Friday, 21 November 2008

Can we start a new debate?

Pre-Budget Report on Monday. So what do you want Alistair to do? Do you support the idea of a fiscal stimulus to get the economy moving again? Or do you want to 'let the recession take its course'? ((c) John Maples, former Tory Treasury Minister, who actually apologised for it in the Chamber today).

If you want the Chancellor to cut taxes, should it be income tax (basic or higher rate?), stamp duty, capital gains, corporation, or VAT? If you want more spending, what should be the priorities? Support for SMEs, capital spend on infrastructure projects/ construction/ house-building, or more money in people's pockets? And if so, whose pockets - pensioners, poor people, families with children?

And what about environmental taxes? Is there any place for them in a recession? (The Tories don't seem to think so).


La Bete said...

This proposed 'Fiscal stimulus' is IMO reckless and foolhardy, especially funded by borrowing. All Brown's plans are going to do is increase debt and make it impossible for us to maintain any kind of recovery in the long term.

If you really want to help then reduce taxes across the board, focusing on VAT and base rate and see people spend more as the money they have available goes up. Increase the attractiveness of work and see some of those currently caught in the benefits trap become economically active. It's a win-win policy.

The only downside (for you) is that it will reduce the client class by reducing dependency on the state.

Bristol Dave said...

And what about environmental taxes? Is there any place for them in a recession? (The Tories don't seem to think so).

I don't either. The government, local and national, have not, do not and will not really care about the environment. It's just a convenient way, handed to them on a plate, for arbitrary and regressive taxation.

Take a look at the cost, unreliability, and impracticality of public transport in Bristol. As a resident of Bristol you simply cannot argue that it is anything other than absolutely attrocious. Since environmental taxes usually involve squeezing more money out of that already well-punished "evil" group, the motorist, then I think the quality of public tranport is very relevant. Until it's improved, most enivronmental taxes cannot be justified, especially in the current climate.

Also, as La Bete said, a Fiscal Stimulus funded by borrowing (e.g. even more debt is a truly, truly, stupid idea. Brown/Darling clearly have no idea. It's like someone who is having problems keeping up with mortgage payments and credit card bills taking out another loan.

Kieron said...

La Bete -

It would be "reckless and foolhardy" NOT to bring about a stimulus during a recession. The Thatcherite view of public finances held out in the 1980s, and produced unemployment above 3 million. But of that went on to become long-term, structural unemployment. We have been trying to pick that apart since 1997.

David Cameron agreed that unemployment has to be kept down, and that grave mistakes were made in the 1980s - although hasn't come out with a realistic way of doing it.

"Focusing on base rate" does seem like a good idea, until you realise that, oh, we're in the middle of a financial crisis. Monetary policy (alone) has very little effect without a working financial sector. Didn't you see the row between the government and the banks re. passing interest rates on? Base rate dropped by 1.5pp and that had precisely zero effect by itself.

As regards tax cuts, there probably will be some, but they will be targeted at those who most need them (and are likely to spend them). Across-the-board tax cuts (such as a general cut in VAT) would seem like a good idea until you actually look at the evidence: in the USA, where the Bush administration engineered a $150bn fiscal stimulus mostly comprised of rebates (in Jan/Feb), the majority of people didn't spend the tax cuts, but saved them. The US saving rate jumped from a long-term avg of 1.1%, to an avg 2.3% over the past five months.

It's worth pointing out that VAT cuts would also be regressive - i.e. rich people would benefit disproportionately from that policy, whereas it is the poorest who have been suffering disproportionately from the downturn and from higher energy/food prices.

Kieron said...

Bristol Dave - A fiscal stimulus is only a fiscal stimulus if it is funded by borrowing. Cutting taxes but cutting spending too, is not a fiscal stimulus, it is fiscally neutral. It is redistributive - and there is nothing wrong with that, per se - but it will do nothing to stimulate the economy, as it will produce no extra demand.

Same goes for what the Lib Dems have proposed (higher taxes on the rich and lower taxes on the poor) - redistribution is all well and good, but it's not going to do anything whatsoever to stimulate an economy in downturn.

To insist on balancing the books at all times is a pro-cyclical policy, meaning that it will exacerbate booms and busts. And whatever anyone thinks, the Tories are basically economically literate. They are fully aware that not to bring about a fiscal stimulus, is "to let the recession run its course." This is total madness. They have never proposed a pro-cyclical fiscal policy before (since Thatcher anyway) - and if they were in government, they wouldn't be proposing it now. They just have to oppose the fiscal stimulus, as they know it's going to be quite popular...

Kieron said...

Ooh just realised I didn't answer Kerry's question in the original post.

My priorities for the PBR:

Tax cuts / tax credits - only where they are going to help ppl who really need them, i.e. those whose expenditure is mostly food & energy, and those on low incomes who are paying higher taxes after the 10p decision (whether or not the govt thinks they are "deserving"), and those with children living in poverty. They have to be highly targeted. (If they were going to put £4bn into the economy they could put it into child tax credits and maybe reach the 2010 target!)

Expenditure - Ideally anything we spend money on will a) fill a gap where investment is desperately needed, and/or b) be of long-term benefit to the economy. So investment in infrastructure where there is a lack of it would be a good option. So public transport (not in London, but elsewhere in the country where there is an enormous need) would have a lot of potential. So would building plants and infrastructure for nuclear and/or renewable power. Building social and affordable houses would also be a good option in terms of future benefit (I know the Government has an agenda to keep Britain a homeowning country, but that aim needs to be put on a back burner, as the most immediate aim should be to make sure everyone has somewhere to live).

I wouldn't want to put any money into generalised tax cuts - because the evidence shows they wouldn't help, and because it would be hard to make them temporary. And I wouldn't want to spend the money mostly on current spending, because that would lead to long-term structural problems in the budget. A fiscal stimulus needs to be mostly on the capital side.

Elby the Beserk said...

Me. I'd just like my pension back, please, Alastair. It's worth fuck all - will pay me an annuity the same as the state pension - after 25 years of paying into it.

Please? I know I am not your sort; I worked hard, I paid off my mortgage, I have always been prudent. Now my savings are worth nothing, now my pension is worth fuck all.

Why do New Labour loath those who look after themselves, Kerry?

Elby the Beserk said...

And a broader view ...

1) action on our on balance sheet National Debt of £600bn plus and;

2) disclosure of our OFF BALANCE SHEET National Debt of £1.2 TRILLION plus and;

3) this is not good - the fact that Britain is a NET IMPORTER and;

4) this is even worse - that more than 20% of our workforce is in the state sector most of which are middle management bureaucrats who ensure that boxes are ticked and;

5) that our Prime Minister used to be a Chancellor who believed that he single handedly ended Boom and Bust and;

6) that same Prime Minister seems to be more worried about keeping his job then doing what's right for the country so much so that he plans to borrow more to keep public spending high (and hopefully buy votes in the process) thus ensuring high taxes possibly for decades;

7) we have prolly c 5 million economically inactive (your phrase) in the UK. With the huge public sector, that makes what 35%? 40% of the country DIRECTLY dependent on the government, ille est, we have a HUGE and unsustainable client state.

But that's what Gordon wanted all along, isn't it.

Cue post being ignored. Rather like being on Tom Harris's blog, really. Labour pretend to be "open" but are anything but.

Kieron said...

Elby, several points:

1) re. pensions. Why do you believe that the Government has taken your pension away? How are they meant to have done this? Yes, final-salary pensions have largely gone now, but it's not really possible to blame this on the Chancellor. (And if you can't blame the Government, and you're asking them for help, surely you're admitting that the state has a role to play in helping people like this?)

2) re. debt figure. If you include public-sector pension liabilities, yes, the public-sector net debt figure would come out a lot higher. (If you include PFI projects, it might add 1% to the debt figure.) So? Is that meant to mean that suddenly we're bankrupt? The UK uses the same accounting standards as everyone else. No country includes its public-sector pensions in the national debt. Yes, they probably should, but for odd historical reasons they don't. Everyone knows that national debt doesn't include pensions, so they have always factored that in. Whether you look at the pensions-inclusive or the pensions-exclusive figure, our public debt has still been quite low on international and historical comparisons. It's not like no-one realised that the public-sector pensions weren't there. You shouldn't read so many tabloids.

3) re. extra borrowing. Economist Roger Bootle said in that famous left-wing publication the Daily Telegraph, "Extra borrowing by the Government, if it encourages more output, can be self-financing". It is not efficient, in the long run, for the public books to be balanced at all times - that would lead to the economy under-performing during recessions (like the current one). A government is not like a household - its finances are not the same. Another economist, Sam Brittan, said in that other famous left-wing daily the FT, "Maxims about debt that might be prudent for families can be the height of folly for governments." You must realise that if the Tories were in power now, they wouldn't be calling for spending cuts in the middle of a recession. That would be insane. They are posturing, as they know that they have to oppose whatever Labour does at this time.

4) re. "economically inactive people". I'm not sure what figure you are referring to, but I don't see how 5m ppl can be 35-40% of the population...? Nor of the workforce.

5) re. Gordon Brown. If Gordon Brown wanted everyone to be on benefits, why has GB's flagship tax credit system always favoured people in work, and encouraged them to get into work? Why has the number of people on incapacity benefit gone down so quickly over the past 11 years? Why has Brown's government just now launched a new initiative to get more people off benefits and into work? More broadly, why would anyone ever want to get more people out of work and on benefits?

It's worth noting that large-scale, long-term unemployment didn't exist in this country until the 1980s. It was Margaret Thatcher and her policies that created a poverty trap - where wages were so low, and unemployment so high, that it was often better for people to stay on benefits rather than try and get a job. Gordon Brown been trying to pick those mistakes apart ever since he became Chancellor. It is now recognised that the state has a role to play in getting people into work. Even David Cameron admitted that Thatcherism had been a mistake because it had created long-term unemployment. So what is it that you are objecting to???

Single acts of tyranny said...

At what point* do you believe UK government bonds will no longer be taken up?

(* i.e when the overall debt reaches what level in cash terms)

The Penguin said...

I would like Alistair to grow a pair and admit that the record of the government on the economy is dire, and point out who is actually responsible, ie Gordon Brown, the so-called Prudent Chancellor who abolished Book and Bust but borrowed and spent like a Labour Chancellor while stealing people's pensions, flogging of our gold a knock-down prices, hid debt via Enron-like PFI deals, dismantled a perfectly good regulatory framework thus leading to Northern Crock and first run on a UK bank for centuries, fiddling the inflation and debt figures and telling barefaced lies.

Whilst doing everything he could to undermine Miranda.

Don't think he'll do it.

The Penguin

The Penguin said...

Boom not Book - bloody flippers!

The Penguin

Kieron said...

Single acts of tyranny -

The point at which markets stop taking gilts has nothing to do with any nominal value of the debt - it has to do with confidence.

The UK has never defaulted, so we would have to look to other countries to look at what level of debt can be sustained without the markets giving up hope.

Whilst I would never want the UK to follow any these examples, we can straight away point to Italy, whose public-sector net debt is above 100% of GDP, and Japan, where it is nudging 200% GDP. And that's just within the G7.

For reference, the UK's figure is at 43%, including Northern Rock but excluding Bradford & Bingley and excluding the bank bailout. (This does not include PFI, which might add 1 percentage point to it. Nor does it include public-sector pensions liabilities - but then the other countries' figures don't either, so the figure is comparable.) USA is at 60%, excluding fiscal stimuli and bank bailouts. Germany around 62% and France around 66% I think, also excluding bank bailouts. Will have to check those figures but they are in the right ball park.

The UK is nowhere near bankruptcy and nor will it be after Brown's fiscal stimulus. It's silly to suggest it would be, really.

Roger Thornhill said...

A "fiscal stimulus" based on borrowing is a fools errand. All it will do is push the pain until after the next election. It is, in effect, a mortgage on our future. We don't even get the choice to sign or not.

Yes, cut income tax. In fact, abolish it. This way you can stop interfering in peoples' lives and private affairs.

Secondly you can cut spending, just as ANY sensible household does in times of trouble. E.g. We have 900,000 new "salaried unemployed" on the State payroll since 1997. You cannot say these are all doctorsnursesandteachers.

If we adjusted spending to that in 2001, increasing it for inflation as per the rate the BoE uses, we would save £150bln p.a. 2001 was hardly a year of high efficiency, so I am certain savings can still be made without reducing services.

With that £150bln+, you can put an end to Income Tax. There is no use bleating about "the rich" for they currently don't pay it and if you tried to go after them they would just dance away from your leaden footsteps and settle elsewhere. Tax their spending instead. Most tax clampdowns punish either the poor (10p) or the lower to middle classes who cannot afford tax advice. Not very smart.

An end to Income Tax will ensure that the money will be spent by those who know best how to do so, or do you think that you know better than I do how to spend the money I have earned?

As people have more money in their pockets you, Kerry, can then ASK them if they would not mind supporting the causes you think are worthy of support. If they agree and your case is sound, they will do what they can when they think they can. Putting a gun to their head had demanding the money even before they have put it into their pockets is illegitimate, let alone uncivilised.

How about THAT for your pre budget report?

John Pickworth said...

Is there any point to having this debate?

I commend you for attempting to have one Kerry but isn't the Government just going to do what it wants and what it judges will produce the most successful electoral outcome?

So what do you want Alistair to do?

1. Scrap whole rafts of planning regulation.

2. Scrap VAT on property construction and improvements.

3. No taxes for 5 years on any individual starting a business (including payroll taxes for any employees they take on).

4. Smaller, cheaper and more efficient Government. If a Government process can't make an economic argument for its existence, scrap it or privatise it.

5. Move Heathrow airport (Essex estury maybe?) and lay in high speed rail links to London, Leeds, Birmingham, Bristol and Manchester.

6. Halt all green taxes.

7. Halve the numbers of MPs.

8. Stop supporting the banking industry. It can stand on its own feet, if not let it fail (although depositors should be fully protected).

9. Bring back the poll tax - argh thought that would grab your attention. No seriously though. The Council Tax isn't a good way to finance local Government and its way too expensive.

10. Stop borrowing. Stop writing PFI IOUs for later generations. Index link MPs pensions to the health of the economy (that'll slow 'em a bit).

I could go on but no one is going to take a blind bit of notice. Instead we'll get a puppy for xmas and then watch in horror as the Government takes it away later wrapped in a sack on route to the nearest canal.

Kerry said...

Can you explain how we'd pay for number 5, given your other proposals?

John Pickworth said...

Kerry said...

Can you explain how we'd pay for number 5, given your other proposals?

Oh Kerry, you are a hoot :-)

You (that is we) don't pay for it.

Although many large international airports around the world are State funded, they don't need to be. However, as the Government would like to prime the economy with some infrastructure projects, I'm sure some seed capital might be spent on this? Leave the rest to private money. I'm sure the existing Heathrow plot must be worth something?

Yes it will cost Billions and take a long time to complete but just look at the sort of projects they've done in Asia.

Soon, third runway or fourth, Heathrow is going to become full. What then? Let France take the business?

Kerry said...

I was referring to the high speed rail lines. Never been much sign of the private sector jumping to invest in those, has there?

Single acts of tyranny said...

Keiron, thank you for the reply, though I had hoped to hear from the MP herself.

It's true we've never defaulted but that only means there are a big pool of suckers who can be taxed to death, that and the IMF saving us in 1976. I note you are quoting the ONS figure, the PM somewhat pathetically insists debt is 37% but you are right again, true liability is way higher. Japan's debt is partially due to the deflation they suffered rather than wild hog spending per se.

But as ever, you can't argue with the markets. The Credit Default Swaps (CDS) market saw this coming. You will see on the following link that the premium for insuring holders of our sovereign debt has gone up this week. It now costs about twice as much to insure Gordo/Darling than it does Germany or Japan (despite their debt). This should worry you. But, we are still cheaper than the byword for corrupt political mis-management, Italy !

Kieron said...

John Pickworth-
Kerry's got a point... We desperately need infrastructure, but without a state which can tax people, how would we get it? Industry has always shown a lack of willingness to invest that kind of money - and public transport in particular has never been very profitable. Its effects on the wider economy are nevertheless notable.

I agree that Heathrow needs to be moved, and that the Government is unwise to be pushing for expansion there. You are talking about forcing the owners of Heathrow to downsize that airport and transfer to other sites. Again, don't we need the power of the State to be able to do that?

Roger Thornhill - I don't want to repeat myself too much but I refer you to my post above. The view from economists is that "Maxims about debt that might be prudent for families can be the height of folly for governments" (that particular quote was Sam Brittan in the FT). What seems rational at the individual level is madness at the collective level - so for individual households, it is normal to 'hunker down' in a recession (indeed they have no choice), but it would be insane for Governments to do that. Governments need to do the opposite - spend less in an upturn and more in a downturn. Otherwise the Government will exacerbate all the ups and downs.

Single acts of tyranny - It's a good point. It's markets who decide when a nation needs to default.

So why are markets more afraid of British sovereign debt when all the indicators are that it is much less likely ever to default? Markets, particularly financial markets, are notoriously irrational (at the collective level). Maybe they've been spooked by all the scaremongering. The press has sometimes had an influence on markets - and the press, like political parties, always have an incentive to make their output as sensational as possible.

La Bete said...


The goal of Brown's Fiscal Stimulus is to increase economic activity by pushing money into the economy, money that will have t paid in the future.

The same goal could be reached by lowering taxes, thus increasing the levels of discretionary spending.

Lowering the base rate of income tax (The base rate rate I referred to in my previous comment. The clue was that I was taking about tax at the time :)), will affect the lowest paid most of all, and allow them to let out their belts a notch and spend what they earn.

I'm still at a loss as to why it is considered a good idea to try to borrow our way out of a debt problem.

Single acts of tyranny said...

Keiron, again thanks for the reply, your comments essentially amount to

1. The markets are wrong
2. It's all the fault of the media

This is denial not debate.

This point "all the indicators are that it is much less likely ever to default" is just a naked statement, unsupported by any facts. Indeed, the reality, given that we were/are essentially a financial services economy, our tax base is more vulnerable to a collapse than many, ergo the excess insurance premiums

Lastly markets don't decide per se, when a nation needs to default, this occurs in two circumstances, either when the government runs out of cash and can't pay back debt, or, the possibility of default is so high that no-one lends anymore.

Kieron said...

La Bete -

"The same goal could be reached by lowering taxes, thus increasing the levels of discretionary spending."

a) This will still have to be paid back in the future. Lowering taxes is still a fiscal stimulus.
b) The evidence we have suggests it won't work, because people will save the money and thus not stimulate the economy, unless you have some particular reason for believing they will spend it (e.g. the tax cuts are directed at low-income people).

"Lowering the base rate of income tax ... will affect the lowest paid most of all, and allow them to let out their belts a notch and spend what they earn."

Yes, but it's poorly targeted. If you want to help low-income people, you can lower tax just for those people without lowering the tax rate for all the other taxpayers at the same time (e.g. along the lines of what the Govt did in May, or you can increase tax credits). Simply lowering the tax rate would be wasteful, as most of the money will not go on low-income people but middle- to high-income people, who according to the evidence we have are most likely to save the money.

"I'm still at a loss as to why it is considered a good idea to try to borrow our way out of a debt problem."

There may be a problem with household and/or corporate debt. But Government debt is not the same as those, and it is not the source of the problem (if the problem you are referring to is the economic downturn). Nor is Government debt particularly high.

Can you suggest a way that the Government could buffer the economy against a recession without taking on extra debt? You have suggested a cut in the basic income tax rate. If the Government were to do this, wouldn't this raise borrowing? If they were to cut public spending by an equivalent amount, how would this be a stimulus?

SAT - In this case, I do think the markets are wrong.

One never used to be able to say so - the markets were always right and anyone was derided for saying otherwise - until about July 2007 that is. Now it is widely accepted that markets can and will enter bouts of collective mania. After all, that is why we have had one of history's biggest credit bubbles, along with its corresponding house-price bubble. And we have just seen the demise of a big oil-price bubble. 'Bounded rationality' is one of the terms being bandied around.

However I didn't say it was all the fault of the media - I just raised it as one possible factor. It was an honest question, not rhetorical.

It isn't implausible to put it at least partly down to the media. Rumours and commentators can and do have an effect on market 'feeling' (example comment)

And the media do hype things up, and politicians do too of course (example comment).

You are right, I didn't provide any evidence, but that's because I am tapping this out quickly :-)

No-one can really say, with any degree of certainty or based on any provable criteria, that the downturn will hit British Government finances harder than other governments' finances and British debt is therefore more risky. For every possible factor against us there are others which would seem to be for us. It comes down to a general feeling of confidence in the markets - which isn't necessarily quantifiable or, dare I say it, rational.

AFAIK the most quantifiable, definite indicators such as levels of debt, budget deficit, spending plans etc. would not seem to make the UK government twice as risky as the German government, for example. For example in the USA the authorities are preparing a much bigger fiscal stimulus than we are (depending on whether it gets through Congress), at about 4.5% GDP compared to the 2ish% that is expected here. And that's on top of the big one that they did in February, worth about 1.5% GDP. They are spending a lot of public money. US budget deficit for 2008 is 3.2% GDP (according to Reuters), as opposed to about 2.6% in the UK I think? France and Germany haven't AFAIK announced similar fiscal stimulus plans yet, but it seems very likely that they will, giventhe G20 announcement and other comments since then (example).