Ahead of tomorrow’s autumn statement, the UK economy is in a parlous state. Arguably, the rot set in during the Thatcher years and was accelerated by austerity. Growth has flatlined as productivity has fallen behind our international competitors. Living standards for most people are stagnant – or going backwards. Inequality has risen sharply. We have not invested in our public realm and in consequence our infrastructure has become dilapidated. On the international trade front, our account is badly in deficit (not helped by Brexit) and we continue to square the account by selling off the family silver.
Autumn statement for an emerging economy?
A recent article by Will Hutton makes the point that “if Britain’s public sector had a balance sheet like a private company, identifying both public assets and liabilities, its net worth would be in the red by more than two trillion pounds”. In consequence, some international organisations have now downgraded the UK to “an emerging economy”, that puts us alongside countries in the developing world.
The situation is dire, but it is not without remedy. Fiscal policy – the balance between taxation and government spending – has the potential to kick-start and grow the economy. A thoroughly Keynesian approach is the key to UK economic recovery and further regeneration.
Hutton is right to stress the need for the government to invest. Apparently, the state of the public finances is £20bn better off than had been expected. Conservative MPs and their supporters in the right-wing press are calling for that ‘headroom’ to be used for tax cuts – a leading suggestion being a cut in inheritance tax. The Institute for Fiscal Studies reports that four-fifths of the benefit would flow to those with more than £1mn at their death. Given the extent of existing inequality in the UK, that suggestion is frankly obscene.
Hutton’s alternative use for that £20bn is investment in UK infrastructure – our hospitals, schools, railway network, roads etc. But when the National Infrastructure Commission calculates that spending on infrastructure needs to be £70bn per year, then the chancellor needs to find more money. This means taxation needs to rise in the UK.
The price we pay for civilisation
The UK government’s tax take from the economy is lower than several other European countries. These latter have taken on board that with ageing populations and advances in medicine governments need to tax at a higher level. “Taxation is the price we pay for civilisation” said Judge Oliver Holmes, and maintaining civilised standards is becoming more expensive.
There is scope to raise more money from income tax by increasing rates and reintroducing higher bands. This would be a ‘progressive’ move that would have the additional benefit of reducing post-tax income inequality.
I have argued previously for a one-off tax on wealth. A side effect of the pandemic and the then chancellor’s (correct) use of quantitative easing to support the economy was to increase the value of the assets of the wealthy. This was a windfall gain and there is scope for taxing that gain. During the first two years of the pandemic the number of billionaires in the UK rose from 147 to 171 – and has continued to rise. I suggest there is a bit of taxable capacity there.
Any government could increase its tax take by introducing land value taxation (LVT). LVT has had the support of a wide range of economists – including both Milton Friedman and Paul Krugman. As a system of taxation, it has the twin advantages of involving zero distortions of economic activity whilst being progressive.
A shift to LVT might prove an opportunity to do away with council tax which is both is inefficient and regressive. Property values in the UK have not been uprated since 1993 – no government has had the courage. As Larry Elliott has written:
“The result of 30 years of inertia has meant the UK has a property tax system that is regressive, inter-generationally unfair and accentuates the north-south divide. According to the lobby group Fairer Share, someone living in a modest £150,000 home in Bolton is paying over £2,700 a year in council tax – £1,000 more than someone occupying an £8mn home in London’s Westminster”.
Biden leads the way on inflation and emissions
President Joe Biden has given the West a lead with his Inflation Reduction Act (IRA) of 2022. The IRA is incredibly bold and far-reaching. It is designed to reduce inflation but, more importantly, reduce carbon emissions in the US. There are parallels with Labour’s proposed green investment plan, but the IRA is at a much larger scale and more ambitious. A third, hugely beneficial, effect in the United States is the creation of 912,000 jobs per year (estimate by University of Massachusetts).
The benefits of the IRA are already being seen in the USA. The sadness is that we are highly unlikely to see anything along these lines tomorrow. The Labour leadership have also shown timidity by deciding not to proceed with their green investment plan during their expected first two years of office.
A reasonable question would be where is the vision? Where is the ambition and the courage?
We have to make do with speculating over how Jeremy Hunt will spend his unexpected headroom of £20mn. Conservative back benchers and The Daily Telegraph will be salivating, waiting for the chancellor to pull a rabbit or two out of his hat, and, if previous form is anything to go by, further confirmation will be given that we have ceased to be a serious country.