There is something very strange going on in UK political discussion at present.
As The Observer noted at the weekend, right-wing think tanks have all appeared to accept that austerity is dead and unrevivable. They have accepted the idea that deficits are here to stay for the time being.
Meanwhile in the media and amongst some on the left discussion on the necessity for tax increases is commonplace. This is also true amongst mainstream politicians.
The paradox is obvious. The right gets the need for a Keynesian recovery. The media, and some in the left, and in politics in general, do not.
I should add, that on the right there may be some macroeconomic comprehension of their logic for making their suggestions. Elsewhere, I regret to say that macroeconomic understanding is very weak. And modern monetary theory, with its emphasis on the spend and tax rather than tax and spend cycle, is at best, hopelessly misunderstood.
And that is profoundly dangerous. Unless we get tax right now the risk of economic harm is enormous, when the economy is already exceptionally vulnerable. So these are the stages required for the management of tax during this crisis.
Stage one
This is where we're at. Nothing is required right now. Furlough and loans are doing the heavy lifting at present, although furlough cannot last forever and loan schemes need to be replaced with equity investments.
Stage 2
This period arrives as furlough and loans in demand come to an end. That is likely to be later this year. The sticking plasters are then over. The new economic reality will be emerging.
That reality will be horrible, with maybe 25% of the U.K. unemployed. The focus will be in getting people back to work. That will only happen if there is either a) new private sector demand or b) a Green New Deal. There really aren't other options. Neither is helped by tax increases which reduce demand and create the sense that there is no money to risk on investment in anything green. Overall, then, deficit or not, this would be the last moment for overall tax increases.
That is not to say tax reforms are not needed in Stage 2: they are. We do need to tax wealth more. That's to tackle growing inequality and the sense of social injustice it is creating. The Tax After Coronavirus (TACs) project explains why and how these reforms should be made. There are many of them. They are shovel ready. And they should be done now. But, crucially, the proceeds should be used to reduce tax on those with lowest earnings. Council tax reductions are one of the most obvious ways to deliver this reform. There are many others.
Consideration might also be given to an excess profits tax.
Additional funding for tax collection and enforcement would also make sense during this period. This would require, for example, full country-by-country reporting. It would also require that measures be taken to stop small business tax abuse through the use and abuse of incorporation. The reason for these measures is not their revenue-raising potential, as such. It is instead that these measures would substantially improve tax morale at a crucial time. When everyone is under pressure the idea that someone cheating is particularly unacceptable: that is why these particular reforms are needed. But, I stress, this would not be the time for overall tax increases. Tax cuts will be required.
Stage 3
No one knows when stage 3 of this process will arrive. But it will. Sometime in the next two years there will be a need for a new tax consensus to fund the post coronavirus settlement.
There will be post coronavirus settlement. As has been said by many, nothing will be the same again. I am not suggesting that I know what that settlement will be: I am suggesting that it will be different from the settlement that existed until February 2020.
Only at this stage will we learn what the post coronavirus economy might look like. It might be something new, where we have learned the value of care, of education, of the need for much enhanced public transport, of bicycle and walk-friendly commuting, of decent broadband so that people can work at home, of living with less because we have found we do not need it, and flying far less often. If that is the case then it is very likely that the proportion of our national income that will be spent through the state will increase.
If, and I stress only if, that is what becomes apparent as the new settled will of the economy, will tax increases be needed. And even then, they will only be required as we head towards full employment. That is because tax increases at Stage 3 are not required to fund the new level of state spending, which can always be funded by money creation if necessary without risk of inflation arising because we will not be at full employment. They are instead required when we reached a point where there is competition for resources within the economy because full employment is being approached, and the desire is that those resources be directed toward state-run, and not private sector, activity. Then, and only then, will tax increases be needed to make sure that the space for those state-run activities exist within the economy by reducing the scope of activity within the private sector to make sure that overall there isn't excess demand for resources, which would otherwise lead to inflation.
And when those tax increases happen it is vital that they be consistent with the goals of the economy as it is then being run. So, they must be redistributive. They must support sustainability. They must address inequality. They must tackle rentier activity. Tax increases are not just about revenue raising: they are always about the delivery of the overall objective of a government.
Stage 4
Stage 4 is the longer term: the time when it is now commonly said that we must pay for the coronavirus crisis. However, that is not true. We will never need to pay for the coronavirus crisis.
The income of this period has been lost. Capital has been reduced as a result. And the only reason why we would wish to make payment for the coronavirus crisis would be if we wished to restore capital to the position that it had before that crisis began. And yet we know that there is, at present, massive inequality in our society. That is because capital is badly distributed, with a small minority holding far too much of it. And the question that has to be asked of those who claim that repayment must be made is, why would you want to restore that inequality? Why, in other words, do you wish to punish those who work for a living to restore the capital well-being of those who have savings and investments, when we already know that the distribution of wealth is harmful to many in society, to the extent that even those bastions of right-wing thinking called the World Bank, the International Monetary Fund and the Organisation for Economic Cooperation and Development all agree on this issue?
I suggest that we do not need to restore that inequality. As a result no repayment of the cost to capital (whatever that might be - and it is hard to tell, since no one is compelling anyone to buy government bonds right now) should be made in the future as a result of the cost of the coronavirus crisis. That cost should either be absorbed by the state by quantitative easing funding, with new money for use in the economy replacing the lost capital, or it should simply be allowed to wither away through long term inflation, which the use of perpetual bonds would permit. But what will never be required is that tax be used for this purpose.
Add all these facts together and the case for tax increases is remarkably weak, excepting for the reason of redirecting the economy for social purpose in Stage Three as (and when, I hope) full employment is reached again.
In that case, can the discussion be laid aside for now, please?
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I’m trying to remember the author of a particularly interesting piece that included the premise that you could give everyone over the age of 60 a million pounds with four provisos and save the country money.
It wasn’t you was it?
No
I am intrigued!
I think it was 7 to 8 years ago and I remember being impressed. (old age has finally caught up with me and I cant remember the author)
Anyway at age 60 you receive £1million
1. You must retire immediately thus creating a job vacancy and stimulating the job market.
2. You must spend £300,000 of that million on purchasing a new home thus boosting the housing sector.
3. You must spend £50,000 on a British made car thus bringing new life into a dead motor manufacturing industry.
4. You must use the remaining £650,000 on buying a private pension and give up the right to a state pension – transferring the onus from the public purse.
That’s it I’m afraid although everything was costed and I couldn’t pick fault with it at the time although I didn’t delve too deep.
Where did the million come from?
At the time I assumed it was from the Government as a one off cash payment.
Now of course it will be in the form of Government Bonds.
Capital may have been reduced by the crisis but I doubt that it will result in any improvements to inequality problems.
The areas of the economy that are genuinely productive will continue on being profitable and will likely increase profits as unemployment rises driving down wages. The large areas – mainly services – of the UK economy that are superfluous will be heavily scaled back with the burden of this falling on workers and small business owners. Big capital thrives in a crisis.
Sunak has indicated that he is happy to run with larger debt but this is merely the economics of the GW Bush administration and the deficit hawks will stay silent until there is any possibility of progressive policy being enacted then fiscal responsibility will become vital again.
What are the mainly superfluous services?
Actually, it’s physical consumption and not services that are our problem: they consume the most carbon
A large proportion of the service economy is advertising/marketing which is superfluous as it’s merely promoting brands rather than imparting any vital information. Arguably it’s damaging to the economy as successful advertising leads to greater divergence between use value and exchange value.
The hospitality industry is also obviously economically superfluous. It doesn’t create any value and there is no tangible loss in furloughing a barman in the way there is furloughing a teacher or food factory worker.
Despite millions of people being off work in this country and more beyond there is no question of shortages. The material goods we need to live now require only a small proportion of the population to produce them. How the remainder of the population is employed and rewarded is entirely down to social and political imperatives.
If you think hospitality is superfluous you clearly do not have a social life
Or much of a life at all
I simply cannot agree when so much value is created by people meeting
Sorry – but that’s an absurd claim
But I agree, much of product-based sales are superfluous
My social life isn’t what it used to be but i still enjoy pubs and restaurants. However it’s discretionary spending and i’m sure that most people are like me and have had periods when they have reduced their spending on hospitality due to reduced income or a requirement to save. Anyone who has ever had to budget their calorie intake or energy usage knows that hospitality spending is superfluous. Pubs and the night time economy never wholly recovered from 2008 and if the present downturn is as bad as you suggest then I expect the restaurant industry to take a big hit as it’s an area where people can cut back fairly painlessly.
The relevant factor about these kinds of jobs is that they will only exist for as long as they are profitable and not a second more. I think this will create a double blow of unemployment and more capital being directed into rentierism which is where the easiest profits in the UK lie.
SB
I have a limited budget….
But I think it can be wisely spent and time with others sharing ideas is very, very rarely wasted
And I think the hospitality industry assists that as much as it does people getting drunk on Friday night, which baffles me
Richard
While much of the high-end hospitality industry is superfluous – e.g the average cost of a wedding can easily be reduced from £30,355 without too much human suffering (https://www.independent.co.uk/life-style/love-sex/wedding-cost-uk-average-how-much-marriage-ceremony-bridebook-a8460451.html) – the closure of cafés has surely emphasised the social need they fulfill for people of all demographics. One can only hope that most of the better independents will somehow or other be able to weather the storm, but sadly there will be many insolvencies.
Agreed
And weddings continue to baffle me….why is that spend thought necessary?
No issues with your diagnosis or the proposed treatment, however the patient is still in denial and is demanding a different treatment for a different problem.
The right wing think tanks agree that austerity is not the answer, but seem to be lined up behind a) of your stage 2 – new consumer demand rather than GND. Their ‘investment’ in transport projects in the north are little more than Boris’ trademark vanity projects. In particular, many on the right would disagree with your Stage 4 “I suggest that we do not need to restore that inequality”. Inequality is their aim and the greater the opportunities for rent extraction the better.
Until politicians of all shades can be convinced that debt and deficit are different and that neither are as threatening as they appear, then tax and spend will continue to be the mainstream belief. I know you’ve done a lot of work on this already, but wonder if untangling debt and deficit might help and whether things like the PH article might necessitate something aimed directly at politicians and political parties.
I’ve been working on explanations this morning….
“Until politicians of all shades can be convinced that debt and deficit are different and that neither are as threatening as they appear, then tax and spend will continue to be the mainstream belief.”
It is naive to believe that economic policies which increase inequality are implemented due to ignorance or error.
Neoliberal politicians implement policies which increase inequality because the class interest which they represent requires increasing levels of inequality to maintain their wealth and power.
Parliament appears to be a very dumbed-down institution in that Keynesianism which is over eighty years old now taking Keynes’s “General Theory” publication date of 1936 as the base line may as well never have happened given the majority of MP’s appear to think fiscal expansion has to be fully funded by taxation! Why do the British even bother electing these ignoramuses to which the answer would appear to be they are economic ignoramuses themselves. Sadly the nation has deteriorated into a lazy anti-intellectual one. I don’t think I’ll ever quite get over the Labour Shadow Chancellor John McDonnell believing government operates on a credit card but it’s been like that since shortly after the Second World War!
https://labour.org.uk/wp-content/uploads/2017/10/Fiscal-Credibility-Rule.pdf
Also very galling was having to listen to Corbynistas pretend they were socialists!
I couldn’t possibly comment 🙂
The cognitive dissonance on the part of right-wingers is that when pushed they’ll acknowledge there’s a strong demand from the private sector for reserves (what is more commonly known as savings) but they won’t expend intellectual energy to rationally establish where these can come from and especially be something equitably allocated.
Precisely
Joining in on the superfluous debate……….. it is often the superfluous that expands an economy. I often think about the case of nail bars. Prior to the advent of nail bars women and some men painted their own nails. At some point the economy expanded so that women could pay to have nails decorated leading to more transactions and a measurable growth in the economy. This is a prime example of how economies grow. We should not be critical of superfluous services because the reality is that the vast majority of what we as humans do could be superfluous. As long as we as societies are willing to spin the money machine then people can buy food and places to live and survive. Where society falls down is if things have to be meaningful and “truly productive” whatever that means. Then wealth is concentrated in the hands of the few. If we all looked critically at what we do then I think the majority would see that their contribution is largely without true worth. Long live the superfluous services that mean more and more people can take part in the economy and live their lives as individuals.
Why is talk of tax increases for those with high incomes unnecessary. If there is one group going to come out of this reasonably intact it is those whose incomes, from all sources, not just employment, are somewhere in the stratosphere.
In “The Fat Cat Diet” you advocated a way of taxing companies to discourage high levels of pay. Another tack, would be to tax those with incomes (broadly defined) of greater than 10 times (or some such ratio) median earnings (around £29K), starting at, say 50% on the excess and increasing progressively for each multiple of the median. The rich don’t spend it anyway so it could be put to better use.
This tax take could be part of the policy of redistribution to those who have lost out.
Please read what I said!
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