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Written by Dom Weinberg
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Monday, 30 November 2009 16:35 |
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This morning CentreForum hosted 'A Fair Tax System' with Nick Clegg and Vince Cable - a wide-ranging statement of the tax policies the Liberal Democrats will present to the public at the next election. The most prominent message, or at least, the most interesting one for the media it seems, was the aspect that they are planning to double the threshold of the Mansion Tax. The papers seem unsure whether this is bolder or tamer than the original plans, with one broadsheet focusing on the fact that it has doubled, whereas another has described it as watered down. Perhaps the more significance aspect of the statement, and certainly the one that most directly affects majority of the population, was the pledge to raise the starting rate threshold for income tax to £10,000, and this is alluded to by Nick Robinson. This measure is at the heart of the fairness and transparency agenda proposed by Clegg and Cable. Yet it seems that most of the response to this morning's statement appears to be on the more soundbite-friendly Mansion Tax. Videos of the event can be found here or here.
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Written by Julian Astle
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Thursday, 05 November 2009 14:08 |
At the next general election all three parties will ask the British people to pay higher taxes in return for diminished services and benefits. They won't put it that bluntly of course, but that is what the promise of "austerity" means: pay more, get less. So the issue isn't whether a period of real pain can be avoided. With an annual deficit of £175bn pushing the national debt towards £2.2tn, it clearly can't. The real issue for the next election is how the pain should be shared out. Who exactly will pay more and who will get less? Of the many issues this question throws up, none is as politically potent as how much the "rich" should pay in tax. It is potent not just because it divides voter opinion, but also because it forces the parties to take a definite stand – to declare whose side they are on. The contrast between the Conservative promise to raise the inheritance tax threshold to £1m and the Liberal Democrat pledge to introduce a new "mansion tax" on homes worth more than £1m underlines the point. Both parties will stand at the next election on a promise of "change". This policy difference – clear, concrete, impossible to fudge – challenges voters to decide what kind of change they really want. At CentreForum we favour the Liberal Democrat approach for three reasons: it would bear down on inequality, boost social mobility and increase economic efficiency. The Conservative plan to cut inheritance tax would do the opposite. First, the equality argument. Income inequality and, to a greater extent, wealth inequality have been rising for decades – a trend that the Labour government managed to slow, but not reverse. The fact that this trend is visible across the developed world suggests this is largely a result of global economic forces beyond any government's control. But government isn't entirely powerless. If it were to ask those who have benefited from globalisation to make a greater contribution, it could do more to support those who have been made relatively less prosperous and secure. The Liberal Democrat plan seeks to do precisely this. The proceeds of the mansion tax are earmarked, alongside those of other proposed tax rises, for the purpose of raising the personal income tax allowance to £10,000. This would benefit all taxpayers, but particularly the poorest, 4 million of whom would be taken out of the tax system altogether. Second, the issue of social mobility. Those who are less concerned with equality might still agree that a just society is a socially mobile society – a place where people are able to climb the ladder of opportunity on the basis of talent and hard work. Yet most people who own or inherit million-pound houses, talented and hardworking as they may be, have accumulated much of their wealth by means largely or wholly unconnected to their skill or their labour. As Financial Times columnist Martin Wolf recently argued, property prices are in the main a reflection of location and amenities. This, he argues, makes property taxes desirable, as they "bear down not on effort, but on 'rent' – value over and above the costs of production". And as Sunday Times columnist Irwin Stelzer argues, inheritance taxes are desirable because they are paid only by "the lucky winners in the sperm lottery". Which brings us to the economic arguments for increasing, rather than cutting, tax on property and inheritances. In exactly the same way as cutting tax on pay for extra work increases the incentive to work harder or longer, so cutting the tax on unearned wealth, be it inherited or passively accumulated from rising house prices, increases the incentive to work less or to stop working altogether. Which is why, with governments around the world looking to increase their revenues in the coming years, the OECD recently advised that "among taxes, corporate taxes are the most harmful for growth, followed by personal income taxes, then consumption taxes, with recurrent taxes on immovable property having the least impact." It is also why CentreForum argued earlier this year that as well as cutting spending, the next government should increase VAT to 20% and introduce a flat rate levy, over and above council tax, on the most expensive residential properties. Time will tell whether it is the Conservatives or the Liberal Democrats who are in possession of the stronger political arguments. But if social justice and economic efficiency are the goals, there is little doubt which of them has the stronger policy arguments.
This article first appeared on The Guardian's Comment is Free website.
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Written by Rosie Shimell
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Tuesday, 03 November 2009 17:55 |
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Since its pre-recession peak in the first quarter of 2008, the UK economy has shrunk by a total of 5.6 per cent. As the tax take has shrivelled and unemployment benefits have surged, the budget deficit now stands at £175 billion. Unemployment now stands at 2.47 million. Rumours are circulating that Alasdair Darling is going to announce a further fiscal stimulus in the Pre-Budget Report, which is due in the next month. This would put a vast gulf between the Tories and Labour. George Osborne says the Conservatives will start to make cuts in 2010 if they win the election – and Brown and Darling may be about to stake their chips on an economic strategy to borrow more, and cut later. Will the debt markets allow it? Other countries have been through this experience before. On the 12th November, CentreForum is holding a one-day conference, where speakers from Canada, Sweden, Ireland and Australia will give UK MPs, journalists and policy wonks some advice. • David Herle, political advisor to finance minister Paul Martin in the 1990s, on how to bring ministers, trade unions, local government and voters on board with spending cuts.
• Pär Nuder, ex-Swedish finance minister, on how the Social Democrats dealt with their banking crisis in the 1990s: the party’s efforts to save the Swedish model of public services and tackle unemployment could be a model for Labour to follow.
• Prof Colm McCarthy¸ of University College Dublin and one of Ireland’s foremost commentators on the crash, will discuss how Ireland performed cuts for growth in the 1990s – and how the next round of fiscal tightening is being put together, after their property and financial bubble burst in 2008.
• Dr Chris Aulich of the University of Canberra will discuss John Howard’s privatisations and public services reforms in Australia, which cut the state’s share of the economy from 37.7 per cent to 33.2 per cent of GDP between 1996 and 2007. Other speakers include: Gemma Tetlow (Institute for Fiscal Studies), Andrew Tyrie MP, Sally Keeble MP, Lord Newby, Julian McCrae (Institute for Government), Warwick Lightfoot (former SPAD to Chancellors Lawson, Major and Lamont), Christopher Cook (economics leader writer, Financial Times), Marnix van Rij (Tax policy partner, Ernst and Young), Prof Nick Bosanquet (Imperial College) and David Walker (Audit Commission). The conference will take place between 9 am and 3.15 pm on Thursday 12 November, at 45 Millbank. It is sponsored by Ernst and Young and the Canadian Foreign Ministry. If you would like to come, please email
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Last Updated ( Tuesday, 03 November 2009 18:14 )
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Written by Giles Wilkes
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Monday, 02 November 2009 11:55 |
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I've produced a very quick piece of research putting the Conservatives' recent espousal of growth-through-exports-and-investment into historical context - and asking whether their reliance on this model is realistic, or very risky. The answer: very risky. It's all very fine raging against the debt being loaded on our grandchildren. But they don't want to inherit a ****ed economy either.
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Last Updated ( Monday, 02 November 2009 12:44 )
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Written by Giles Wilkes
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Monday, 02 November 2009 10:58 |
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This is cross posted from Freethinking Economist. Apologies to those of you subscribed to both . . . Everyone is talking about exit strategies, but what should be exited and when? No consensus from economic wiseguys, just a recognition that this issue is utterly critical. Fathom Consulting have a direct go at Conservative economic policy. “While we agree that the UK’s fiscal position is dreadful, Opposition plans to begin fiscal tightening next year could spell disaster. We are calling for an overhaul of the Bank’s QE programme to make it start delivering for the real economy: for all firms, not just the biggest; and to provide a cushion for cash-strapped households.”
This reminds me of Slash and Grow, and the conclusions on QE are similar to those I would make: focus QE better on the real economy, do less of it, don’t dismiss fiscal policy but use QE to support it. Hamish Mcrae’s answer is to start thinking about exiting BOTH fiscal and monetary support, and by 2010. What is clear is that QE has to end soon. Once growth is re-established, there can be no justification for continuing it. . . . Behind all this is a bigger question. It is to what extent is the present recovery – first, in financial markets and, now, in the real economy – an artificial creation of exceptional policies? It is a fiscal issue – how far, for example, was the American growth the result of the US government’s boost? And it is a monetary issue – how far have house prices here recovered merely on the back of QE? So when these policies are withdrawn, and I have seen no suggestions they can continue beyond 2010, will there be self-sustaining growth?
But Roger Bootle says More QE, and it’s good for us. As far as things over which we have control are concerned, all we have is QE. It is without doubt a dangerous policy. The far bigger danger, though, would be to do nothing, allowing the recession to continue and the economy to sink into deflation.
Whereas Wolfgang Munchau says we must NOT be too late in preparing the Big Exit from . . . QE. But in the meanwhile, fiscal policy is the more effective. Some recent economic research** has shown that stimulus programmes are particularly effective when interest rates are very low. It is no surprise therefore that even fiscal conservatives, like the Germans, are now borrowing as if there is no tomorrow. As the world economy heads into a still uncertain recovery, this is not the time to apply the fiscal brakes. But it is perhaps time for a moderate monetary tightening.
So QE is helpful because it helps fiscal policy. But is it risky? Roger Bootle thought not: it can be easily reversed. Richard Koo in his excellent book pointed out the hugely inflationary risks of the policy, while finding it utterly inert in the case of Japan when there are no willing borrowers. Personally, I doubt the inflation risks while the output gap is so large. But the risk of asset bubbles – you know, those things that got us into all this mess – is bigger. Unsurprisingly, Nouriel Roubini is the most worried of all. the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – . . . So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles . . . the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
What is my verdict on all this? 1. I think QE really is riskier than Mervyn King lets on 2. I think fiscal policy has unusual traction for the next year or two whereas QE itself is potentially intert on demand, at least directly 3. I think QE has economic effects but they are little understood, and the mechanism of causing an asset bubble to boost demand is not a very good one 4. Now that it has happened, unwinding it quickly might provoke a huge crisis and 5. it might have been better doing less QE but using it for more direct demand-changing operations. Like funding a National Investment Corporation, perhaps? A letter to the FT summarises point 2 very well. Well said, Andrew Kilminster: The events of the last year have amply confirmed Mr Bernanke’s insight that it is possible to have a situation where there can be a great deal of money in the economy but hardly any credit available.
David Heigham (see comments on last post) has done me a big favour by alerting the blog to the existence of the Levy Centre. Like Richard Koo, the authors of a recent piece of research believe that you can’t ignore the debt-situation (i.e. balance sheets) of households and non-financial businesses. While Washington’s focus is on the staggering government debt and unsustainable fiscal deficits, the real concern should be the debt level of the private domestic sector. It is important to recognize that government debt is low relative to the size of the U.S. economy, and deleveraging in the private sector cannot happen without an expansion of the government deficit. Otherwise, there is risk of a full-blown debt-deflation process.
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