Friday, 6 January 2012

Fiscal Credibility, Borrowing and Taxation - Moving Towards A Compromise Policy

The Shadow Cabinet seems to be drip-feeding policy ideas one-at-a-time into the media. The problem with this is that no policy – as no man – is an island. Each affects the other and it is the whole that needs coherence, not just the parts.
In particular, EVERY policy depends on the government’s fiscal and economic policy, because only when you have sorted out how much money you are going to have, can you sort out how you are going to spend.

Jim Murphy’s defence announcement yesterday explicitly acknowledged this, inasmuch as he made great play of the fiscal responsibility that his proposed cuts were displaying. His watchword was ‘genuine credibility’. His statement was linked to Black Labour by the Guardian, and today on Radio 4 a Black Labour spokesperson strongly supported Murphy, arguing that by identifying where they agree with cuts, Labour can then more ‘credibly’ oppose others.

Today in the New Statesman, Mehdi Hasan has begun to criticise this kind of thinking. ‘Cuts’ per se, he argues, are not automatically ‘credible’, but must be considered in the context of their effects, their morality, the alternatives etc. By accepting (succumbing to) a Tory ‘austerity’ agenda, he argues, the Shadow Cabinet is in fact supporting a policy which is ‘killing Britain’ – and what on earth is ‘credible’ about that!

I think I would go one further even than Mehdi Hasan. Until Labour has finalised and announced its economic/fiscal policy, I would suggest, it cannot announce ANY ‘credible’ policy, because the credibility of any policy depends inextricably on the economic/fiscal policy which is going to fund it.
In simple terms, Mr Murphy’s ‘policy’ is as yet unfounded and speculatory.

The Need For A Budget Policy
So, before we make any more policy statements, we really need to sort out our stance on the economy and the budget.

Because, as everybody is well aware, Labour does not yet have an agreed economic/fiscal policy. It is still being knocked back and forth in the Party corridors like a snooker ball – from Black, to Red, to Brownite, to Blairite. Mr Murphy’s announcement seems to me to be much more an attempt to pre-empt that debate, than to set a meaningful agenda for defence. Fairly much the same could be said of Liam Byrne’s announcement on Welfare earlier this week.

So, how far away is Labour from being able to make a meaningful statement about its Budget policy?
Though far from an expert myself, I shall not let that hinder me from telling you what I think about the issue!!!

Because I think there are a number of things which can be said which are becoming generally-accepted truths:

1. The deficit
There was an article recently suggesting that deficit-reduction was a ‘fact of life’ and that Labour had accepted this. I think this is fair enough. Only a nutcase would suggest that, in the current climate, any country can go on running a revenue budget deficit year after year. Even if it was ever feasible, it is no longer possible in a world where the Markets can take fright and your government collapses.

2. Borrowing
The problem with borrowing is that it eventually has to be paid back.
And that includes all those ‘hidden’ forms of borrowing which don’t show up on the government’s balance sheet, but which we as a society are going to have to pay back in the future (I am talking about PFI and all the privatisation deals – I am sure that our government has saddled us, and continues to saddle us, with deals which we are going to find almost impossible to fund in the years to come.)
On borrowing, therefore, I think it is possible to say the following with a fair degree of certainty:
- borrowing in time of a revenue deficit (where you are, in effect, borrowing to pay back money you borrowed yesterday) is the road to ruin.
- borrowing to fund a revenue deficit can only happen in the VERY short term.
- borrowing to fund capital investment (which will produce future revenue) is absolutely valid, as long as you can arrange in the meantime to make the repayments within your ongoing revenue budget.
The word ‘borrowing’ is becoming increasingly politically tainted.
And it is clear that the British government at the moment is borrowing to fund a massive revenue shortfall, that this is getting worse not better, and that it has to stop.
I know there is a lot of talk about borrowing validly, to stimulate economic growth, but we clearly need to be very careful when it comes to borrowing of any kind.

3. Economic Growth and Austerity
I would suggest that it is also becoming generally accepted that austerity alone isn’t working.
The problem with austerity is that it takes money out of the economy, and causes recession … which in its turn REDUCES taxes/government revenue. Thus, as fast as the government introduces austerity measures to address the government over-spending, its revenues fall away leaving it with a greater, not lesser, hole to fill by borrowing. This is clearly untenable.
Having said that, I personally think Labour needs to be careful not to adopt a ‘growth-will-solve-everything’ stance, and particularly a ‘borrow-to-grow’ stance, because – in the current international situation – nobody can rely on growth for the next decade.
A policy which put all our eggs in the ‘growth’ basket, and borrowed significantly on the gamble that we would ‘grow our way out’ of our budget deficit, would be irresponsible in the extreme, however much rational sense it might make in theory.
Indeed, taking a wider view, it is simply common sense that the world cannot continue with everyone growing for ever and, eventually, we are going to have to adopt economic plans which deliver prosperity to citizens on a zero-growth model.
So – where it is undeniable that growth would solve the deficit – Labour needs to make sure that its growth policies are fiscally viable.

4. Taxation and fairness
Incredibly, and I am sure disingenuously, the Coalition seems to be ahead of Labour in this area, which is surely a matter of social justice.
Because, of course, there are two ways of balancing the budget – one is to reduce your expenditure, and the other is to increase your income.
Again, are we not beginning to move towards some basis for consensus in this area?
It is inextricably linked with the concept of fairness. Even the Tories are beginning to realise that cuts which affect the poorest people of our society are not only socially unjust (c.f. Boris Johnson, who has today savaged the government’s Disability proposals), but economically disastrous – austerity cuts which take money out of the pockets of poor people (who spend it immediately) disproportionately damages spending ... which is obvious and visibly happening.

(btw, the hou-ha about benefit ‘scroungers’ is UTTERLY irrelevant in this context; nobody disagrees that people who apply fraudulently must be caught and stopped, and nobody disagrees that people who need benefits need to be given them – that is simply a matter of criteria and administration, not a budgetary consideration.)

Thus (again) even the Tories are beginning to mention that big ‘No-no’ of the right: taxation.
OF COURSE it will have to be done sensibly. Last night’s Panorama programme made it clear that plugging the tax-avoidance loopholes will not be as simple a matter as we had hoped, and the danger is always that we drive businesses away ... which will make the economic (and therefore the fiscal) situation even worse, not better.

I have consistently argued that the solution to this is not to tax the companies, but to tax individuals (i.e. to raise income tax, not corporation tax). Society is constructed of people, and those people have a duty to each other; thus anyone who earns their money in the UK should be made to contribute towards the public weal, and that will ultimately involve a more progressive system of taxation towards the top end. The timid LibDem suggestion for a mansion tax on properties over £2million merely demonstrates that they don’t understand the concept of ‘rich’ people. I suspect the political groundwork has already been done, by movements like Occupy, which would support a proposal to require rich people (as we define them) to cough up more, whether or not they live in the UK.
As I have argued before, rich people don’t need to worry about giving their money in taxes to poor people; they will get it all back almost immediately because the poor HAVE to go immediately out and spend it.

How fair is all this? Am I right in thinking that these are more-or-less generally-accepted truths? Am I right in suspecting that the heat of debate is not so much in the practical policy decisions we will eventually have to make, as in the ethical and political standpoints we are coming from to make those policy compromises?

It just seems to me that Labour has thrashed this out ad nauseam, and that we are more-or-less ready to formulate a policy which would declare:
1. We must move irrevocably towards a budget which is balanced in the long-term.
2. That borrowing must be a solution only in extremis, and only then to fund capital investment.
3. That there must be a coherent and realistic policy for fiscally-viable growth.
4. That Tory policies which make cuts to the income, services and benefits of the poorest and most vulnerable of our society must be reversed.
5. That where the budget deficit cannot be plugged by non-regressive cuts in spending, it will be met by more progressive taxation of individuals.

I know that anybody with expertise in these matters will be able to raise all kinds of caveats but, surely, for ordinary people like you and me, these five principles would seem a sensible basis for a compromise Party policy?

1 comment:

  1. TODAY!! Ed has made a statement to the press which includes this:

    Miliband is due to make announcements next week on how the party will adjust to the reality that a fair society can no longer be created simply by redistributing the proceeds of growth, the model that worked for previous Labour governments. He said: "That used to be the terms of trade. That is what Blair and Brown did between 1997 and 2010 – new schools, new hospitals, tax credits – that is not going to be available to the next Labour government. The Blair-Brown route is not available to us. Social democrats are facing problems with this all round the world: difficult times don't automatically mean social democracy wins."

    Today's 'rant' suggests that, before Labour proposes any policies, it needs to agree its position on the budget - to define what moneys it intends to possess, and how it intends to possess them ... and then it will be able to say how it intends to spend them.
    This paragraph by Ed gives me hope that this is precisely what he intends to do.

    Then, once we know what we are fighting for, we can begin to campaign for it.
    But even if he doesn't go so far, at least it seems that he is going to give us principles that we can support/advance.