We don’t need a spending review: we need a paradigm shift

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I note an article in the FT this morning that says:

The National Health Service cannot survive as a purely taxpayer-funded service and will have to look for other forms of revenue, such as co-payments and top-up insurance, if it is to meet future demand, one of its most influential figures has said.

David Bennett, until just over a week ago head of Monitor, the hospitals regulator, said Britons were “close to the limit” of what they were prepared to pay in tax.

And another that reports:

Politicians and investors agree: there is an “infrastructure gap”, it is global, and it approaches $1tn each year. From the US through Europe to the emerging world, there is a backlog of projects that are needed to drive growth, while institutional investors are desperate to find investments – like infrastructure – that offer them a return that is not related to the volatility of the stock and bond markets.

Yet the deficit remains. “The challenges are as much on the side of projects as on supply of capital,” said Bertrand Badré, the World Bank’s managing director, at its annual meeting in Lima last month . “There are simply not enough viable projects out there.”

And in case you think I only read the FT in the morning the Guardian has this:

George Osborne’s decade-long redesign of the British state will result in 44% of state spending going on health and elderly people, the highest proportion since comparable records began in the 1990s.

Meanwhile, the share of overall state spending that goes on education and economic development, including house building, is set to fall by around one fifth over the same period to 19% — its lowest share since comparable data began in 1997.

In case you are wondering by now what the connection is, it is the poverty of thinking.  David Bennett thinks that however great the healthcare needs of the country, and however great our capacity to supply them  might be there is some immutable limit that suggests we reach a point where we say enough is enough and we refuse to produce any more health unless we can also produce handbags, holidays and gladrags that are  the supposed precondition of paying for the NHS. The assumption  is that  the provision of healthcare  by the state is a mere byproduct of the  meeting a private need by the market.

George Osborne clearly buys them logic: it is very obvious that he intends to ration the supply of many public services over the course of the next few years  on the basis that we would rather shrink the state than pay for those things that we really need  and want.  In the process he will, whether he intends to or not, seek to alienate younger generations from the state to the greatest degree possible by ensuring that they pay more, relatively, for a service from which they will see ever reducing benefit.

In the meantime, as the FT article on infrastructure hints,  the world's capital will offer no redress to all this because it can find no real investing opportunities worth pursuing in the private sector and at the same time it refuses to make itself available, either at reasonable cost or by way of tax payment, to meet public need.

We are stuck in a crisis created by an extraordinary mindset.  The world's capital is desperate to invest in infrastructure because it can think of nothing else to do, such is the worldwide poverty of entrepreneurial thinking,  but at the very same time  those politicians chosen by the world capital are refusing to provide a use for that wealth  because they will not create the new debt that it wants to buy, whether it be issued by National Investment Banks or in the simple form of gilts, because they believe that if the state undertakes such activity it will crowd out the private sector even though the owners that private sector are, in effect, crying out for  state leadership on this issue.

And, at the same time, because in the world's wealthier economies  the wealthiest are realising that there is little else that they can consume they are beginning to save more with a threefold result.  First, they are not fuelling growth, with the result that there is a steady decline in the overall rate of growth of government income where the trajectory which was, for so long, steadily upwards, now looks to be remarkably flatline.

Second, their  saving is having a remarkably distortionary effect upon society because, since they know that they aren't spending they also know that there is no point in  saving by buying the shares of the companies whose products they're not interested in acquiring,  so they are instead buying property, but are in the process making the lives of the middle and lower earners in the societies in which they live considerably harder.

Third then, unsurprisingly  those on middle and low incomes are feeling worse off, but not because of taxation,  but because of the rewards that they are paying to the already wealthy who are then not making their cash available to the state to meet the needs of the majority of the population.  Those under pressure to pay back student debt, mortgages, provide for pensions that they might never be able to take  and simply keep a family fed  whilst also paying for the educational support for their children when the state is no longer able to meet it are inevitably going to have limited additional resources to pay tax, although George Osborne does, in his July 2015 forecast, presume that they will in fact be making significant additional payments despite that fact.

So,  we have reached crisis point.  Capital has given up the game of growth, but we have not learned  how to manage that fact.  It has instead  taken up the game of wealth extraction, but yet again, and despite the enormous consequences of this, we have not adjusted to this new reality.  And, because we do not tax wealth in any effective way the consequence is that significant sums  are being moved beyond the effective reach of taxation whilst the need for services in society is continuing to grow at the rate it did prior to 2008, when government was not profligate but simply met need which (it should be stressed) it was apparent that we as a society had the ability to fulfil if only the cash was available for that purpose, just as we could now meet the need  if only the right mechanisms were put in place to fund it.

My point then is a relatively simple one:  we do not need a spending review right now, unless it is to increase the level of supply of services to those who are in need. What we need instead is an income review, which looks at how the capacity of our economy to meet public need can be best met from the resources available to it at this time.  And what would that spending review conclude?  I suggest that three things are possible.

First it include the deficit funding at this point of time is entirely logical.  We have no risk of inflation. We have under-used  resources in the economy.  We have low effective wages.  We have capital crying out to lend money to the government at almost no interest rate.  And we now know that quantitative easing can cancel debt if it proves to be necessary to stabilise markets  without any apparent repercussions of consequence, as Japan  continues to prove.  There is,  despite the claims of right wing politicians, a mechanism to provide the money that we need to make the economy work if we have to use it and only fools would deny  us the chance for better well-being on the basis of outdated theories and paranoia about the Weimar Republic.

Second,  we need to tax wealth.  Let's not beat around the bush: if the world is awash with wealth that is largely untaxed, which wealth appears to have little productive use, then the obvious thing to do is tax it.  And, since we will in the next few years have effective automatic information exchange from tax havens the opportunity to tax wealth has, for the first time, been created as a consequence of the tax campaigning by those in the Tax Justice Network, development agencies and others who have put this topic onto the international agenda.  It is  time to tax those who can afford to pay.

And third? We really do need to release capital for investment. I mentioned a way to do this via pension funds the other day. But a National Investment Bank is the obvious route to use to co-ordinate such activity. And PQE is the back up (and I stress, the bank up) here.

Put simply, another world is possible, but to get to it we need a paradigm shift in thinking. Until it happens we are all going to suffer from wholly unnecessary and counter-productive cuts in spending.