I was agonising last night, and even into the night, on how to deal with the issues raised by the Institute for Fiscal Studies yesterday in their pre-budget analysis. In essence, they said three things.
First, they suggested Rachel Reeves needs at least £25 billion of tax revenue a year to simply address the current deficiencies in public services.
Second, they are joining the club of commentators suggesting that this money cannot come from the wealthy or they will all leave the country.
Third, they then suggested that the City has very little desire to fund any investment plans Rachel Reeves has, and they will not be taken in by any plans she might have to change the fiscal rules. The implication is that they think the City might go on a funding strike, refusing to buy more government bonds as a result.
They did not, of course, put things quite like that: I am trying to cut through the details, of what they did say to get to their core points, the essence of which is that Labour is between the devil and the deep blue sea, partly because it said it will not raise VAT, income tax, national insurance and corporation tax, and partly because the City is not persuaded that there is a good case for spending more in investment, however numbers are rejigged.
To put it another way, it would seem that they think that the total incompetence of Rachel Reeves in making absurd promises before the election means that she has no choice but to impose austerity now, and as for investment, we can forget that because the interest cost is far too high and the City will not tolerate being paid anything less.
The IFS analysis is, of course, hopelessly inadequate. Its willingness to think very firmly within the neoliberal box whilst always believing that the rich will leave and the City has a choice as to what to do with its money, whilst perpetually denying that all the funding for government spending does, in fact, come from Bank of England money creation always means that will be the case. It's a simple fact that if you start with prejudice and then make a series of false assumptions, then your analysis will always be flawed. That is what the IFS do.
That said, they describe what almost all journalists then think to be the reality of our economic situation. It is not. The problem I have is in communicating the contrary message in the time I have available to me.
To do so, let me also get to the basics: the time for detail can follow.
My assumptions (some framed to make life for Reeves a little easier ) are that, first of all, the situation now is worse than she thought when she made the promise not to increase all the aforementioned taxes, and so that assumption has to be abandoned. There have to be some increases in those taxes if the public services of the UK, on which we all, the wealthy included, rely, are not to collapse. It really would not be hard for Reeves to say this. She keeps saying the Tories made a mess of things, so why not blame the need for tax rises now on their reckless tax cuts before the election whilst emphasising all that she will do will impact the wealthiest alone?
Second, she has to revise the fiscal rule, or simply not have one. They are, after all, just bits of economic folklore which everyone knows will never be compiled with. Why not just say she will invest in what this country now needs to make it productive, sustainable and secure rather than spend her time talking about rules that prevent all those things? Which, ultimately, matters more?
Third, she has to tell the Bank of England to cut the bank base rate: it is absurd that it is so high, and the fact is that it is costing this country dear when there is absolutely no need for high positive real interest rates right now given that a) there is no significant inflation risk right at present and b) any risk that does exist will be entirely incapable of being addressed through interest rates manipulation. The ludicrous constraint of the government not being able to do what is required for this country because its cost of borrowing is too high because a government agency (which is what the Bank of England is) has set it at an absurd level has to come to an end.
Fourth, the payment of interest on at least 75 per cent of the central bank reserves that were created by new money creation via the QE process between 2009 and 2021 has to end. Right now, taking tax into account, that might save £18 billion a year, which is around 75 per cent of what the IFS says is needed to fund essential improvements in public services.
Fifth, if the City goes on gilt strike, refusing to buy more of them, then two things have to happen. First, the absurd quantitative tightening process, which is effectively sucking £100 billion of funds out of the City this year solely to reduce the size of the central bank reserves accounts and not to in any way support government spending or investment, has to stop. It is beyond crazy that cuts in real investment are being discussed when this programme is underway for no good reason.
Then, sixth, if there remain issues around funding, despite the fact that the City has purchased £156 billion of news bonds so far this year according to Debt Management Office data, which makes a mockery of the claim that they have no inclination to buy government debt, then the government has a duty to chose between City and people, and side against the City. It can do so by simply funding investment by borrowing directly from the Bank of England, who have no choice but fund the sums in question if instructed to do so by parliament.
Seventh, the paranoia about the wealthy has to end. Firstly, they do not pay disproportionate amounts of tax. As Chapter 3 of the full version of the Taxing Wealth Report shows, they vastly underpay tax in the UK. They know that. The vast majority of them are not going anywhere as a result. And even if they do, their wealth has to stay here: to presume that they now pack up their money in an old kit bag, put it on their back, and take it with them on a pack mule when they leave is absurd but appears to be what political and economic commentators think to be the case.
As a result, more taxes on wealth are required. Equalise capital gains tax. Add an investment income surcharge. Do both, and the funding the IFS says is needed is available. See chapters 6.2 and 8.1 of the Taxing Wealth Report for details.
But most important of all, end for good the belief that the UK only exists as an entity for the purposes of financial engineering and exploitation by the City and the wealthy, which is the current framing used for all budget decisions. What the City and the wealthy may want is not the basis for choosing what is required for the benefit of this country. What the people of this country need is the required basis for choosing budget priorities.
The City and the wealthy want:
- Children in poverty
- Pensioners dying of cold
- Under-educated children
- Low pay
- Inequality
- Rising rates of sickness
- High levels of mental ill health
- A failing justice system
- Skyrocketing household debt
- Perpetual cost of living crises
- And more of a similar sort.
They must want these things: someone demanded that they be delivered, and they have been. The only people who could have chosen them are the City and the wealthy. They must, in that case, have demanded them in exchange for their support for fourteen years of Tory government.
So the choice is, the City and the wealthy versus the people. It is becoming increasingly clear that is the case. The massive, panicked and utterly absurd reactions to Labour's feeble attempts to adopt a different agenda makes clear that is true.
Rachel Reeves could decide to be on the side of the people.
It is already clear that she is caving in on almost all her plans. She is deciding to succumb to the demands of the City and wealth.
The short-term cost will be enormous. Misery and despair will continue whilst the wealthy continue to consume our planet as if there is a spare available when this one runs out, which will never be true.
The long-term costs of this cowardice from Reeves will be bigger still: we are talking about the fates of people, this country, our democracy and our planet here and she is putting herself on the wrong side of all of these issues.
Meanwhile, the IFS is hailed as the voice of reason when it is the voice of the wealthy and the City, wishing, as a result, the destruction of everything of value in our society.
I despair.
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A good analysis. Yes unfortunately the commentators lack sufficient knowledge to assess economic policy and therefore simply parrot the same old rubbish. They are unable to look at alternative options – which as we know do exist. The IFS is regarded as the only body which has the ability to evaluate and comment on government policy being ‘well regarded’. Its views are taken as value free, rational, sensible and therefore should be accepted.
All of this remind me of the commentary after Black Wednesday in 1992 when there was majority dismay on the grounds that withdrawing from the ERM was incorrect. They did not understand that an overvalued currency was not appropriate. Also the apparent consensus after 2010 that austerity was a good thing, a view based on ignorance, wishful thinking and plain stupidity. I recall David Dimbleby berating a politician who disagree with the policy saying where would the money come from? We have too many journalists who have an inadequate understanding of economics. It would be better if they refrained from commenting on issues they know nothing about!
Not sure where we go from here!
People are taught to believe that society relies on the wealthy and trickly-down economics. You would have thought that the last 40 years demonstrates that it is a complete failure.
Then there is the post World War II government that founded the welfare state (including the NHS), nationalised the railways, and begun building 4.5 million homes (80% affordable housing), resulting in the best economic growth in decades. People could afford to buy a house on one salary and a 3.5% mortgage fixed for 30 years, and rail and energy prices were so low, we never had to give them a second thought.
I had a depressing chat yesterday with a rich fellow who voted Labour for the first time in the last election. He won’t be voting for them again if they continue this way. Essentially his point was that he knew he was going to be taxed more, but he was ready to accept that in exchange for serious investment in public services. Now he expects to be taxed a lot more but with no obvious benefits in return. I guess he’s typical of many first time Labour voters.
How does he know there is no obvious benefit?
What is his evidence for that claim?
Serious question…
Labour scrapped the funding of 1.3bn in technology (supercomputer and AI research). If this government doesn’t invest in new technologies, the country will not be able to achieve the levels of productivity and growth it needs.
The IFS £25Bn tax rise proposition is going to fall on the middle and poorer tax payers and their families. We have had the pantomime performance of threatening to tax anyone else; but you can’t have tax equalisation (reducing higher rate reliefs), or tax non-doms, or taxing effectively subsidised private schools (taxing education, as if student loans that are so large they pursue them through life are not equivalently penal), or anything that increases the tax of the untouchables (if I may borrow a phrase from the Horizon Inquiry): because the untouchables will just leave, because they can (even if it is just in the form of a threat).
What is left? Tax those who will not leave, or can’t leave and whom will not fight it, or have not already bought and cornered the market in politics and media. Then tell the overwhelmed and overburdened we are all in it together, and the Government has their back.
Correct, John.
As a 78 year old mother and grandmother of children ranging from from 4 to 23 whose husband has Lewybody dementia with cap gras ( he doesn’t always recognise me) I feel continual despair at not only what only is happening in this country with this dreadful government but with all that is happening on this planet of ours which we are destroying. I read your comments regularly Richard for showing some sort of sanity but I don’t know how you do it day after day.
Please take care of yourself.
I do it because I don’t think I have any choice but do so
And thank you for your comment
And I hope all goes as well as it can for you, your husband and family
Labour of more than a century ago wouldn’t need to be told how it should behave towards the people; it was established to represent the working class and the unions. I doubt the present leaders of the Labour party know anything of their own party’s history and reasons for its establishment. They see it as a vehicle to enrich themselves and their families. Accepting bribes and nepotism is rife within this so-called Labour government.
LINO showed us exactly who they are when they voted to keep the 2-child benefit cap and abolished the universal Winter Fuel Allowance. Those were the very first things they did right off the starting blocks – they kicked society’s poorest. This is who and what Reeves, Starmer, Streeting and the others are and they showed us straight away.
LINO is the Tory Party and the Tory Party is LINO. That’s the reality of the situation today. My expectation is the gap between the poor and the ultra-wealthy will continue to grow.
We’re going back to the time before the Labour party came into existence.
We’re going back to the days of
https://www.amazon.co.uk/Ragged-Trousered-Philanthropists-Wordsworth-Classics/dp/184022682X/ref=sr_1_1
which no doubt some of the utterly vindictive upper classes look back on as halcyon days.
In what way doesn’t the City have a choice what to do with its money?
Where else is it going to save very large quantities of sterling? It is not safe in banks – and they know it. So they have to save with the government.
The Treasury has an unlimited amount of money at its disposal, so why doesn’t she dip into that, carefully of course?
Paul Johnson seems to be the BBC’si ‘independent’ ‘authoritative’ superglue of choice to maintain the economic ‘analysis’ in a closed orbit, so that the debate operates entirely self -referentially and any potentially contaminating MMT-carrying asteroid does not collide and wipe out the neo-lib ‘there is no money’ dinosaurs.
The academic mode of discussion is supposed to be one of ‘enquiry’ – not just pronouncements – as Johnson and IFS often seem to do
If BBC purports to be seeking independent economic comment – they should als be asking Murphy, Sikka, Mazzucato etc – not only Johnson.
Ms Reeves could declare that the UK faces a national emergency to rebuild itself after 14 years of unnecessary Tory austerity and announce a massive support package.
Remember that during Covid the Tories produced a huge ( by current UK standards) support programme. President Biden did even more.
Did the sky fall down? Did the financial world complain? Not that I recall. The mantra was that it was necessary.
For the UK it’s urgent and doable.
Will it be done? No chance.
She could, indeed, do that
Yup, she could get the the Ways & Means Facility at the BoE to step up just as it did for Covid.
The greed and depravity of wealth knows no bounds and it’s not just a few ‘bad apples’, it’s systemic and without real consequences for the perpetrators. Unless that changes, it’ll just keep extracting wealth in any way that it can. They don’t even need to be voted for. Their bought and sold politicians simply do their bidding for them. It’s insanity.
‘As private equity has spread, so have dire warnings about its effects.’
‘This is where the baby root canals come in, as a grotesque epitome of the industry’s modus operandi. According to multiple media investigations and a US Senate inquiry, in order to drive up profits, private equity-controlled dental chains have induced children to undergo multiple unnecessary root canals. “I have watched them drilling perfectly healthy teeth multiple times a day every day,” a dental assistant in a private equity-owned practice told reporters. One child even died as a result. To its many critics, private equity is a shining example of “asshole capitalism”, but baby root canals make one feel even that label is a touch too kind.’
https://www.theguardian.com/business/2024/oct/10/slash-and-burn-is-private-equity-out-of-control
How many not-rich people, but potentially rich in the future, leave is never modelled as far as I’ve seen.
If the UK doesn’t offer opportunities then its people in their 20s with skills and qualifications people want, but who aren’t yet rich, will clear off. There’s anecdata for isntance about Scottish engineering graduates going off to the oilfields off Brazil for instance, as the opportunities in the North Sea are zilch.
Yes some rich will leave if taxes go up, but there must be a term for the phenomenon of the rich you won’t get coming through your own ranks.
Of course young people go abroad for a bit. Why not?
The vast najority also return.
And the EU is closed to many of them now.
I really don’t see this as an issue.
“Anecdata”. You mean anecdotal chit-chat and gossip? Now given a sober title that implies this dubious form of “data” has authority and substance. It isn’t evidence, even it passes for evidence in the 21st century; but almost anything passes for evidence.
No doubt there are Scots engineering graduates in Brazil; but when weren’t there Scots engineers in far flung parts of the world? Scots engineers from Burmah Oil opened the Middle East oil industry in Persia (Iran) before WWI; under the brilliant Chief Engineer, Charles Ritchie; who built the first oil pipeline from the oil fields to Abadan by around 1910-11. Yes, the Government failure of modern Britain and parochialist failure of Scots Unionism speaks to precipitous decline; but that failure is because essentially we rely on Britain either to do anything well, or indeed more typically to do anything at all; save line some industry with a badly conceived market advantage that doesn’t work; for all but a few, who are grossly overcompensated for achieving nothing beyond their own success; we now have Adam Smith Institute economics – Adam Smith without either the secret or the hand (but we have 21st centuryreplacement, the wink and the legislated private monopolies).
Thank you and well said, John.
I would add sugar and tea planters around the empire.
Congratulations John:
You figured out what anecdata means.
But did rather miss the point that if opportunities to get rich in the UK are quashed, rich people leaving is going to be an issue, but so too is people from here already not getting rich here. There are many examples of emigrants from these shores in the post war period who never returned, who made their wealth elsewhere, or their children went on to add value and make wealth elsewhere because taxes were easier and planning wasn’t socialised.
Policy makers would like to know the magnitude of this issue, and their research arms are not giving us estimates, perhaps because they are skewed in their thinking and don’t like to analyse the unseen.
Politely, this is absurd.
The wealthy have done phenomenally well in the UK and are seriously undertaxed, which is one reason why they are wealthy.
And real entrepreneurship, of which you clearly have no comprehension, is never driven by a desire for wealth. It’s driven by a desire to do something. That’s what differentiates it from private equity, which is not entrepreneurial at all.
I am sure that if the City threatened The Governments plans, should they choose the Chancellors response might be something along the lines of ‘is that wise’
I am sure they would back down quickly
The word ‘theatre’ came up for me before I read John Warren’s comment on the pantomime so I am in good company.
So, there is going to be lot posturing and posing and standard dialogue going on now like all theatrical productions but it seems that this one will have the longest run of all thanks to lack of courage and imagination by Ms Reeves.
Speaking as a man though, at least I get some satisfaction out of the fact that a woman has decided to behave like this rather than usual silver haired, rather well fed bloke telling society that we cannot afford this and that.
Equal-opportunity incompetence – it’s good to know we’re world-beating at something!
The I. F. S. emphatically warns that reliance on taxing “the rich” and big companies to pay more has limits and would be far from risk free.
Is there a warning of equivalent clarity and emphasis about the “real life” risks associated with the evident growing concentration of wealth power, not least over the governments of our somewhat deformed democracy?
Ditto its twin, which is increasing hardship for regular people and their children? (All from Open Democracy)
Might it be that, in a healthy, honest democracy, the role of government is to recognise the inevitable, society damaging consequences of an unmanaged market and, for the equitable benefit of all citizens, their children and a resource producing economy, to manage “the market” openly, responsibly and confidently?
“Concentration of wealth yields concentration of political power. And concentration of power gives rise to governmental decisions that increase and accelerate the cycle.” (From Noam Chomsky)
(P. S. Might the main stream media do more to assist governments in being objective, equitable and benign to all?)
I’ve noticed that the Guardian are refusing to open comments on their Reeves/Chancellor/Treasury/Tax articles.
Comment is… not free but stifled.
That’s routine for articles on economic matters in the Guardian these , possibly because the the nonsense in them was routinely getting shredded by the commentators, most of whom, to my eye, displayed considerably more grasp of contemporary economics than the writers.
It’s to save embarrassment then.
Today’s on private media is good
I hope the rumours that they might consider taxing employer NICs are unfounded because the idea is bonkers. In an economy where workers have not been receiving their fair share of increased productivity for four decades, a plan that will penalise an employer that pays generous pensions to their employees more than one who doesn’t is not a good idea at all.
What we need in order to boost tax revenues is to put the money in the pockets of average earners. Instead of penalising a company that contributes 10% to employee pensions twice as much as one that contributes 5%, let’s set a ratio of employee wages and benefits to net profits and tax the difference at a 100% rate to punish the bad employers or to force them to pay staff more and boost tax revenues.
Take net profit plus labour costs. Multiply by 45%. Take away labour costs from figure. Take that figure as tax.
I would never, I think, have ever come up with this idea. It stinks of desperation.
Mine or theirs?!
Theirs
I’m yet to be convinced that there’s a better way of increasing a nation’s tax invome than creating more jobs.
Proper jobs mind you, not this gig-economy nonsense.
Ian hits the nail on the head , clearly the answer to your question is the Wealthy and has been for a wee while .
All we have to do is keep plugging and referring to Richards Taxing Wealth report. The mainstream media never refer to it and Rachel Reeves and Labour never refer to it.
We have to ensure that becomes untenable .
A good analysis.
What if a significant number of the very wealthy did leave? Does it really matter that much?
As you say, government spending could be funded by borrowing from the BoE. How much do the wealthy invest in productive uses rather than existing assets and property, leading to asset price inflation? We would presumably still be able to tax their UK based assets and incomes. And, higher government spending would create additional economic activity and this is more likely to be where we need it most.
Or am I missing something (entirely possible)?
Not much…
I have read that the top one per cent pay 30 per cent of all income tax revenues: is that true? If they leave, who would foot the bill?
It’s true
They would not all leave
Count on a few thousand doing so
And who would pay the bill? We would: the income would not go. Other people would earn more.