This article by me has just been published on Comment is Free:
We have a financial crisis in the UK. It was not caused by the government; the crisis was caused by a collapse in our national income. That was, in turn, caused by the collapse of the banking sector. That crisis then resulted in the income of the government collapsing. Government spending continued, however, much as planned – except for two things: unemployment has risen and a bit more interest is being paid to government debt.
Neither of these issues created a government spending crisis, because what we have is a government income crisis. The budget for 2008-09 forecast that government income in 2009-10 would be £608bn.The budget for 2009-10 forecast that same income to be £496bn. That difference in anticipated income for that one year – £112bn – is what made up most of the borrowing requirement in 2009-10.
The rest was entirely reasonable borrowing to pay for the £44bn of net new investment by the government in that year. In combination, making good lost government income and paying for investment cost a total of £156bn in 2009-10. Total borrowing was £161.9bn in that year. If income had fulfilled expectations there would, therefore, have been no deficit to cause any concern at all.
Any deficit reduction policy aimed at cutting spending is wholly misdirected. What we need is a deficit cutting policy aimed at increasing government income, and there are three ways to achieve this.
The first is for the government to stimulate a moribund economy by encouraging investment. This is the Keynesian solution that is proven to work. The second is to raise selective new taxes on those best able to pay them. This is possible. The third option is to tackle the tax gap.
The tax gap has three parts. The first is tax avoidance, which I estimate to be about £25bn a year. This arises from the exploitation of loopholes in UK tax law and between UK tax law and that of other states – especially tax havens. The second part is tax evasion – that is breaking the law. I estimate this to be £70bn a year. HM Revenue & Customs claims it is much less, but their methodology for estimating anything but VAT evasion is very weak. Last, there is unpaid and late-paid tax – currently evaluated by HMRC to be at least £26bn.
Put these figures together and they come to more than £120bn. Enough, at least in principle, to close the whole current government deficit. Of course, no one will ever collect all tax theoretically owed – that's just not possible. Serious measures could be taken to tackle the tax gap, and yet there is no evidence that the coalition government is adopting any.
The current government is continuing the policy of cutting staff at HMRC – a policy initiated by New Labour. Almost 26,000 jobs have gone since 2005. Last year 5,000 frontline staff went and more still are to go. This makes no sense: each frontline member of staff brings in on average 30 times in tax what it costs to employ them. The result is that tax that is so badly needed to keep services going is being given away.
Second, strong measures are needed to tackle tax abuse – something the coalition has little to say about. They just claim that:
‚Ä¢ We will make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals.
‚Ä¢ We will review the taxation of non-domiciled individuals.
Interesting that while the Tories had nothing to say at all, the Lib Dem manifesto stated that they would:
‚Ä¢ Tackle tax avoidance and evasion, with new powers for HMRC and a law to ensure properties can't avoid stamp duty if they are put into an offshore trust.
‚Ä¢ Crack down on tax havens, which allow individuals and corporations to avoid paying taxes to developing countries.
‚Ä¢ Propose specific policies to restrict pension tax relief and relief for charitable donations to the basic tax rate – both now seemingly abandoned – and a pledge to increase the capital gains tax rate to the income tax rate, also now abandoned.
Sadly, the weakness of these proposals within the coalition list of priorities has been amply demonstrated. On the several occasions on which my work on the tax gap has been debated in parliament since the election, the Tory ministers who have responded have gone out of their way to make clear that they do not think this an issue of consequence. This is not just chance: a crisis in the nation's income which created a crisis in the government's income is being addressed by cutting spending – which was (by and large) under control. That makes no economic sense at all and does suggest that the spending cuts agenda is purely political.
But there is opportunity in that: for those who are looking to the world after the time that Osbornomics has failed (as it surely will) addressing the tax gap and raising new taxes have to be two parts of the agenda for rebalancing the equation in the government's income. The rest will have to come from something else more important still – and that will be getting people to work again.