Public finances: the left's problem

It’s insufficiently appreciated just how much of a problem the state of the public finances poses for the Left.
The difficulty is: how can public borrowing be reduced without sacrificing leftist objectives?
Even by 2012-13, the Treasury expects net borrowing to be £118bn, 7.2% of GDP, with most of this (5.5 percentage points) being “structural” - that is, not blameable on the state of the economy. And even this forecast is predicated upon what Polly Toynbee calls “savage cuts” in vital public spending.
The problem is, it’s not obvious how this gap can be greatly closed in ways the Left would like.
For example, abolishing the Department for Business, Enterprise and Regulatory Reform and halving spending on big military projects would save only £6.3bn. Pushing the tax rate on incomes over £150,000 to 70% would raise another £3.6bn, even if they don‘t emigrate or dodge it. Even if you could get the 10% of richest households - those earning over £41,000 - to pay an extra 10% in income tax, you'd only raise a little over £2bn.
Add in a few other favourites - scrapping ID cards and immigration controls - and we’d only bring in a little more.
The fact is, then, that obvious leftist ways of cutting spending and raising taxes would close only a fraction of Darling’s estimate of the structural Budget deficit.
So, what can be done? Here are three possibilities:
1. Hope that something comes up. It’s possible that the public finances will improve more than Darling expects. This would happen if the ending of the credit crunch causes firms and households to increase borrowing - and the counterpart to this would, as a matter of arithmetic, be lower government borrowing. Certainly, history shows that long-term forecasts for public borrowing are usually wildly wrong.
2. Campaign for higher inheritance taxes. In the latest year for which we have data, £58.3bn (pdf) was inherited. The tax rate on this was a mere 5.8%. Why should inheritances be taxed more lightly than work or savings?
3. Argue for greater workers’ control of public services. The fact is that it’s top-down command and control managerialism that got us into this mess, on two counts - by allowing the mismanagement of banks that caused the financial crisis, and by allowing waste (a lot of which is management) to proliferate in the public sector. As I said, it is only workers’ control that offers hope of genuinely useful cuts in public spending.
I dunno if these possibilities are adequate. But I do know that standard leftist slogans - “tax the rich”, “stop the cuts” - aren’t enough.

Comments

[Bob B]

"Tony Blair has said he does not regret leading Britain to war in Iraq when he was Prime Minister and has called on the world to take on and defeat Islamic extremists."
http://www.timesonline.co.uk/tol/comment/faith/article6153607.ece

I was musing on how much better shape our public finances would be in were it not for the costs incurred by the invasion of Iraq in March 2003, supposedly because Saddam Hussein was able to summon use of all those weapons of mass destruction within 45 minutes.

In celebrating the 10th anniversary of his keynote speech in Chicago, I noticed that Tony Blair failed to recall this bit:

"If we want a world ruled by law and by international co-operation then we have to support the UN as its central pillar."
From: http://www.number-10.gov.uk/output/Page1297.asp

[Luis Enrique]

4. introduce euthanasia / assisted suicide to the NHS

[only kidding folks .... or am I?]

btw. I thought that inheritance tax was regarded as inherently too easy to avoid to be much use.

[Luis Enrique]

Do I understand you correctly that by 2013, even on rosy Treasury forecasts, we are still going to be adding to our stock of public debt at a rate of £120bn odd per year?

I don't have a sense of how big that £120bn number is. At first I thought that we need to cut that £120bn to zero, so it's very big, but of course that's not right. If GDP is growing, then we can afford to borrow on net each year, and still decrease the stock of debt as a percentage of GDP. So how far away is that £120bn from a figure consistent with doing that, assuming trend GDP growth of say 1.5%? What I'm asking is how much does that £120bn figure have to fall by? Is it miles away from a sustainable number (by which I mean something like constant debt/gdp) or actually quite close to being okay?

[Luis Enrique]

[or have a misread you, and £120bn is the accumulated stock of debt, not the annual flow of new borrowing?]

[RobW]

The left are clutching at straws.

Like in any household or business if the figures don't add up you will need to severely cut spending at some point or you will go bust.

[redpesto]

1 - sounds like Darling's current strategy on steroids (I mean, how much more optimistic than his prediction of 3.5% would the left have to be?)

2 - yes, but then New Labour bottled this argument when it had the chance (and the Tories still seem committed to theirs of only taxing at £1m+, probably at a very low rate)

3 - A lovely idea...if only there was a major political party in favour of it...

[Chris Clark]

Regarding point 3:

So you empower workers - I'm with you 100% up to this point - but then where would the responsibility lie? Managers will be a necessary evil for as long as the buck needs to stop somewhere, which it does.

Can I suggest a compromise that even a nasty old rightist like me would support. If workers develop a keen knowledge of where savings might lie and we want to empower them to effect these savings, why not select managers exclusively from within the existing workforce rather than moving professional managers in from other sectors? This would, probably, also serve to decrease the gap between manager pay and everybody else's. A good thing.

I believe the police force used to work along these lines in that every policeman had to start out as a plod. No chief inspector or commissioner anywhere in the force hadn't spent a set number of years working his/her local beat.

I think this would also serve to reduce the ability of power mad people at the centre of government and the media to wield power over important institutions.

[Patrick Vessey]

"The difficulty is: how can public borrowing be reduced without sacrificing leftist objectives?"

It really depends upon what what those objectives are.

If they are a desire to see much greater economic equality and fairness, then I'm sure that you know that such would be the natural outcome of a truly free market. The good news here is that removing the structural supports to corporatism -- state capitalism -- doesn't involve a huge cost, but does require legislative changes (e.g. to IP law) and a reduction in/removal of state support for the capitalist elite. In other words, political costs must be borne, not financial ones.

If those objectives are redistributivist, then I'd gently suggest that they are largely wasted effort anyway; so long as the root causes of our social and economic inequalities remain, so will gross inequality.

If social programs such as health and education, then perhaps we ought to be bearing in mind that the recent tendency has been to increase quantity -- might we instead focus upon quality and relevance? -- and also that the political class seem unable to bring themselves to rationally debate what the NHS should be for, bearing in mind the diminishing marginal returns of certain modern/technical treatment regimes.

You recently wrote a piece looking at the (leftist) arguments for a smaller state. I'm a tad confused as to how you can understand that such an outcome would actually further leftist egalitarian aims, but in this post are now fretting over how to continue to fund the current bloated state and, consequently, to help perpetuate the exploitative economic system that it supports?

[Cabalamat]

The problem with worker control is that ir means the public sector will be run for the benefit of the workers, not the service users or taxpayers.

[A Very Public Sociologist]

Cabalamat - there's more than one way to skin a cat. There's no reason why service users and representatives from the government can't have a say too.

[dearieme]

IHT is easy. Exempt only the first £10000, tax the rest at 10%, and allow no further exemptions. Solved. Even the stinking rich could probably accept that it might be tolerable to pay the 10% compared with the legal shennanigans they go through at the moment.
No further exemptions, mind - no sentimental crap about spouses, handicapped children, charities, or what have you.

[Matthew]

What's the evidence that the public sector is more inefficient than the private sector? I've worked in both, and can't say I've noticed a difference.

[dsquared]

With regard to 3, is there any likelihood of your revisiting earlier assertions that the building societies were coming through the crisis unscathed due to their superior ownership structures?

[JimH]

There's no economic crisis so bad that some socialist can't make worse by insane meddling......

[Andrew Brooks]

IHT is, indeed, very easy to avoid or to mitigate in its current form, but that need not be the case. It would not be difficult to change the law and to make the tax nigh on impossible to avoid. This was largely the case with the old capital transfer tax system. Taxing the inheritance of wealth is, further, easy to monitor because of the formalities of probate.

Why, and in the light of the new political agenda adopted by NuLab, IHT has not been tackled is baffling.

The only answer anyone has offered is the fear of disappointing the aspirational. This was displayed by a campaign run by the Daily Express a couple of years ago. Ninety percent of the paper's readers were in favour of abolishing IHT but, yet, the profile of the paper's readership suggested that the vast majority were in a social bracket which would leave them paying no IHT in any event. These were the people who should be demanding more IHT, not less. Go figure.

Aspirational and stupid can be strange bedfellows. Perhaps, NuLab is pinning its hopes on the stupidity angle to shore up its votes ?

[griswold]

Yeah.

Point about Labour Govts is that they bankrupt the country.

That is the bottom line.

Tax the rich. Yeah. They will leave. 1976-80 revisited.

[Matthew Cain]

I've done a quick and dirty assessment of the Treasury's track record on growth forecasts. They seem to mostly get the 1-year and 2-year projections wrong: http://blog.matthewcain.co.uk/chancellors-predictions-usually-right/

[Mr Divine]

DEFENCE DEFENCE DEFENCE

WASTE OF MONEY. CUT IT BY 90%

PROBLEM SOLVED

[Bob B]

If councillors like Lady Porter or the rent-hike rebels in Bolsover can be surcharged for "bad" decisions in local government, I can't understand why ministers and MPs can't be surcharged for their bad decisions.

They never did find all those WMD in Iraq that Saddam Hussein was supposed to be able to deploy within 45 minutes so why isn't Blair forking out from all the millions he has been making since stepping down as PM?

That £12.4 billion on a national database of personal medical records for the NHS which doctors won't trust to maintain patient confidentiality? Patricia Hewitt, stand up and pay out.
http://www.medicalnewstoday.com/articles/96079.php

Why do the military need equipment like the Euro fighter and aircraft carriers now the Cold War is over?

The cry goes out that ID cards or Passports didn't prevent 9/11 but the Taleban and Islamicists plainly aren't deterred by the threat of nuclear missile strikes either so why is the government proposing to upgrade Trident?

Now that burglary and robberies are rising, how about efficiency savings by the police? Dick Cheney is saying that waterboarding was efficient in extracting useful intelligence from detainees. If so, wouldn't the rack be even more efficient - it worked with Guy Fawkes, after all?
http://en.wikipedia.org/wiki/Rack_(torture)

[avicennaaccounting]

Isn’t it terrific to be financially secure? Having never to worry about money and other finance issues? All big and small businesses around the globe spend half of their time in increasing revenues and profits and the rest in being worried about its safety and security. From small business companies to large ones, all are seeking to catch the golden bird called “money security”

[Bob B]

Like this? We have to admit now that we certainly can no longer afford - if we ever could - to continue to splash out remuneration on this scale just for organising the London Olympics in 2012:

"In the past year, board members of the Olympic Organising Committee received £1,000 per two-hour meeting and the chief executive, Paul Deighton, a former Goldman Sachs banker with a personal fortune of more than £100m, was paid a salary of £557,440. The committee chair Lord Coe splits his time between his Olympic work, for which he receives more than £250,000 a year, and managing the Complete Leisure Group, a sports marketing company he established, with the former bankrupt and tax exile Peter Abbey, a month after Britain won the 2012 bid."
http://www.independent.co.uk/sport/olympics/london-2012-a-gold-medal-muddle-968634.html

Regretfully, the London games will have to be cancelled. That will cause much anguish in places, I appreciate, but there really are more pressing priorities - such as healthcare and education.

[sean]

yep it was despicable the way jade goody made the maximum provision for her two sons. And a working class girl as well, shame on her conservatism.

[The Welsh Jacobite]

"Why should inheritances be taxed more lightly than work or savings?"

Why should inheritances be taxed at all?

A family is taxed when wealth is acquired, why should the wealth be taxed again just because someone has died?

[Balla]

"Why should inheritances be taxed at all?"

Why shouldn't they be taxed at 100%?

A government HAS to raise revenue somehow - they can do that by taxing earned income or alternatively they could tax unearned income, such as inheritance. I know which I think is fairer and more just.

[sean]

Balla, go and have some offspring and come back and tell us how you think then.

I know things like kinship does not register on the dialectic materialist radar, but my dying wish is that my children benefit from my already taxed labour, its my property and my right to give it to them, not yours or the states.

[Balla]

Sean, what has your wish got to do with anything? It's a simple question of what's fairest. Why should I have to be taxed at a higher rate on my EARNED income so that your children can inherit a windfall which they have done diddly squat to earn?

And that leaves out the more important 'equality of oportunity' argument.

[DBX]

Griswold, not all Labour governments, and certainly not the one you blame. The 1976-79 government of Jim Callaghan saw inflation drop from 20 percent to eight percent, economic growth go up, unemployment drop, and the budget deficit shrink.

Unfortunately, they got hubristic with the still-powerful unions over an ill-conceived incomes policy, and they effectively brought down the government. But if you forget that government's considerable economic achievements, you're doomed to repeat the past.

Margaret Thatcher's principal achievement was not the economy, on which her record was very poor indeed, but rather breaking the unions. And her public spending record would have been pretty good (as in appropriately restrained) but for her incompetence with the economy, which meant all the North Sea Oil windfall going on unemployment and welfare benefits.

NuLabor®, on the other hand, has made the fatal error of combining Thatcherite macroeconomics and monetary policy with the worst of leftist profligacy. A more toxic combination I cannot imagine. It's the complete opposite of the Callaghan government.

So Britain needs some serious belt-tightening if that's the structural deficit. Time to dust off the Callaghan playbook, which, with the unions that proved so troublesome to Callaghan now vanquished, should actually be politically feasible this time.

I don't see it happening, though. NuLabor® would have to admit they were wrong, and the Tories would have to be both sufficiently enamored of government intervention and sufficiently disciplined in the art of counter-cyclical policy to pull it off politically. Frankly, flatulence has better chance of being noticed in a hurricane.

[Mr. Divine]

Sean
You've got a point but how are you going to make it happen?

What you could do is give it to me and i'll pass it on.

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