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:
• We will make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals.
• 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:
• 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.
• 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.
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You repeat the non-sequitur about the deficit being caused by a fall in national income. This is a complete logical fallacy.
The cause of the crisis was ridiculously low interest rates by governments and central banks around the world designed to promote unrealistically low unemployment and unrealistically high growth. Low interest rates fuelled a price bubble which the government borrowed against. The bankers were just taking their slice of the pie, as everyone else was.
This crisis was caused
by government. They stood by and did nothing and not only did they do nothing but they actually encouraged it. The government was running a budget deficit at a time of boom for heaven’s sake.
@Pat
I see no point responding to this
Absolutely no one with any credibility believes your argument
@Pat
Spot on Pat. The Labour government were warned about continually running a deficit when Gordon Brown broke his own rules for deficit management.
@Pat
You’re living in cloud-cuckoo land! It was City-encouraged light-fingered regulation that led to light-fingered behaviour.
Get out of your City propaganda bubble and read an intelligent account of why taxpayers are being bankrupted by a global Ponzi scheme propped up by morally bankrupt politicians.
@Pat “The cause of the crisis was ridiculously low interest rates by governments and central banks around the world designed to promote unrealistically low unemployment…”
I think that just about says it all about the aim of neoliberal economics. So please can we know what the main objective of economic policy should be.
One of the central tenents of neo liberalism is that central banks are independent (trans completely unaccountable).
Central banks have no interest in employment levels or growth, they are purely fixated on inflation, more particularly wage inflation. They are the political wing of the finance sector, as can be seen by the ECB ruthless enforcement of creditors’ interests in Greece.
Gordon Brown was feted for making the BofE independent
Therefore the government were not responsible for ‘low’ interest rates.
Interest base rates averaged 5.29% 1997-2007, around half found in the preceeding 80’s property boom and ten times the current rate.
Most people do not buy houses for cash, how much they can pay is bound by what they can borrow.
The housing bubble was created by the increased lending by the banks. They printed the money to fuel the boom, or in the case of northern rock,to borrow recklessly through the capital markets.
The giddy years of the housing bubble were a market driven misallocation of resources, leaving a mountain of private debt and a reduced productive sector.
If low interest rates created booms,recalling norman lamont of unpleasant memory,we’d all be singing in the bath now.
@Paul
Have you ever wondered why we have to suffer high interest rates in order to keep house prices under control? It’s sheer ignorance of how the economy works, I’d say. Extract the free lunch (land rent) for public benefit and capital values would relate to the real capitalised rental stream. The rental value of property does not tend to boom/bust but follows local supply/demand and general GDP trends. The main beneficiaries of the status quo are the banks (through interest – actually most of the land rent) and property speculators.
Low interest rates do benefit the whole economy if the land ‘free-lunch’ issue is dealt with.
“Have you ever wondered why we have to suffer high interest rates in order to keep house prices under control?”
No, because I have not seen any effort to control housing prices through interest rates. Rates were pretty steady throughout the boom and the independent monetary committee were as relaxed about it as anyone else as far as I can recall.
The boom petered out because it ran its course, not because the wise mens’ skilled entrail reading.
They were tasked to monitor the RPIX measure of inflation which excludes mortgage interest payments. So the committee could conveniently ignore the bubble happening outside their remit.
It’s been a little while since I looked at georgist/land value stuff but I do remember thinking anything that:
a)stemmed the flow of available credit into already in place capital
b)shared the benefits of a good so unequally divided amongst the population
would be an idea worth exploring.
Low interest rates are always a great idea:
a)modern economies run on credit
b)credit has virtually no production cost
c)An efficient economy should minimise its running costs
d)Its better for a population to retain (within the public or private sector) as much of the surplus they produce than to hand it over to the non productive finance bureaucracy for basically nothing.
Land/property is a sort of fulcrum for the current predatory arrangements but I think the production of credit is where the real free lunch lies.
However, we don’t have low interest rates except for savers and the financial institutions. The spread over base rates by the time it reaches the small business or consumers is colossal.
The creation of an environment conducive to investment, better than or at least competitive with similar and similarly located countries and by regional and global benchmarks.
@Paul
On re-reading I recognise that it wasn’t you who blamed low interest rates. You are of course correct that the trigger was the credit explosion and I totally agree with you that credit is a free-lunch. But tackling the money problem is fraught with difficulties. High interest rates – an easy measure to implement – would undoubtedly have curbed the house price boom. However, LVT is a simpler solution which brings many other benefits. That’s why I am happy to promote it.
@Alex
I disagree. Full employment is the best policy to aim for. If everyone is working who is capable of working the demand exists to stimulate real productive investment.
“The creation of an environment conducive to investment, better than or at least competitive with similar and similarly located countries and by regional and global benchmarks”
Sounds nice, I could imagine Gordon,Tony, Dave and Nick delivering just such a bland, baffling mission statement.
What is an environment conducive to investment?
One that places the interests of non public investors above all other considerations, including those of the non investors, which are the majority.
And we should compete with our friends and neighbours for their indulgence?
After thirty years of putting on a dress and lipstick for the investors, we haven’t much to show for it. High unemployment, low social mobility, deadbeat banks,increasing inequality and the fiscal drag of outrageously poor value PFIs.
Global benchmarks…which brand of cornflakes do I buy to find out about these?
Look, you don’t need to be a right-wing ideologue to realise that the structural deficit in the UK is a lot bigger than it could and should have been because a) too much of the UK’s economic growth during the last decade was based on cheap money/credit and the related inflation in asset prices and b) the govt. didn’t run a surplus during that period of (albeit somewhat artificial) growth. “Big government” IS a problem if it is unaffordable/unsustainable in the long-term.
I have no idea how to tackle the deficit or whether cutting too much too soon or taxing too much too soon is going to lead to the much feared double-dip recession or not, and I’m aware that the current situation is a small statist’s wet dream (i.e. that there will be an ideological motive behind some of these spending cuts/tax increases), but the assertion that Brown & co. are/were somehow blameless for the extent of/size of the deficit is ridiculous.
@Delphinium
I have addressed many of the issues raised here at http://www.taxresearch.org.uk/Blog/2010/08/23/we-need-to-cut-the-deficit-but-we-dont-need-cuts/
“Low interest rates fuelled a price bubble which the government borrowed against. The bankers were just taking their slice of the pie, as everyone else was.
This crisis was caused by government. They stood by and did nothing and not only did they do nothing but they actually encouraged it. The government was running a budget deficit at a time of boom for heaven’s sake.”
This is typical of the dishonest and morally bankrupt arguments put forward by the right to try and avoid taking responsibility for the financial crash. The blame is shifted from the bankers and those right wing economists and politicians who promoted the neoliberal agenda, onto the government, and the rest of society. Well Pat, plenty of people such as myself did not indulge in an orgy of irresponsible borrowing, but we’re now paying for those who did.
Certainly New Labour was stupid enough to go along with the neoliberal agenda, and is therefore complicit in what’s happened, but the principal blame for the crash lies with the banks and right wing ideologues.
@sickoftaxdodgers
Well said
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