can minimise the chances that he will have to come back with another austerity Budget at a midterm stage when the government might have become unpopular.
That’s why the Right’s calls have been so extreme and from so far beyond the boundaries of political acceptability at any normal moment. They intend this budget should be a coup d’?©tat. It is their intent to overthrow society as we know it and the welfare state. They will sacrifice the lives of millions to achieve that – as if they were First World War generals standing behind the lines (as of course they will be – secure in their own incomes).
But just as throwing humans at machine guns was no solution to the impasses of trench warfare nor is cutting now the solution to the problems inn our economy. Both ideas were based on wholly mistaken belief dfrom another age that show utter contempt for human life.
The Generals were wrong and history despises them for it.
The ConDems are wrong and history will also despise them for it.
It’s a disaster it’s going to have to be so bloody on the way.
As the FT notes today:
Mr Osborne believes the public will be with him on Tuesday. But in spite of opinion polls showing that a majority accept the need for cuts in general, nothing has fully prepared people for what is about to land on their heads.
I did my only small piece of research on this today. OK, not wholly scientific, I agree, as it was undertaken from the barber’s chair here in deep Tory Norfolk but what I found quite surprised me and was confirmed as commonplace by the barber himself – a man I’ve got to know over a few years. People are really frightened about what might happen on Tuesday. They think they’re going to suffer. They think the less well off are going to be hit hard (the survey population is biased in their favour, I might add). And they’re really angry about it.
The ConDem ‚ÄòPlan for Pain’ is deliberately designed to make ordinary people suffer whilst the best off benefit. And they realise that now. Even here in Tory heartland.
This would be interesting except for the fact it is going to be so nasty.
From the Guardian, today, this call for no VAT increase and an ambitious programme for the banks to pay more tax:
As economists we are concerned that the much-discussed rise in VAT (Report, 18 June) would hit the lowest earners hardest. Deep public sector cuts threaten frontline services and risk dampening demand. Abroad, the poorest countries are facing a major hole in their finances because of a financial crisis they did nothing to cause. Yet the banking sector, since precipitating the largest recession in a generation, remains the most profitable industry in the world. Global profits this year are expected to be well over £400bn.
In the emergency budget on 22 June we call on the government to live up to its progressive rhetoric by announcing an ambitious tax on the financial sector that could raise tens of billions to help reduce the UK’s unprecedented deficit, protect the poorest and fight climate change.
The letter was signed by:
Stephany Griffith-Jones, Financial Markets Director, Initiative for Policy Dialogue, Columbia University
Prem Sikka, Professor of Accounting, Centre for Global Accounting, Essex Business School
Dr Jan Toporowski, Department of Economics, SOAS
Ronald L. Martin, Professor of Economic Geography, Cambridge-MIT Institute Research Associate, University of Cambridge
Ian Gough, Professorial Research Fellow, LSE and Emeritus Professorof Social Policy, University of Bath
Richard J. Smith, Professor of Econometric Theory and EconomicStatistics, University of Cambridge
Barbara Harriss-White, Professor of Development Economics, Oxford University
Sheila Dow, Professor Emeritus in Economics, University of Stirling
Geoffrey Hodgson, Research Professor, University of Hertfordshire
Stuart Holland, Visiting Professor, Faculty of Economics, University ofCoimbra
John Weeks, Professor Emeritus, University of London
Dr Alberto Paloni, Head of Economics Department, University of Glasgow
Sushama Murty, Assistant Professor, Department of Economics, University of Warwick
Richard Murphy, Director, Tax Research UK
Simon Mohun, School of Business and Management, Queen Mary, University of London
Dennis Leech, Professor of Economics, University of Warwick
Dr Jamie Gough, Senior Lecturer, Sheffield University
Grazia Letto-Gillies, Emeritus Professor of Applied Economics, Director, Centre for International Business Studies, London South Bank University
Tony Thirlwall, Professor of Applied Economics, Keynes College, University of Kent
Dr Pritam Singh, Senior Lecturer of Economics, Oxford Brookes University
Dr Nitasha Kaul, Visiting Fellow, Centre for the Study of Democracy and formerly Lecturer in Economics
Philip J Whyman, Professor of Economics, University of Lancashire
Roberto Veneziani, Senior Lecturer, Queen Mary, University of London
Dr Colin Richardson, Internet Economics Consultant, Imperial College London
Howard Reed, Director, Landman Economics
Judith Metha, Research Co-ordinator, ESRC Centre for Competition Policy, University of East Anglia
Stephen Spratt, Head, Sustainable Markets Group, IIED
Dr Roberto Simonetti, Senior Lecturer in Economics, Open University
Alan Freeman, Association for Heterodox Economics
Christophe Edwards, Senior Fellow, University of East Anglia
Dr Jerome De Henau, Lecturer in Economics, Faculty of Social Sciences, Open University
John Christensen, Director and Economist, Tax Justice Network International Secretariat, London
Michael Burke, Economic Consultant
Dr Jonathan Aldred, Newton Trust Lecturer
Can I remind commentators of the moderation rules of this site?
Lots of pedantry and “ya boo” commentary from libertarians is still arriving in my in box. If you wish not to be offended please do not bother to send such comments in. They will be deleted. Editorial freedom is something I’d have thought libertarians would defend, but it appears not. I uphold it in the interests of those who do not wish to be subject to such abuse when they in turn comment here.
As the FT notes:
President Barack Obama on Friday urged other G20 countries to boost domestic demand and increase exchange rate flexibility to encourage global growth and rebalance the world economy.
One guy is still on message I note.
Shame about the owners of the whelk stall.
I have issued a new economics briefing this morning. It is available here.
In it I predict that UK unemployment will increase to at least 4 million if the coalition government continue with their programme of cuts.
The briefing explains the logic as follows:
£60 billion of cuts
The UK’s coalition government is pressing ahead with a programme of cuts in public spending, starting immediately. Their stated aim is to eventually close what they believe to be the “structural deficit” in public spending.
The latest Institute for Fiscal Studies estimate of the gap between income and spending that the government will need to close if they are to meet their plans is about £75 billion a year by the end of the parliament. The coalition says 80% of this will come from cuts and 20% from tax rises.
This means there will be £60 billion of spending cuts per annum by the end of the parliament.
1.5 Million job losses – 4 million unemployed
When this scale of cuts is being discussed the issue is not one that can be considered at the micro level: this is a scale of cuts where the consequences have to be considered for the country as a whole.
According to HM Treasury and the Office for Budget Responsibility around 65% of UK GDP is consumer spending. According to national accounts about 60% of gross value added goes to wages. It therefore follows that a sum of between £36 billion and £39 billion (all numbers are, necessarily approximate) will be cut from total labour incomes as a result of these cuts at the national level.
UK median pay is a little short of £500 a week at present. That is about £25,000 a year.
If labour rewards as a result of government spending cuts are reduced by £37.5 billion (a mid point in the estimate noted above) then almost exactly 1,500,000 people can be expected to lose their jobs as a result.
A recent forecast by the Chartered Institute of Personnel and Development is that 725,000 public sector employees will lose their jobs as a result of these cuts.
The forecast made here suggests that, within normal ranges of forecasting, for every job the CIPD thinks will be lost in the public sector another will be lost in the private sector.
There are 2.47 million unemployed in the UK now. When these additional jobs are lost it is likely that UK unemployment will reach 4 million.
How likely is this?
This is highly likely to happen but it does assume that no alterative employment is created for those state sector employees losing their jobs within the private sector. This is considered likely because:
For these reasons it is considered highly unlikely that the private sector will recruit those being made redundant by the government over the next few years. Those people will become unemployed.
The private sector will, however, also bear its share of the cost of cuts. Sacking 725,000 people at £25,000 each, even after allowing for the additional costs of employing these staff, will not save more than £25 billion of government spending. That leaves at last £35 billion of cuts to be made elsewhere. The only options available to achieve that level of saving are to either reduce benefits (and since almost all benefits are spent almost immediately upon receipt within the private sector this actually effectively means imposing a direct cut on private sector revenues within the economy) or that same private sector will receive a direct hit by having its extensive contracts with the government cut in value.
Whichever way this is looked at the result is not less than £35 billion will fail to reach the private sector as a consequence of government cuts (and this is before the effect of reduced spending by the former 725,000 public sector employees, now unemployed, is taken into account). Of this sum about 15% will be profits, which will be foregone. Maybe 20% will be investment, which will be foregone, resulting in job losses. The rest will be represented by direct job cuts. In other words about £23 billion of jobs by value will have to be cut – and at UK average earnings after allowing for the additional costs of employment and for wages being paid on average at the average rate of £25,000 per annum, that means a little over 750,000 additional private sector job losses on top of those already suffered in the state sector– exactly as forecast above.
The impact of the reduced spending of formerly employed people, now unemployed, could only exaggerate, and not eliminate this trend towards increased unemployment occurring. The likely fall in investment also increases the probability of cuts, and is not taken into account when achieving the estimated total unemployed figure suggested here. In other words, if there is any calculation error in these estimates it is to underestimate likely unemployment.
What can be done about this?
There are three things that can be done to prevent this disastrous scenario developing.
First of all the programme of cuts that has been announced can be halted before a tidal wave of unemployment is unleashed on the UK economy – none of which, because of tax revenues lost and additional benefits paid, will actually in any meaningful way reduce the UK government deficit.
Second, the UK government can and should be promoting new investment in the world economy – as was agreed upon by the G20 earlier this year.
Lastly the UK government has to promote demand in the UK economy, but in a way that is sustainable and economically justified. This is the basis for the Green New Deal, which is the most timely economic plan the UK government could now adopt.
http://www.ifs.org.uk/pr/obr0610.pdf page 3
http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.pdf
http://www.statistics.gov.uk/pdfdir/qna0609.pdf table D
http://www.statistics.gov.uk/cci/nugget.asp?id=285
http://business.timesonline.co.uk/tol/business/industry_sectors/public_sector/article7147171.ece
http://www.statistics.gov.uk/cci/nugget.asp?id=12
See http://www.neweconomics.org/projects/green-new-deal
The Press Association has reported:
The TUC called for an increase in capital gains tax, claiming it was used by the rich to avoid paying their proper share of tax.
General secretary Brendan Barber said: "The vast majority of taxpayers never come into contact with capital gains tax as they are simply not wealthy enough to buy and sell the assets that bring capital gains. But most will find it incomprehensible that they pay more tax on the wages they earn from putting in a full day’s work than the wealthy do from sitting back and watching their assets increase in value."
The full TUC briefing on the need for an increase in Capital Gains Tax is available here and references official figures which clearly show that CGT is the ‘tax dodger’s tax of choice’:
The TUC says that the Chancellor should increase CGT rates so that they are the same as income tax rates, and that the annual allowance for gains before tax is due should be cut from £10,100 to £2,000 a year as the Liberal Democrat manifesto proposed.
The TUC also says the Chancellor should crack down on abuse of the exemption for business sales. While there is a good case for treating people disposing of a business they have built up over many years as a special case, the current low 10 per cent rate for the first million pounds gain on a business asset is abused by hedge funds and private equity.
There also needs to be a major anti-avoidance and evasion programme with more tax inspectors and new requirements to register asset sales. Capital gains on any asset held for less than two years should be taxed under income tax rules, says the report.
With all of which I, unsurprisingly, agree.
Disclosure: for those who don’t know, I advise the TUC on tax issues
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