If the left were being honest, it would continue to support the spending cuts it was proposing a month ago.

Perhaps the best thing to do would be to grasp economics.

After all, it is all very well to advocate Keynsianism but this kind of depends on having reserves to spend (saddling future government with debt is also rather obviously hurting the poor).

And it might help if left-wing commentators realised that there was more to the economy than the government (my A-Level economics said demand in the economy was government spending + investment (presumably not government) + money spent (there was a technical term). So government is not all of the economy, and is probably the worst bit to spark growth (not having any money and all that…).

So presumably any coherent solution would have to show a philosophy of how to deal with this, as opposed to wishful thinking that we can keep on spending (Brownianism?). But the joy of opposition is that you don’t need to have one of these and can just be opportunistic, and my guess is that the left-wing response will do this rather than address the key problems.

“We accept that the budget deficit is high and needs to be reduced over the medium term in order to avoid the economy collapsing. Right?”

Erm, no. Wrong. Or at the very least a debate the left should be having before getting sucked into the dominant ‘the national economy is a bit like a household economy’ narrative. It’s not.

http://thoughcowardsflinch.com/2010/03/29/is-being-in-debt-good-or-bad/

Mary Mellor’s new The Future of Money also look quite interesting on this (only just started it), as is Warren B Mosler’s seminal Soft Currency Economics.

I just think we (as in the left in general) shouldn’t be rushed into accepting dominant assumptions about how the economy acually works.

The cuts will be contradictory, as Lent pointed out. The deficit is a revenue problem, not a spending one. The best way to ensure long term fiscal recovery is, ta da, economic growth, which the cuts will impede. Not sure what could possibly work, if that doesn’t.

Sadly it seems this will just have to run its own grim course.

“(not having any money and all that)”

Money is a fictional asset, created by the government as it desires. To say that the government doesn’t have any money is meaningless.

“Money is a fictional asset, created by the government as it desires. To say that the government doesn’t have any money is meaningless.”

Fair enough, but do you really want to really hurt the poor by creating loads more money and therefore inflation?

This was my take below on the deficit situation and that we are asking the wrong question (btw I have made the point of green technology and growth in previous posts on my blog).

http://harpymarx.wordpress.com/2010/05/24/6787/

“the government should look to stimulate new growth industries like green technology in order to support provate investment and therefore long-term growth. No one seems to be making this point though.”

Us Lib Dems were saying this all through the election campaign, I just wish Labour and the Conservatives had actually seriously considered the idea instead of ignoring it to focus on attacking us on stuff like trident.

“Fair enough, but do you really want to really hurt the poor by creating loads more money and therefore inflation?”

I don’t think there’s any possibility of much further inflation with so much excess capacity in the economy and with such tight money at the moment all across the western world (just because interest rates are almost at zero doesn’t mean monetary policy is loose, its about demand as well as supply).

Loose money should be the left’s call, lean on Mervyn.

By the coalition deal, the government is looking to stimulate green technology investment. So point 3 is accomplished. Been Lib Dem policy for some time that.

In answer to your points SUnny;

1. Welfare, Public sector pay and pensions and the NHS are the only three places you can go to for massive savings. Given the simply enormous scale of the deficit, money is going to have to come out of all three, plus many other places, and tax rises are going to have ot happen to get us back to an even keel….and any growth we see is likely to be counteracted by the huge increase in interest payments we are going to have to pay by 2015.

((~£40bn in extra interest, which would need a ~9% growth in GDP and associated growth in taxation to fund)).

2. Taxes are already pretty high, and increasing taxes still further acts as a drag on growth. The new government are raising taxes, but to cut the deficit, most is going to have to come from spending cuts.

3. No-one is making the green technology point as at the moment it all has to be massively subsidised by governments. Wind power especially (look at the situation in Germany for example). In time it might be cost effective, but at the moment it simply isn’t, and the timescale for financial ruin is much shorter than the timescale for green energy projects to become economically viable.

As for the left callnig sanity on spending cuts…..couldn’t they have called sanity on the spending they made in the first place?

The deficit could have been financed by higher taxation than spending cuts, and therefore the Tories/Libdems are punishing the poor.

Well, maybe. Depends on where the higher taxation would come from – the deficit is too large to close it by taxing the rich, if it means higher VAT or other broad based taxes, the distributional impact is less obvious. Plus, how strong is the case that the cuts just announced “punish the poor”? (I don’t know).

Also, left wingers really must remember that not only public sector cuts cause job losses – tax increases cause job losses too, and there’s nothing particularly left wing about putting private sectors on the dole instead of public sector ones.

“Stimulating Growth” through government spending is also easier said than done. Remember that the govt helping firm A can involve workers being poached from firm B, and firm C going bust, so the net impact on “growth” and tax revenues is not clear. I think there is a case for some activist government industrial policy, but I am not sure how it fit into the “what to do about the deficit” question.

Paul,

The difference between public debt and private debt is not that individuals have to repay rapacious loan sharks and banks whereas governments only have to deal with far sighted pension funds who will accept “reasonable” terms – the difference is that countries, unlike people, do not die.

If I take out a mortgage and repay only the interest rather than the principal, then in 25 years time I still owe the bank the entire value of the mortgage. However, in 25 years time I will be nearing the end of my working life and I won’t be a good credit risk so I will either have to pay off the principle in ready cash or give up the house – the bank won’t give me another mortgage.

However, in 25 years, the UK will not be nearing retirement, its ability to repay will be just as good then as it is now – so it will be able to roll over its borrowings.

This is good news – it gives governments flexibility (relative to people anyway) which it can use to deal with crises. But, however often you roll over or refinance the debt, each set of creditors still expect to be repaid. The debt doesn’t go away until the principal is repaid. And, until that happens, you are paying, every month, for things you have already consumed. Moreover, when you roll over the debt, the new creditors might charge a different rate of interest – which will be higher if they think there is any risk of default.

And it is silly to claim that the government making interest payments to domestic pension funds doesn’t matter because it is simply transferring the same stock of money around. That may be – technically – true but it isn’t a remotely good thing. As interest payments rise, the government has to meet them one of three ways – Either, it can print money in order to pay the debt – which creates inflation and raises the interest the government pays on the rest of its debt – as well as devaluing its citizens’ money. Or, it can choose to cut services or raise taxes, both of which constitute robbing Peter to pay Paul; no new value is created and everyone is on average worse off (if only because citizens have less discretion as to how they spend the money they earn).

As an aside, if the pension fund invests in something other than public debt, such as shares or corporate bonds, then the interest payments are normally funded by the creation of new value. The creation of new value makes us all better off.

LO,

“I don’t think there’s any possibility of much further inflation with so much excess capacity in the economy and with such tight money at the moment all across the western world (just because interest rates are almost at zero doesn’t mean monetary policy is loose, its about demand as well as supply).”

Unfortunately inflation is not based on capacity, but on supply, and supply has now contracted somewhat due to reduced capacity…

This is delightful. “We know we are going to oppose all these spending cuts… but people aren’t upset about them despite our best efforts. So, do we want to say it’s because they’re not necessary or because they’re the wrong cuts? We need to decide!”

Priceless.

Start pumping money into the economy and you’ll end up distorting the capital structure and making things worse. There’s no point the government spraying newly-created cash at Company A if consumers would prefer to buy from Company B. Extra money pumped into the economy doesn’t affect all areas equally (hence Friedman’s helicopter example was nonsense) but advantages some areas to the detriment of others. Unfortunately the areas being advantaged aren’t necessarily those that can depend on long-term demand from the private sector.

“the dominant ‘the national economy is a bit like a household economy’ narrative. It’s not”

Oh it SO is (in the relevant respect, anyway).

Good debate to open up Sunny.

I think that you are right – this is about audience management and the long game.

We launched the campaign http://www.noshockdoctrine.org.uk with a specific audience in mind – left wing political types. I know huge numbers who are relatively political, and on the progressive left, who had accepted the narrative that ‘we need to cut public services’ because no one was challenging this. When a few basics of economics are explained, (or even arguments from authority used) they turn round very quickly – I was astonished how many students I spoke to during the election who fitted into this category. This audience is crucial because it is already politicised, easy to organise, and influential. Just as any NGO will run workshops educating it’s activists, we need to train lefty types in why cuts aren’t needed, and provide them with a narrative to explain what is really going on (they are using the recession as an excuse to do what they’ve always wanted to – the shock doctrine). In a 6 week campaign, this wouldn’t be a priority. In a 5 year campaign, it is crucial.

It is also important to pull the debate in the right direction rather than letting the right drag us towards them. As climate deniers have taught us, sowing doubt is very easy if you are willing to stick to your guns, and we need to sow doubt about the economic case for these cuts – cos while there isn’t one (much) most think there is. So your messaging ‘we need to cut the deficit in the medium term’ while it is (sort of, to a certain extent) true, is not the only voice we should be hearing. That is, essentially, a centrist voice in the economic debate, and we should ensure that the argument that there is no problem with running a long term structural deficit (so long as it’s being invested in services, like education, which deliver high return gains) is also heard, to ensure that that position becomes seen as the centrist position it is, rather than the loony left one that the Tories are succesfully framing it as.

There are also many other audiences, as you discuss, who are much more concerned about direct material interest, but I’ve already banged on for far too long…

Adam

sorry, bad;y explained last para – by ‘that position’, I meant Sunny’s one, not the argument that there is no problem with a long term structural deficit.

Adam Ramsey

you think the idea “there is no problem with running a long term structural deficit (so long as it’s being invested in services, like education, which deliver high return gains)” is “centrist”?

What do you understand the words “a long term structural deficit” to mean? Because if money is borrowed and spent on “services which deliver a high return”, if you mean economic return, then those returns should close the deficit, meaning you are running a short-term structural deficit, to take advantage of some high return investment opportunities, not a long-run deficit.

Please explain to me how you think the UK would finance a long-run structural deficit – that is, if our stated policy was for the government to spend significantly* more than it receives as tax revenue, year after year over the long-run. How does that work, in your world?

* we can spend somewhat more, because of seigniorage and perhaps other bits of slack in the system. let’s define significantly more as having the percentage of debt/GDP increasing each year.

@ Adam Ramsay

What utter nonsense. You are basically reverting to the “we can grow our way out of debt” line. Given that only ~1/3 of GDP can be taken as taxes, to balance our books at the moment we would need to be growing at about 30% p.a.

That, my friend, is never going to happen.

If we were running a 1-2% deficit, it wouldn’t look out of place, but we aren’t – cuts are going to have to happen, and happen on a significant scale.

As it is, just the interest on the debt we are piling up is going to outstrip the so called proceeds of growth by a significant factor. We need annualized growth of about 1.4% of GDP just to keep up with the interest on the debt we are running up THIS YEAR!.

We are spending too much, and living beyonds our means. Whilst you might not like facing up to reality, someone has to buy our government debt, and the taxpayer has to pay for it over time. The latter is a huge burden, the former not a given.

Even if someone does buy that debt, you average 10 year Gilt ends up costing the taxpayer 50% more than it’s face value in interest over it’s life. The ~£160bn we are going to borrow just this year alone is going to cost about £80bn in interest, to the taxpayer. That is money that can’t by the private secotr to invest in growth.

@8. George W Potter

I don’t think you have been paying attention. The Labour government was putting a lot of focus on green technologies over the last few years, perhaps you chose to ignore them. For example at the beginning of the year the Crown estate announced £200bn contracts for offshore wind generation (on top of the first phase of IIRC £25bn), and their was an announcement of wave power schemes at the Orkneys. Alex Salmond is more or less betting the future of Scotland on these huge power generation plans.

And darling announced a Green investment bank in the Budget.

Of course, none of the scheme will account for the occasion when the wind stops blowing (or rather, not blowing enough to power the entire country) but then you LibDems don’t have a solution to that, do you?

@11. Tyler

#1 “Public sector pay and pensions” this is what the Big Society is all about. Once a public sector worker moves to the private or voluntary sector then their future pension liability is taken away from the government. Of course private or voluntary organisations don’t want that liability so it will be put on the employee. All this talk of “choice” or “standards” is nonsense, the Big Society is about who will pay the pensions.

#2 “Taxes are already pretty high” not really. The Laffer Curve is bunk. The bonus tax and 50% showed that tax does not cause an exodus of bankers. The ConDems words are right: fairer taxes. But what we on the left regard as fair is very different to what the ConDems think is fair.

#3 “has to be massively subsidised by government” Sure, and this will be the case if you assume that we will be swimming in oodles of cheap oil for the next couple of decades. But we won’t. “green” technologies are sensible for the simple fact that our cheap energy source is getting more expensive and scarce. Of course, if we had had a proper integrated energy generation strategy rather the silly market-led (and government subsidy skewed) system created by Major then we would not have a problem now.

I think I’ll be agreeing with Paul here, admitting the need for cut’s at this point is buying into the Tory world view, not a particularly good move politically.

First off, Labour really ought to be putting more effort into defending it’s economic record, while Gordon Brown did run a deficit, it was not a particularly large one by any stretch of the imagination, it’s also worth pointing out that it was going down just before the recession hit and it shot back up again. All this talk of Labour’s irresponsible spending is a ridiculous exaggeration.

As to how to reduce the deficit, it will have to come from economic recovery,simple as that. That is what happened in the 1990′s after all.

The counter argument, that the right (and Orange Bookers) like, is to cut the deficit by cutting services. It appears good on paper, if the government stops funding X then they save the cost of X.

The problem is that most of the services are things we need (education, health, social services, social care) and if the government stops funding these services people will have to buy them. This means that the *disposable* income of a household goes down since they have more outgoings (paying for health insurance, for the kids’ education, to get the bins emptied and for the security company to patrol the road once a night). In effect, they have not gained and it is arguable that they will be worse off since some of our public services are good value for money (for example a few weeks ago I compared the £750 fee that NHS hospitals are paid for a cataract operation with the lowest figure of around £1800 that a private hospital will charge).

@ Richard Blogger

#1 Public sector pensions aren’t even on the balance sheet at the moment – that would be another ~ £1tr or so.

What you are getting at (though I doubt you realise it) is that the public sector (at 52% of GDP) is way too big.

#2 Laffer curve is clearly not bunk. If you tax people more, they will eventually move to mitigate that, and you will henceforth recieve less taxes. The bank bonus tax is not a good example as when Darling moved to put that tax in place (as a one off) the banks reacted by paying their staff bigger bonuses to compensate.

There hasn’t been a huge exodus yet, but people (myself included) have moved abrouad to avoid paying as much tax. Hedge funds especially. JP Morgan might not move to the wharf if things stay the same, and relocate some businiesses abroad….jsut examples but these things do have an effect.

#3 Which bit of “subsidised” do you not understand? The costs of wind energy in Germany are higher than any alternative by a long way. At current prices (which are actually going up as windfarms prove less efficient and more mechanically unreliable than first though) every other form of power generation beats it. Windfarms don’t generate enough power during their lives (on average) to even pay for themselves. They also need ~90% latency, so you need other power generation behind it running at 90% capability, all the time anyway!

@ 24 “The problem is that most of the services are things we need (education, health, social services, social care) and if the government stops funding these services people will have to buy them. This means that the *disposable* income of a household goes down since they have more outgoings (paying for health insurance, for the kids’ education, to get the bins emptied and for the security company to patrol the road once a night)”

But the argument goes (and I don’t necessarily agree with it) – you reduce the public sector and you reduce the tax burden, this puts more money in peoples’ pockets, “disposable income”, which they can then spend on the services that they need, not the ones that they don’t.
The state can and do perform essential services, but some parts of the current public sector perform no useful function – to pick some random examples from the sacred cow of the NHS – homepathic medicine, “swine flu” vaccines, cosmetic surgery, smoking cessation nurses, adverts telling people not to eat too much salt etc.
If this is typical of all Departments (and it probably is) there are vast swathes of non-essential services that no one, or hardly anyone, wants or uses.

@ Richard Blogger again

You forget that if government spending goes down, then taxes also go down, allowing disposable income to go up. Matt Munro at 26 points this out nicely.

You should also be very careful about making comparisons between the private sector and public sector. For example, you look at cataract operations. In the private sector they do indeed cost around £1800 but that INCLUDES all consultant fees and hospital fees. The NHS figure of £750 is for the operation alone, and covers no other fees.

You also forget just how much we spend on the NHS. At last check, it was £107bn. This works out to about £1600 per head of population. My private health insurance with a well known company costs me only £820 a year, and that is after I have claimed several times for knee surgery. The service I get from my private healthcare was significantly better than I recieved from the NHS – the main reason I have it is because I was repeatedly bumped from waiting lists, despite Labour’s (supposed) 18 week wait limit. My private appointments with the specialist consultant and then surgery were within two weeks of my complaint recurring.

There is huge waste in the NHS, and enourmous beaurocracy. Same all over the public sector, for various reasons. Primarily though, the public sector hasn’t been under financial pressure for years, and it is incredibly difficult to fire people. It’s ni huge wonder productivity has been fallnig in real terms for years whilst it has been constantly improving in the private sector.

@4 – dSquib, you’re so close. You’re right in a sense, a lot of the problem is revenue based, although government spending remains too high against the long-term trend of revenues (i.e. there is a significant structural deficit that needs addressing).

What I don’t get is why you think the cuts will retard growth. We need to cut the vast amounts of regulation that get in the way of growth. It is right to cut business grants. Business grants incentivise businesses to focus on how best to get the grants and not on how best to innovate. Innovation drives economic growth – all grants do is take money (in the form of taxes) from many companies and give it all to one whom the government feels is deserving. Lower taxes will drive growth in the economy, and we should cut anything that gets in the way of delivering that.

@Tyler – sure, I accept that we need to pay down the deficit at some point. I think it should be done through higher taxes. Why can only 30% of GDP be taken in tax? Wasn’t it (from memory) closer to 35% – under Thatcher..?

That is not the same as saying that we should pay down the deficit now.

Also, as Stiglitz has pointed out, the return on investment in most public services is huge – 5-6%. As long as interest on our debts isn’t going to exceed that, surely it makes sense to carry on investing?

Adam

“Laffer curve is clearly not bunk. If you tax people more, they will eventually move to mitigate that, and you will henceforth recieve less taxes.”

Go on then. According to the Laffer Curve, what is the optimal rate of taxation which would maximise revenues?

“Laffer curve is clearly not bunk. If you tax people more, they will eventually move to mitigate that, and you will henceforth recieve less taxes.”

Go on then.

At what rate of taxation (overall or for individual taxes) would revenues in the UK be maximised, according to the Laffer Curve?

According to the Laffer curve, the optimal (for revenue) rate is somewhere between 0 and 100%.

Anyway, Tyler is right on Adam Ramsay. And what is particularly bizarre about Adam’s plans to grow our way out of this deficit, is that Adam is a Green and therefore doesn’t really believe in economic growth.

Sure, a structural deficit can be supported long term in a growing economy. But an enormous structural deficit can’t. Is that all there is to “noshockdoctrine”? A wilful ignorance of the numbers?

Tyler@27 – The disposable incopme argument doesn’t really wash either, publ;ic sector workers don’t exactly throw their paychecks down the drain, part goes straight back to the treasury in the form of taxes and part is spent in the wider economy.

I really don’t get this whole “state is too big” argument simply because it doesn’t seem to me that the public sector is really denying the private sector of what it needs. I’ve not exactly heard many stories of bosses with recruitment problems because all the best people have been sucked up by the public sector.

The Green Party Manifesto had a fully costed plan to avoid public service cuts whilst halving the deficit over the next parliamentary term. Here are some highlights (the full plan is pages 14 to 17 of the 2010 manifesto).

1.Cut trident
2.Cut ID cards
3. increase the minimum wage
4.pull out of afghan
5.increase tax to 50% on all those earning over £100,000 pa

The independent thinktank green alliance also proposed 12 billion worth of cuts by cutting road spending and charging airlines VAT.
The government could also save hundreds of millions by getting rid of the tax breaks Mr Darling gave to oil companies exploring north sea oil fields.

The money is there to keep public services – the government just has different priorities.

@29 Adam Ramsay

You could try and take more tax, but it would retard growth. In real terms a government never manages to take much above 40% of GDP in taxes (which is plenty, don’t you think?). I did my analysis using 36%, which is what we ave at the moment.

The point though is that it is hard to beat increasing debt interest payments by growth. You need to do ~3x as much growing as your debt to stay afloat as a rule of thumb. When you debt/GDP is 12% growing your way out just isn’t a reality.

ROI of 5-6% is tiny. It probably wouldn’t happen in the private sector with a return so small.

@30 Donpaskani

Laffer curve has been shown to exist time and time again. It is not a fixed curve, and other factors have significant effects.

Is it so hard to imagine that if you disincentivise people to work (by taking too much in tax) you will have reduced taxes, not to mention the lengths people will go to avoid taxes if too high?

I know several hedge funds are moving to Geneva because of the 50% tax rate. Whilst you might not mourn the loss, their employess pay millions in taxes every year, which is a loss to the economy, along with the money they would otherwise spend here.

@32 Joe.

Quite right. You *can* support a small structural deficit if you are growing, but no-one (in their right minds) believes we can grow fast enough to pay off a 12% deficit and the associated debt before that debt interest consumes us and we go the way of Greece, Hungary, Iceland, Latvia, Lithuania etc.

@33 Andreas

Public sector workers are not NET taxpayers. Without the private sector and taxes upon it, the public sector could not exist. Some of their pay might go back to the treasury, but that is effecitvely just a rebate. Without money to pay the public sector worker his WHOLE wage, the treasury wouldn’t be able to claim part of that moeny back in taxes.

The state is too big argument has nothing to do with the public sector denying the private sector what it needs, and everything about the public sector accounting for 52% of GDP, and thus being net non-productive for tax purposes. The private sector has to pay those taxes, but if you slap them with the difference you’d kill off growth there, making the problem even worse.

@34 S+M

There is no money for the current spending in public services.

1. Trident would save £100bn between 2017 and sometime in the 2040′s. It’s not a saving in real terms.
2. Saves minimal amounts
3. Unlikely to raise much money in real terms as businesses are forced to cut wage costs elsewhere.
4. £4bn if it could be done. You happy to let the Taliban back in though?
5. Would raise about £4bn.

You can’t cut road spending significantly, and airlines are already charged other taxes instead of VAT.

The deficit is over £150bn. You’ve managed to save £10bn. Where is the rest coming from?

@ Tyler, 35

1. How is not spending 100 billion, not a saving in real terms? Research and funding is directed at it all ready, so there would be an immediate saving on top of this.
2. saves 2.5 billion immediately
3.would raise 6 billion over 5 years, by reducing the number of people claiming tax credits.
4. The taliban are in this for the long haul – we have to leave at some point and when we do they’ll come back in. The war was a terrible idea from the start and could never have kept the taliban out permanently.
5.would raise 2.3 bn pa.

A two year moratorium on road expansion would save £2.4bn over two years, and the roads budget could be cut by a further £2.8bn once the appraisal
methodology has been reformed.

Abolishing zero-rating of VAT for aircraft and ships could save £2.2bn

So (not including trident) we save18.2 billion over 5 years. Further savings could be:

Abolishing allowances against Petroleum Revenue Tax and Climate Change Levy – £2.9bn

Reducing public sector energy and fuel consumption might save £1.5bn over
four years, especially if the MoD can also cut some of the costs of the logistics
of transporting and protecting its fuel supplies

End the zero-rating of VAT on new dwellings, putting them on a level with conversions and renovations of existing dwellings, raising £5bn.

No longer offer zero VAT rating to financial services and betting duties, £5.6bn by 2013.

Increase the rates for the Climate Change Levy and for Landfill Tax, raising £300m.

Reintroduce the fuel duty escalator, raising fuel duty by 8% per year, £2.2bn rising to 10bn by 2013.

Gradually increase alcohol and tobacco taxes by about 50% to match anticipated
increases in expenditures on the NHS, raising £1.4bn in 2010 rising to £5.6bn by 2013.

Make tax concessions on savings, such as ISAs, only available for investment in sustainable technologies, raising £1.8bn

Introduce new taxes on use of water by businesses and waste heat from power
stations, raising £3bn by 2013

Reform Council Tax by making people in more expensive houses pay more and those in smaller ones less, adding an additional band at the top for the biggest houses, £1.7bn.

Reform inheritance tax, so that the level of taxation depends on the wealth of the
recipient rather than that of the deceased,raising £3bn

Raise the Capital Gains Tax rate from 18% to the recipient’s highest income tax rate (that is 22%, 40% or 50%), raising £1bn

Increase the main rate of Corporation Tax from 28% back to 30% and reduce the small firms rate back to 20%, raising.1.4bn.

Abolish the upper limit for National Insurance contributions, raising £9.1bn.

so on a conservative estimate (not taking into acount some of the projections I gave) that’s another 39.8bn, added to the original 18.2 comes to 58bn in 3 years.

“Is it so hard to imagine that if you disincentivise people to work (by taking too much in tax) you will have reduced taxes, not to mention the lengths people will go to avoid taxes if too high?”

I understand the theory, yes. What I am asking is at what rate taxes should be set in order to optimise revenue. If we strip out the anecdotes and bluster, what your argument currently amounts to is that tax rates should be set at some point between 0% and 100%.

*correction* in 5 years, not 3

This idea that the rich will leave the country if taxed more highly is a load of rubbish. Labour reduced the income of the top earners by 12%. Anyone see them rushing to leave?

Tyler@35 – I don’t really accept the whole taxes killing off private sectopr growth argument. The vast majority of taxes are related to earnings, the more you earn the more income tax you pay, the more profit you make the more tax you pay. The tax system also has plenty of built in reliefs for companies who invest their profits and even more for those who perform research. With the exception of business rates there seem to be very few taxes that really impede the work of businesses.

Also, I would add that it’s not really 52% of GDP, an awful lot of that money is just transfer payments to certain groups.

Nice that lots of rightists have popped in to respond to the question “How should the left frame opposition to spending cuts?”

I’m off to ask my local butcher about pet care.

@36 S+M

“so on a conservative estimate (not taking into acount some of the projections I gave) that’s another 39.8bn, added to the original 18.2 comes to 58bn in 3 years.”

Brillaint. You have managed to cut this years deficit from £152bn to £94bn. What about the rest of it, and the deficits for the next 5 years, given you are happy to count the savings for the next 5 years…..see the problem?

((and btw, you are wrong on Trident. Cutting it gives no savings now, as Trident is off the shelf from the US))

@37 Donpaskani

You are asking a rhetorical question. There is no “right” answer, but lots of wrongs ones. At the moment higher taxes are causing the UK to become less competative and making some businesses move abroad. That the exodus isn’t as big as feared isn’t an excuse. It shows taxes (and red tape) is starting to become a hindrance to new business, which in turn is costing the exchequer revenues.

The Swiss have a good system IMHO – every company organises it’s tax affairs with the canton taxman on a individual basis. Thus both the Swiss state and the company can ensure it is mutually benficial, and the company is likely to stay rooted there.

@39 S+M

See above, but yes, higher earners are leaving. Hedge funds are, banks have reversed moves etc. I myself am part of that statistic. Between the cost of living, high taxes and crap pensions, plus bonus taxes if I do well, it’s not worth me staying here. I am moving abroad, getting paid better, taxed less with no threat of bonus taxes and much better pension arrangements – I won’t even have to work as hard.

I’ll tell you for free, I’m not the only one making that trade.

@40 Andreas

At last measure, public sector spending was 52% of GDP. Argue the definition, fine, but it makes the figure no less fact as currently described.

You are correct that taxes are linked to earnings, but are missing the point. No one minds paying a fixed proportion of earnings in tax, especially when earnings are growing. I am talking about HIGHER taxes as a %, on possibly lower earnings. That means companies have less to invest etc, reducing growth. Its exactly the same argument for personal taxes and disposable income really.

@ Tyler, 42

If, as I first suggested you go to the Green party manifesto for 2010 You will see a full breakdown. Where are your figures for people and companies moving abroad? How much will this cost? Peopl are not moving in their droves, and I doubt it is costing more than we’re making.

“You are asking a rhetorical question. There is no “right” answer, but lots of wrongs ones. At the moment higher taxes are causing the UK to become less competative and making some businesses move abroad.”

!

In that case, you don’t believe in the Laffer Curve.

The Laffer Curve states that there is a point where increasing taxes reduces revenue. Therefore, it is not a rhetorical question to ask what that point is, and there must be a “right” answer to the question “at what rate should taxes be set in order to optimise revenue”.

@ 41 Milgram

So we don’t need to cut spending at all, do we? I suppose the fact that we are massively overspending, and have been doing so since 2001 is nothing to do with the Labour government either. The left can’t shirk their responsibility for this mess.

@ 43 S+M

The bonus tax raised just over £2bn.

As a comparison, it only takes one large hedge fund (of around £15bn in size) to move abroad to cost the treasury about £750m in lost taxes.

I know of at least two large hedge funds both moving part of their operations to Switzerland at the moment. It doesn’t take much for financial operations to start moving.

@ 44 Don

I do believe in the Laffer curve. It is a theory, with a lot of supporting evidence (especially in the US) but it doesn’t mean there is a particular answer to it. It just describes a law of dimishing returns as you move taxation away from a certain optimum level. If you could simplfy the situation down to one variable alone (tax) you could get a definitive answer to your question. In real life that is impossible though – there are too many factors to consider to get a simple answer.

@Tyler 45

There are only 4 hedge funds worth 15bn or over based in the UK, if they all leave (will they?) that amounts to a net loss of 1 billion. In which case I will revise my estimate to 57 bn cut from the deficit. The UK can, in fact HAS to, distance itself from the city.

@ 46 S+M

I can immediately think of 5 HFs over the £15bn mark, and many more asset managers set up in similar ways. The numbers of smaller funds is huge.

A HF will aim to be making ~20% ROC every year. Many are up a lot more than that this year. So, for a £1bn HF they will be aiming to make £200m. They will pay 18% cap gains on that (plus other taxes like stamp) so roughly per £1bn of HF assets a fund will pay £35m a year. That’s before the employees start paying their taxes.

So, take 2 HFs worth £15bn each, and let them leave the country and you can Call it £1-1.5bn tax lost per year. Compare with the bonus tax which recieved £2.3bn, and is a one off.

Whilst I agree the UK should diversify it’s economy as much as possible, we are also massively in debt, and high spending, high earning hedge funds are apainless way to to have more money coming in. Why wouldn’t we want them to stay???

How should the left frame opposition to spending cuts?

It should claim that Santa Claus will save us, because that is clearly what it believes.

@12 Luis Enrique: “the deficit is too large to close it by taxing the rich”

This claim is often made, but appears to be made blind of what could be achieved by a tax on accumulated wealth as opposed to purely on declared income. From what I have seen, a small wealth tax – can’t remember the numbers, but I think it was something like 5% on the top 1% richest and 1% on the next 4% – would clear the deficit at a stroke.

It would also have the benefit of putting extreme wealth piled up in bank vaults, country estates etc back into circulation in the economy and thus raising the level of economic activity – itself generating tax revenues. Or do others dspute that when wealth is shared too unequally, this in itself restricts the productive potential of the economy?

Such an approach would see us through the next year or two and leave the super-richest still with 90% of what they started off with, and hence many millions in assets at the end of the process, so it wouldn’t force them to have to go out to seek a wage or anything.

See above, but yes, higher earners are leaving. Hedge funds are, banks have reversed moves etc. I myself am part of that statistic. Between the cost of living, high taxes and crap pensions, plus bonus taxes if I do well, it’s not worth me staying here. I am moving abroad, getting paid better, taxed less with no threat of bonus taxes and much better pension arrangements – I won’t even have to work as hard.

But presumably your former employer has found someone to do your old job and they are paying the taxes which you would have paid. And how does the overall quality of life compare with the UK where you are? And do you have family and friends still in the UK? How often do you get to see them? I don’t mean to be personal, but there are many reasons apart from tax rates why people may wish to live in one country rather than another.

As for the Laffer Curve, well it obviously exists in the sense that if you levy taxes at 0% or at 100% you will raise nothing so there must be an optimal rate in between, but unless it tells us where that optimal rate lies, which it doesn’t then it isn’t really any use.

I find Bill Mitchell to be particularly coherent on this. Here’s three posts of his about deficits, and what they mean under our current currency arrangements:

Deficit spending 101, pts 1,2,3
http://bilbo.economicoutlook.net/blog/?p=332
http://bilbo.economicoutlook.net/blog/?p=352
http://bilbo.economicoutlook.net/blog/?p=381

The gist being that, as early contributors to this thread pointed out, thinking of govt deficits in the same terms as household debt is misleading, as is thinking that taxation funds government spending. Reducing public spending when the economy is contracting and there is spare capacity in the form of mass unemployment will make things worse.

From what I have seen, a small wealth tax – can’t remember the numbers, but I think it was something like 5% on the top 1% richest and 1% on the next 4% – would clear the deficit at a stroke.

‘Clearing’ the deficit solely by raising taxes would require additional revenue of £160bn or so. Given that total income tax receipts last year were £134bn I am extremely dubious that substantially more than this could be raised by a wealth tax on the richest people in the UK.

There just aren’t enough ‘rich’ people to pay for everyone else.

Strategist @49,

Yes, I was thinking only of taxes on income, capital gains etc. taxes that can be applied annually.

Lord knows how you think the scheme would work (apart from ushering in a bonaza for tax avoidance schemes) but really: “would also have the benefit of putting extreme wealth piled up in bank vaults, country estates etc back into circulation in the economy and thus raising the level of economic activity – itself generating tax revenues” is just very silly. How exactly do expensive houses keep money from circulating in the economy? You are aware that money deposited in savings accounts is lent out again? It’s called “banking”.

“Or do others dispute that when wealth is shared too unequally, this in itself restricts the productive potential of the economy?” Oh Lord there’s tons of research into inequality and productivity, hit google scholar. But yes quite possibly inequality in some forms is bad for productivity

Tim J

he’s talking about taxing assets not income

Tim J,

oh sorry, I didn’t read! well – well the total assets held by the rich is a very big multiple of their income (say: Steve Jobs, annual income a few million, assets many billions). So any such tax would require major asset sales by the the rich, because they couldn’t pay it out of their income (somebody with £5m in assets would need £250,000)

@ 51 Owen

I find it simply incredible, given the repeated real world examples, that anyone should continue to believe that continued significant deficit spending is a solution to this problem – it is always a cause and/or something that turns crisis into disaster.

@ Luis

Tax on assets? If you tax assets, who is going to buy them when those rich people are forced to sell? Other rich people, who will have to pay tax on their new assets?

You will end up forcing asset prices down and making everyone poorer, and for the tax to work the threshold will continuously be coming down. It’s not a sound stratgey, and no-one has implemented it for good reason.

Tyler @56 – “repeated examples”, are you quite sure about that? I can think of a good few examples where the opposite is true, where public spending cuts have done little other than worsen the existing problem.

Off the top of my head I also know that the UK cut it’s deficit in the 90′s despite the fact that it increased public spending in real terms. You seem to be acting like deficit spending is always a disaster when that doesn’t really seem to be the case.

Tyler

well it’s wasn’t me suggesting it.

but yes, an asset tax would make rich people poorer, and forced asset sales would reduce the prices of the assets rich people own and are having to sell (both because of supply shock and also because rich potential buyers for the assets are now a bit less rich).

but it wouldn’t be all bad, because those assets would now be cheaper, meaning that not-quite-so-rich people could afford to buy them, and enjoy big houses and returns on equities: saying it would “make everyone poorer” is just very silly – I can point to ooh about 20 million households who would be make no poorer at all, and quite possibly better off.

“You forget that if government spending goes down, then taxes also go down, allowing disposable income to go up.”

Only once the deficit is gone.

“. Without the private sector and taxes upon it, the public sector could not exist”

Without the public sector, the private sector would look like Somalia.

Both private and public sectors need each other to thrive, which is why any remotely successful economy is a mixed one state provision of some services, private sector provision of others.

Balancing the budget has to be done, but it needs to be done in a far more careful manner than just raising taxes and/or cutting spending willy nilly, and timing is also crucial. Just as the laffer curve does exist, and raising taxes can be counter-productive, there are similar processes on the other side of the coin; sacked public sector workers claim the dole until finding new employment, cutting crime prevention programmes lead to more money spent on prisons, cutting preventative health measures like quit smoking helplines lead to more illnesses for the NHS to treat. But there is also waste that does exist, and spending that isn’t necessary. Afghanistan is one, we can be free riders on the efforts of the US, another is subsidy of the arms trade, and there are some frankly pointless welfare to work schemes (there are others that pay for themselves). Similarly there are also taxes that can be raised and introduced that really will raise revenue, and tax loopholes that need to be closed.

@57 Andreas

I can’t think of an example when massive deficit spending solved the situation. I can think of many where massive deficit spending has either caused or exacerbated the problem.

I can also think of several examples where massive spending cuts have enabled much faster growth – New Zealand and Canada are the prime examples.

The 90s recession was short and relatively mild. Even though real terms spending was increasing, the deficit came down quickly after the so called automatic stabilisers kicked in, and started from a very low point. It was back to trend (downwards) very quickly.

@ 58 Luis

The tax doesn’t work, becaues of the law of diminishing returns. Once you tax people, the next year their estate is not worth as much. Thus, to get the same return, you have to set the bands lower. You have to do this every year to keep the same income from this tax coming in. It is a regressive and dangerous tax. It punishes not jsut wealth, but investment as well.

Regardless, what will most likely happen is that the rich find ways to avoid paying the tax, even if that is simply leaving the country, and once again the purpose of the tax is defeated.

On wealth taxes.

I don’t argue that you have a wealth tax every year for decades on end. I propose a one-off redistribution of wealth as a means of alleviating the crisis that has been caused by one small group in society perpetrating a massive rip-off of the rest of society. IE, it’s a re-redistribution.

ONS (at http://www.statistics.gov.uk/downloads/theme_economy/wealth-assets-2006-2008/Wealth_in_GB_2006_2008.pdf) tell us that the top 20% of households have 62% of the total net UK household wealth of £9trillion. The ONS pull their punches – they don’t seem to tell us what the top 1% have, but I think it’s a surprisingly large fraction of that 62%.

@53 Luis. You argue that my “the benefit of putting extreme wealth piled up in bank vaults, country estates etc back into circulation in the economy and thus raising the level of economic activity – itself generating tax revenues” … “is just very silly. How exactly do expensive houses keep money from circulating in the economy? You are aware that money deposited in savings accounts is lent out again? It’s called “banking”.”

I wasn’t being silly. When I said bank vaults I didn’t mean cash sitting in bank vaults, I meant physical wealth. ONS say 11% of the £9trillion is in physical goods such as car & antiques – that’s about £1trillion.

I also mean property and land wealth. Most of us have to live in houses that are too small because housing wealth is too unequally distributed.

Instead of bank vaults, think of a garage. If a wealth tax forces a rich man with 5 Bentleys in his garage to sell four of those Bentleys, then 5 people will now have the enjoyment of a Bentley. There will be more utility derived from 5 people enjoying a Bentley each than from one enjoying five.

Similarly with land, there will be more utility derived from 100 families enjoying a house with one acre of garden than from one man having 100 acres and 99 families having a window box only.

So, after a one-off wealth redistribution, there will be more utility, and I would argue, the potential for a more productive economy generating stronger conventional tax revenues.

Finally. My proposal would also have the benefit of once and for all getting Tyler out of the country. Upon announcement of the tax he would no doubt try to make a break for the Channel Ports at 100mph in his Bentley with a gold bar shoved up his ass. So we could repossess his house (which he would have difficulty shifting offshore) against his unpaid wealth tax bill, and put it on the newly invigorated property market. On the downside our economy would lose his immense talent and genius (which we see demonstrated again & again on this site). What’s not to like?

There is one wealth tax that would work, and that is on land values. Land is not going to leave the country.

Strategist

Are you really telling me that when you wrote: “the benefit of putting extreme wealth piled up in bank vaults, country estates etc back into circulation in the economy and thus raising the level of economic activity” you were merely talking about physical assets changing hands so that they are more likely to be actively used by somebody rather than stored? Here’s how much that “raises the level of economic activity: 0.000000000000000000000000000000000000000000000001%

I like your last point though.

@63 Yes, I was. Funnily enough I don’t imagine that when you take your actual cash to a bank they keep it in a vault till you want it back.

I don’t know about your figures – I think a more equitable distribution of wealth in land and assets would boost productivity more than that. And increased Gross National Happiness is not to be sniffed at

@ Strategist

Da Comrade! Communism is the solution!

Fortunately myopic green-eyed socialists like you are rarely listened to these days, as people have seen the damage their policies have wrought on countries again and again.

I’ve explained some of the problems with a wealth tax, but in effect you are now suggesting that we should nationalise all properties and businesses, otherwise assets under any foriegn ownership wouldn’t have to pay the tax.

Like I said though, his tax will force asset prices into a downward spiral. The rich won’t end up paying that much tax, and the boundary for it will have to come lower and lower every year to make the same amount for the government.

Regardless, you won’t be able to answer two questionsm certainly without resorting to some form of jealous abuse, socialist claptrap or plain old class warfare;

1. Who is going to pay the taxes that the rich leaving the country otherwise would? Who is going to pay your benefits if people like me leave?

2. Is wealth redistribution even fair? Why shouldn’t I be allowed to keep the money I have made, fair and square. Why shouldn’t I be allowed to keep the money my father made over his career, after he started in this country with nothing? Why should we have the spoils of our hard work taken away to supplement someone who hasn’t worked hard over their life? My extra endeavours are already penalised by higher taxes – isn’t that enough?

Tyler – In answer to your questions:

1. This assumes that those who are rich are so because of their own hard work and that they in doing their day to day business somehow create wealth.

Lefties like me have an inherent distrust of this view, we believe that many high earners overestimate the contribution that they make to society and take a disproportionate amount of the spoils.

If the rich leave, then it’s ultimately one less exploiting parasite and we’re all better off.

2. I can’t speak for other lefties here, but personally I think there is a flaw in the belief that everything we earn is ultimately ours. As an example, if I were to invent some new product, it’s success would depend on my customers, those customers exist as a result of the society I live in. As such, I believe that in paying taxes to maintain and improve that society.

@67 Andreas

All those rich “parasites” pay the bulk of all taxes in the country. The top 25% of earners pay approximately 75% of all the tax. If they leave who will pay the benefits and public sector bills?

You clearly are a lefty though, and display the Left’s most disgusting traits – the politics of jealousy and a belief that what’s mine is yours. Should you ever one day become wealthy, I have no doubt we’ll see your hypocrisy coming pouring forth.