There is an alternative

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I have the following on the web site of Public Finance, sponsored by the chartered Institute of Public Finance and Accountancy, this morning:

The party conferences are almost upon us. I’ve been invited to them all, and have thankfully got out of most: there is only so much lobbying a man can do before he loses the will to live. But there are common themes that will be relentless and familiar throughout this conference season.

The first will be whether the Coalition government can survive under back bench pressure. I’ll leave others to debate that. The second theme is cuts. I’d like to debate that, but not now. The third is whether there are alternatives to cuts. This seems to me much more interesting than the other two, so it’s to that I’ll turn.

Those of a certain age will remember TINA: Margaret Thatcher’s oft repeated line that ‚ÄòThere is no alternative’. George Osborne has revived TINA with an enthusiasm not seen on his party’s benches since the days of, well, Margaret Thatcher. But, in the end even Maggie was proved wrong. Will Boy George be likewise consigned to the dunce’s corner?

There are three reasons for thinking he might be. The first is that the financial markets may not behave as he expects. For example, far from there being a fear of gilts as he predicted, there’s a demand for them that is almost unprecedented – precisely because in the downturn his cuts threaten to make private sector investment looks decidedly unattractive.

Second, the idea that austerity will deliver the results the government expects is not proven. Certainly market reaction is currently much less favourable to Ireland, which has embraced austerity, than it is to Spain, which has not really done so, at least as yet.  There may be reasons for this market reaction – not least that the markets think austerity will not pay, or may cause more harm than good. Any wise public sector finance manager needs a plan B at this time – and it might be called on quicker than expected if a U-turn is demanded soon.

Third, and perhaps most interestingly, the idea that cuts are the only option may yet be challenged. The reality is that, despite the rhetoric, deficits have not been caused by runaway spending.  This is not a spending crisis: it is an income crisis. At some point if cuts prove harder to deliver in practice than on a spreadsheet (and those long in the tooth know just how true this can be) then the alternative of raising more revenue – or, heaven forbid, borrowing more to fund investment – has to be a possibility.

Both options exist. I have, for example, argued that the UK has a tax gap – a difference between the tax that should theoretically be yielded by the economy using the laws that are in place, and that which is actually collected. After a long period of denial this has now been conceded – and in December 2009 a tax gap of £40 billion was acknowledged by HMRC.  http://www.hmrc.gov.uk/stats/measuring-tax-gaps.pdf . I have argued that it is something more like £95 billion before late paid debt is taken into account. http://www.taxresearch.org.uk/Documents/PCSTaxGap.pdf. Either way, the potential yield from tackling this issue is enormously significant.

No doubt other sectors also have the potential to contribute more revenue if  more resources are allocated to the task. The cost of doing so for UK plc as a whole is insignificant when the people so engaged would otherwise be unemployed.  Plans for increased revenue raising should therefore be on the radar of anyone who is anywhere near a tax collection process.

And then there is more borrowing. But that, as they say, is for another time.