Jeremy Hunt, the new chancellor (for now), has a hole in his budget that he needs to be filled. On 18 October he warned his cabinet colleagues that he would be coming for departmental savings (cuts). In this Hunt is in line with a predecessor, George Osborne, who piloted through the austerity programme of the coalition.
Let there be no equivocation – austerity 2010–2015 was precisely the wrong policy. Following the global financial crash all major economies suffered deficits in their public finances. National debts rose and the received wisdom was that governments had to behave like households. Governments could not ‘live beyond their means’ nor ‘max out on their credit cards’. Spending had to be reined in.
This was economic illiteracy on an epic scale. In response to this error a whole series of books and articles appeared, including Nobel Laureate Paul Krugman’s End This Depression Now! and Professor Mark Blyth’s Austerity – the History of a Dangerous Idea.
The case against further cuts
There are two good reasons for opposing as strongly as possible any new public spending cuts. First, accepted Keynesian economics shows that such cuts are counter-productive – in theory they are wrong. Secondly the UK public sector, having been battered and underfunded since 2010, is in no shape to take any more punishment as per the joint survey by the Institute of Government and the Chartered Institute of Public Finance and Accountancy reports:
“Public services won’t have returned to pre-pandemic performance by the next election, which in most cases was already worse than when the Conservatives came to power in 2010.”
To quote just three specifics: on 17 October Radio 4 World at One discussed the fact that the NHS is under such pressure and struggling with ‘throughput’ that ambulance drivers have now clocked over one million hours spent waiting to deliver patients. Secondly the NHS waiting list has hit an all-time high of seven million patients, the latest figures show.
(At this point we might remind ourselves that for six years Hunt was the man who, as health secretary, both starved the NHS of cash and ‘ran it hot’ so that it was in no condition to cope with Covid when the pandemic arrived.)
Thirdly, Tory austerity stripped £37bn out of the welfare system over a ten-year period. Latest figures show that 13 million UK residents were in relative poverty 2020/21 including just under four million children. Since 2010 the poor have become poorer both relatively and absolutely. Meanwhile in the first 18 months of the Covid pandemic the number of billionaires in the UK rose from 147 to 171 as the wealth of the rich ballooned.
A false economy
Austerity is frequently self-defeating. From 2012 onwards the legal aid budget was cut by £350mn per year. Studies have shown how short sighted this was, with Citizens Advice finding that every £1 spent on legal aid ‘can save £8.50’. Our courts, justice and penal systems generally are jammed in backlog as a result of this ‘saving’.
Under these circumstances a wise chancellor with a social conscience would hold back from making spending cuts but rather:
- For those holding non-housing wealth of £1mn or more in 2020, introduce a 50% tax on their windfall gains in the last two years. (A research project run by Professor Arun Advani of Warwick University states that a one-off 1% raid on wealth, to be paid over five years, would raise £80bn.)
- Impose a 50% tax on the windfall increase in profits of the energy companies. Their current level of profits was not anticipated. It was not part of their business plan. They can afford the tax. (Bloomberg reports UK energy companies stand to make £170bn in windfall profits over the next two years).
- Institute a 60% tax on income above a £250,000 threshold.
The above are all things that can be instituted in the short or medium term. They would bring in a sizeable chunk of one-off revenue together with a flow from higher rates of income tax.
Investing in the future
This income to the Exchequer might be used in order to provide emergency additional funding to the NHS that is on its knees and for schools but more especially skills education for school leavers, to raise future labour productivity. Additionally additional funding could be put into the justice and penal system and uprating all social security benefits in line with inflation to preserve their real value.
In the longer term the UK should look to rejoin the EU single market and customs union (The Norway model). At a stroke this resolves the Northern Ireland protocol issue but more especially will make trade with the 27 EU members so much easier. Trade will expand and we will go some way to addressing the UK’s terrible balance of payments position on current account. Expanding trade will increase profits and hence tax revenues – a win-win.
Again, in the longer term, the government should look to bring in ‘land value taxation’ (LVT). LVT is like a council tax for land. It is a charge on the value of your land rather than your house. In fiscal policy terms LVT is highly ‘efficient’ in that it is non-discriminatory and has no disincentive effects. It is a significant potential source of additional tax revenue and also drives towards more efficient land use. It would help close the gap in the current budget.
Keeping some balance in the budget over the economic cycle (five years) is something that reassures the markets but this in my view is a secondary objective.
Much of what I suggest above is going to help sort out debt and the deficit, at the same time making for a fairer and better-performing economy. Throughout, our key guiding principle has to be that those with the broadest shoulders should bear the burden of getting this right.