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| A balancing act: fair solutions to a modern debt crisis |
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| Written by Giles Wilkes |
| Friday, 10 July 2009 09:30 |
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Today CentreForum has published a major piece of research on Britain's fiscal mess. It aims to counter some of the unbalanced analysis that now dominates the public discussion of the UK's looming debt. If you want the publication itself, the PDF is called "A balancing act". Subscribers will be getting a beautiful bound copy soon. The fiscal deficit exploded when the government's revenues collapsed: the forecast for 2009-10 fell from £608bn to £496bn in just a few months. So why are all the arguments focussed on spending cuts? Sure, everyone recognises that spending became unsustainable under Labour - though Policy Exchange's way of describing a 'surge' in lending was highly misleading, as we argued here. But cutting spending during the recession would have been a sure-fire way of ensuring that future historians would have put the word 'Great' in front of it. There are also practical limits on how far and fast spending can be cut. In the meantime, tax revenues will hit a low point for the last 45 years, and will remain well below the average. The real uncertainty of how quickly and reliably spending cuts can impact on the deficit - all those redundancy payments, contracts to be broken, etc - means they are a far less reliable way of reassuring the bondmarket that you have a way of satisfying their demands. It is also fair to ask for taxes to rise to help deal with the problem. With the threat of a deflationary recession, the government's expanding balance sheet was conceivably the only way that a really nasty situation was averted - both in terms of financial sector interventions and absorbing the collapse of private sector demand.* What would have happened had they acted like fiscal hawks? Hard to say but: collapsing asset prices, soaring unemployment, contracting nominal incomes, and eventual inflation are all likely candidates. The rich would have suffered alongside the poor, and have therefore benefited from this debt, whether they know it or not. And, finally, ignoring tax rises means an opportunity is missed. Not an opportunity to 'punish the people who caused this mess', as some left-wing writers imply: but a chance to redraw our tax system in a way that is more balanced, less inimical to economic growth and the less likely to encourage destabilising bubbles. Hence our preference for a property tax supplement to the council tax, and VAT, although this last item will have to be carefully timed if it is not to damage a recovery. There is plenty more to the paper: a discussion of the inflation-option, a comparison with the situation Margaret Thatcher inherited (building on the Cameron-Thatcher theme discussed earlier), and a novel mechanism for preventing hubris in future Chancellors. Once again, we argue that the situation does not call for a super-quango, aka "The Office of Budget Responsibility" - as the Conservatives suggest. We intend to publish on the inescapable subject of spending cuts soon, as well. * this view helps explain why we took Ed Balls' side in his fight with Fraser Nelson |
| Last Updated ( Saturday, 11 July 2009 07:16 ) |
The unintended and unforeseen damage caused by the empty rates tax will far outstrip the short term benefit of £1.4 billion in tax revenue.
But there is a little talked about, but much more universal, business rates problem coming towards British businesses. The Valuation Office is currently conducting its five year review of Rateable Values as it is bound by law to do. The new rateable values will come into force on 1st April 2010, and will be based on market values as at 1st April 2008. (Known in the trade as the 'antecedent valuation date' - AVD). Unfortunately since that date commercial property values have plunged by some 40% or so. (Fitch says that they may reduce by 50% before the market recovers.) In the five years prior to 1st April there had been considerable growth in property values, especially in London. The large projected rises in rateable values will inevitably mean significant tax rises for all businesses, at a time when most are struggling to survive.
In my view, given these unprecedentedly difficult trading circumstances, the government should intervene and stop the valuation agency from introducing the increases. Business needs tangible support which is readily available. Everyone understands that the government needs to raise revenue to try to balance its budget, but to heap more taxes on a commercial sector fighting for survival is lunacy. Business needs tax cuts for the sake of our economy.
http://petitions.number10.gov.uk/RatingReview/
It is also not true that the deficit is something that is unavoidable and results from the current economic crisis. The ratio of government spending to GDP rose from 41.8% in 1999 to 45.8% in 2007 before the downturn commenced. The suggestion that “public sector receipts will soon be as low as they’ve been since the 1970s” is simply not true (though taxes are lower than they might be due to the government’s willingness to borrow and so pass the tax burden onto the next generation rather than take the honest and prudent approach of paying for expenditure out of current taxation).
The idea that there is not room to reduce government expenditure is simply absurd. Whether it is big-ticket items ( ID cards and ballistic missiles) or ongoing costs, there is a lot that government could cease doing or fund more efficiently and less wastefully. We are right to focus on spending cuts; CentreForum is wrong to deny that truth.