Towards a progressive fiscal policy

Howard Reed

Monday, 20 October 2014

Towards a progressive fiscal policy: mistakes, omissions, and alternatives

The Conservative-leaning media were predictably dismissive of Ed Miliband’s speech at last month’s Labour Party conference, on the grounds that, speaking without notes, he forgot to deliver the part of his speech that explained how Labour would deal with “the deficit”. In passing we should note the complete double standards of the right-wing media here: the “ConDem” coalition promised to reduce the deficit to zero by 2015-16 and yet, in the final year of the coalition government the latest statistics  suggest that total public sector net borrowing for 2014-15 is likely to be over £100bn – still more than half its real terms value in 2009-10. Moreover, the temporary improvement in the economy is largely a result of the current asset price and housing bubble. It masks an underlying deterioration in UK productive capacity as a result of misguided and counterproductive austerity measures, which will mean a much larger fiscal hole when the next crisis strikes – as it will, most likely in 2016 or 2017. In addition, David Cameron promised more than £7 billion of unfunded income tax cuts in his Conservative conference speech and appears to have got a much easier ride from the unfailingly biased media, despite the fact that, as the Financial Times (among others) has shown, the Tories’ sums simply do not add up.

In any case, so what if Ed Miliband forgot to mention the deficit? The other Ed – Balls – covered Labour’s policy in detail in his speech the day before. And the tragic fact is that, following a mild flirtation with Keynesian deficit spending in 2010/11 before he was slapped down by the right-wing critics in the Labour Party and the media Ed Balls has now retrenched into total Tory orthodoxy – a repentant convert to ‘Osbornomics’. Hence his commitments not to borrow any extra – even for capital spending – over the next parliament relative to ConDem plans, and a pledge to balance the books by 2020 – no matter what state the economy is in by then. Combined with a determination not to raise taxes (except for the 50p income tax rate, which is welcome but not a huge revenue raiser by itself), Labour has completely straitjacketed itself on the economy. On current policy there seems to be no alternative to massive spending cuts during 2015-20 which will inflict huge misery on some of Britain’s most vulnerable families (who have already borne the brunt of austerity measures in the current parliament) while rendering Labour unelectable for a generation.

The only real difference on fiscal policy between the Tories and Labour as things now stand is that, should the Tories win in 2015, George Osborne will be implementing huge expenditure cuts and the destruction of the remaining vestiges of the welfare state with a smile on his face, whereas Ed Balls will be carrying out pretty much exactly the same policy, but in a more hand-wringing and embarrassed manner. As Richard Murphy laments in his book The Courageous State, we have now reached a truly desperate state of affairs in British politics: where the difference between the major parties is simply a matter of the mindset of the politician implementing neoliberal ‘small state’ policies (Conservatives implementing them with relish, Labour reluctantly, and the Lib Dems somewhere in between, with extra duplicity to boot), with almost no differentiation between the policies themselves. To be fair, Labour says it will get rid of the ‘bedroom tax’, which is welcome: but what about the other £30 billion plus of social security cuts made by the ConDem government? Are those other hard-hit families any less deserving than the victims of the bedroom tax?

Faced with such a disastrous prospectus on economic policy, one can only conclude that the best thing for Ed Miliband to say on the deficit was nothing at all. Because he sure as heck hasn’t got anything useful to say on current policies.

Of course, it is very easy to criticise; but what should Labour’s policy be instead of the current Tory-lite offering? A full policy analysis and ‘alternative manifesto’ will have to wait until my forthcoming Compass report with Richard Murphy in early 2015. Here I offer only a few guiding principles.

Firstly, there is a desperate need not only to stop, but to reverse, most of the spending cuts made since the Great Recession of 2008/09. With spending cuts set to account of over 90% of total fiscal consolidation compared with only 10% tax rises, it is clear that many of the poorest and most vulnerable families – particularly low income families in work – are bearing the brunt of austerity. This pattern needs to be reversed and fiscal consolidation should be rethought from scratch, with the aim that poorer families should be spared any pain if at all possible. Labour’s proposed ‘zero-based spending review’ should be recast as a ‘spending convention’ – analysing each and every spending cut undertaken since 2010. At the central government level, all cuts with a regressive distributional effect should be reversed unless a more progressive alternative policy can be implemented at the same or lower cost instead of a simple reversal. Meanwhile, cuts to local government funding should also be reversed and similar enquiries into the impacts of cuts undertaken in each locality. Participatory budgeting techniques, as seen recently in Paris, could be used at both local and national level to advise on the biggest priorities for additional expenditure.

The ‘spending convention’ should be accompanied by a tax and social security commission which over a period of (say) 18 months should draw on a wide range of expertise from academia and the third sector to design a more progressive – and simplified – tax and benefit system. The key features of this new system would be: (1) a basic income payment for all families sufficient to reach an acceptable minimum living standard; (2) merging the national insurance and income tax systems into a comprehensive income tax; and (3) replacing council tax, stamp duty and other taxes on capital and property with an annual wealth tax and a land value tax. All these taxes would be designed to be steeply progressive. The new system could be introduced 2 or 3 years into the next parliament alongside the reversal of many of the spending cuts, and should be designed to raise enough net revenue to ensure a balanced current budget at revised spending levels when the economy is at full employment. At the same time, given that the economy is still very weak at the moment – despite a return to modest growth in 2013 – there is ample opportunity to use Quantitative Easing to provide extra funds for public spending as Britain makes its way through a long and drawn-out recovery. This approach, which combines a refreshed, progressive tax-and-spend fiscal policy with a radical monetary policy – will ensure that the people who got the economy into the mess of 2008/09 should pay for it, and not the impoverished innocent bystanders.

The third plank of policy should be aimed at rebalancing the economy in the medium term to stand the UK in much better stead in the event of further financial turmoil in future. This includes better financial regulation, a green new deal to make the UK economy much more sustainable and resilient, a rebalancing of the the economy away from the City and financial services to reduce the likelihood of another crash, and a decisive shift away from the industrial feudalism of the plc and private equity dominated neoliberal economy towards a social economy which foregrounds worker-managers, cooperatives,  social enterprises and crowdfunding. Compass’s recent report on the economy, Building Blocks, offers some excellent initiatives in this vein.

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  1. Posted by Shaun

    The guiding principles are a good starting point, which make the prospect of the ‘alternative manifesto’ a welcome prospect.

    Reply