There’s a cross-party acceptance of the need for strong austerity measures among the so-called main parties. It’s not an election issue like it was in Greece and other countries in the EU. Why is that? Why have we accepted government austerity measures so easily in the UK without a proper debate and without giving other solutions full consideration?
Austerity is an attempt to address the government’s fiscal imbalance: the difference between the present value of the government’s commitments to cover its outgoings (such as state pensions and running the NHS) and the present value of its tax revenues. This difference is undoubtedly significant, at close to six times our national income.
Contrary to popular belief though, there are several options available to deal with this imbalance. The deficit isn’t caused by immigrants stealing our jobs and claiming our benefits as UKIP would have you believe or by lazy people on Benefit Street as Ian Duncan Smith clearly suggests. It’s a consequence of public spending pressures that we face as the baby boom generation reaches retirement age and life expectancy continues its upward trend. Many other countries are facing similar problems, although the UK deficit is high relative to our US and European counterparts.
Despite the cause being largely linked to changes in demographics, we can probably dismiss the idea of increasing the retirement age again and increasing immigration of young people in order to increase the number of workers paying tax. Both of these options would be deeply unpopular and come with their own issues – not least being the lack of available job vacancies. However, this still leaves two clear choices. On the one hand, we could increase income taxes, National Insurance contributions or consumption taxes such as VAT and fuel duty. On the other, we can take the currently favored option of cutting public spending.
What this really comes down to therefore is which groups in society should bear most of the burden – low-paid workers and the unemployed who rely most on the welfare state, the NHS and other support services provided by any decent modern society, or should the wealthy bear more of the cost by paying a little more tax, or at least by paying some tax. Let’s face it, we lose billions in revenue from tax dodging corporations and high net worth individuals every year.
The problem here is the cost of enforcing tax collection. If enforcement could be improved significantly at relatively low cost, the government could take more in tax revenue, but if enforcement is very costly then the extra tax revenue collected might fall short of the cost of enforcement, leaving the government finances in a worse state. You would expect HMRC to conduct a cost-benefit analysis to decide how much of its resources it should put into enforcement, but one wonders.
The other thing that those of the right of the political spectrum like to remind us is that movements towards higher corporation tax or tougher enforcement would likely deter investment in the UK, even by those corporations who are willing to pay their fair share, as it might be interpreted as a signal that further regulations will follow in the future, making it more difficult to do business in the UK.
So government takes the easy option of cutting spending instead, though this doesn’t explain the level and pace of cuts in public spending. Why try and balance the books in just 5 years as Osborne set out to do? How quickly we reduce the deficit is a trade-off between current and future generations. The fast pace of fiscal adjustment that George Osborne has instigated (and Ed Balls doesn’t oppose) doesn’t aim to spread increases in taxes and reductions in spending over a long period of time and therefore spread the pain. They want instant results, or at least within a 5-year term of office, because that’s how politics works. It’s short-termism. How else can you take credit for re-balancing the books? The result is that the burden per person is much larger, and the economic pain for individuals correspondingly greater.
But does it work?
It hasn’t worked in Greece where austerity policies have led to unemployment rates of 28% nationally, without reducing the debt or providing the economic growth it promised.
So, what should be done?
At the very least we need to have a public debate about how to deal with this issue, rather than simply accepting the path chosen by the three main political parties. The Green Party at least have a different approach. They want to see about 45% of GDP being spent on government services; the same as Germany. They don’t want to roll over for big business or give up because it’s too hard. Instead, they want to see rich individuals and multinational companies paying their fair share of taxes.
Thomas Picketty suggests that a tax on capital instead, or as well as, income could not only provide fiscal returns, and hence reduce the fiscal imbalance, but would have other benefits also. The tax burden would fall heaviest on the “super rich” – those most able to afford the tax and who, some could say, are the sector of the populace that has benefitted most from the economy. The tax, depending on what tax rate is selected, would also go some way towards reversing the polarity of wealth which has been such a feature of recent decades.
The concept of taxing capital fills the richest 1% with horror and has prompted an outpouring of misleading arguments against Picketty, and regrettably these arguments hold sway to our political leaders who are under the control of the 1% by virtue of their control of the media and the lobbying groups.
But as well as reducing inequality we need to live sustainably and our current requirement of needing the resources of three planet Earths is already causing massive disruptions that will rapidly reach catastrophic proportions. If we really want to talk about fairness, the truth is that we need to take a look at what our fair share of the Earth’s natural resources is and set ourselves on course to really live within our means. The deficit exists because we’ve had more than our fair share of the spoils already. We need to recognize the need to live within our own resources at a lower level of consumption and stop worrying about GDP and growth.