How to cut the deficit

Tomorrow, we’ll be told there is no alternative. In fact, there exist several spending alternatives

The mood of sour resignation before the nation shortly meets its Spending Review fate is palpable. Yet rarely have such momentous decisions been preceded by such misinformation and muffling of public debate. The sense of foreboding and inevitability is seriously misplaced.

Everyone agrees that the current deficit of £155bn is far too large and needs to be reduced. But there are four ways of doing this, not just one – cutting spending – and indeed, the latter is the least relevant because the deficit arose not from too much spending, but from a major collapse in tax revenues.

In the last fiscal year government spending rose 7 per cent, but government income, which had been forecast to reach £608bn, fell hugely short at £496bn. That £112bn gap, caused by the collapse of the banking sector, is the root of the problem. The solution, therefore, is to restore government revenues to fill the gap.

One way this shortfall will be met over the next four years (the timescale accepted by both government and opposition) is through economic growth. The government's own forecasts for GDP growth over that period average 2.7 per cent per year. As UK GDP is about £1.45trn, that suggests an increase in national income over the four-year period of some £157bn. Of this, the government take is about 40 per cent, or some £63bn. Thus nearly 41 per cent of the deficit will be met by the economic growth that the government is itself predicting over the next four years.

"Tighten your belt"

That still leaves roughly £92bn in debt outstanding. The second alternative way of meeting the deficit is through tax increases. The government is indeed proposing this itself in putting up VAT to 20 per cent in January. But this regressive tax will hit the poor hardest and may well choke off any fragile recovery there is.

Both these downsides would be avoided if the tax increases were directed at the very richest. That is entirely fair, when many of them were directly responsible themselves for the financial crash, and when their gain in wealth over the past decade and a half has been stupendous. The Sunday Times Rich List – a sort of X Factor for capitalists – recently showed that the richest thousand, just 1,000 persons, had almost quadrupled their wealth over this period to £370bn, and that in the past year alone, when most British people were having to tighten in their belt, their wealth expanded by a cool £77bn.

The most obvious way to ensure a fair contribution from this hyper-rich elite is by making them pay the due taxes they have been avoiding or evading in tax havens for decades. HMRC itself modestly estimates the UK tax shortfall at more than £50bn each year, meaning that one-third of the deficit is attributable to super-rich individuals and big businesses that cheat the tax system.

What is equally scandalous is that these same people have relentlessly lobbied the Treasury to go easy in its scrutiny of their tax liabilities, and as a result 26,000 jobs for tax inspectors have been axed since 2005. Since the average tax inspector generates 60-180 times his salary cost, that represents a loss to the Exchequer of up to £5bn a year. One highly cost-effective way to cut the deficit therefore would be to double the number of tax inspectors in this next year.

A real crackdown on tax havens and reform of residence rules to stop tax avoidance by corporations and "non-domiciled" residents would raise at least £10bn a year. In addition, several other measures would raise substantial revenue while leaving 98 per cent of the population untouched.

A tax rate of 50 per cent on incomes over £100,000 (not just over £150,000, as is being implemented at present) would raise £4.7bn each year. An empty property tax on vacant dwellings, which exacerbate housing shortages and harm neighbourhoods, would raise another £5bn. Ending tax breaks that disproportionately subsidise incomes of the richest 2 per cent would raise £14.9bn each year. Aligning capital gains tax with higher-rate income tax and uncapping National Insurance contributions so that they apply to all earned and unearned income would raise a further £9bn.

Room for manoeuvre

Introducing a financial activities tax (FAT), which would act as a brake on the kinds of excessive risk-taking and speculative transfers of derivatives that caused the crisis, would raise an extra £25bn a year. Ideally, the latter – a Tobin-type tax – should be applied internationally, but even a 0.01 per cent tax on UK financial trades alone would raise £20bn a year.

These tax measures would thus raise about £53bn a year. That still leaves residual debt of about £39bn. The third and most efficient way to cut the deficit is a major public-sector-driven job-creation programme that saves public money by switching the unemployed off benefits dependence and into tax-paying jobs. There is certainly a huge need for these extra jobs in infrastructure development, the new green digital economy and a large, sustained housebuilding drive.

But can that be paid for when the government and media have been constantly trumpeting austerity? Research released last month by the IMF sought to measure "fiscal space" – how much headroom countries have available to increase expenditure for jobs and growth before the markets lose confidence in them. The study concluded that there's a more than 75 per cent chance that the UK has room to increase its debt stock by another 50 per cent of GDP (yes, you read that right, the IMF thinks the UK's debt could rise to 140 per cent of GDP) before getting into a vicious debt spiral.

That puts the UK in better shape than the US, where there is only a 50 per cent chance they could sustainably raise their debt that much. Nobody is suggesting that need be put to the test, but it does show that the UK is far away from the doomsday scenarios painted in some quarters.

Nor is that so surprising, given the much longer maturity of UK debt – nearly twice as long as the OECD average and nearly three times as long as the US. Crucially, this gives the UK much greater leeway over the next few years for funding a moderate jobs and growth programme than the government has admitted to.

None of this is to propose that there shouldn't be cuts in public expenditure. Over £2.8bn could be saved every year by ending the use of private consultants, and another £3bn a year in user fees and interest charges if PFI schemes were replaced by public procurement.

Other options include cancelling Trident replacement (£76bn saving over 40 years), identity cards (£12bn) and wasteful government databases that keep leaking confidential information (at least £10bn). All these, of course, will be settled on grounds of policy, not just money. But the real point is that public spending cuts are not the sole means to deal with the Budget deficit, not even the necessary means, and certainly not the best means.

It's TESSA (there exist several spending alternatives), not TINA (there is no alternative).

Michael Meacher is MP (Labour) for Oldham West and Royton.

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David Davis interview: The next Conservative leader will be someone nobody expects

The man David Cameron beat on why we should bet on a surprise candidate and what the PM needs to do after the referendum. 

“I’m tired,” says David Davis when I greet him. The former Conservative leadership candidate is running on three hours’ sleep after a Question Time appearance the night before. He is cheered, however, by the coverage of his exchange with Ed Miliband. “Which country would it be be like?” the former Labour leader asked of a post-EU UK. “The country we’re going to be like is Great Britain,” the pro-Brexit Davis retorted

The 67-year-old Haltemprice and Howden MP is at Hull University to debate constituency neighbour Alan Johnson, the head of the Labour In campaign. “As far as you can tell, it’s near to a dead heat,” Davis said of the referendum. “I think the run of events will favour Brexit but if I had to bet your salary, I wouldn’t bet mine, I’d place it on a very narrow victory for Brexit.”

Most economists differ only on how much harm a Leave vote would do. Does Davis believe withdrawal is justified even if it reduces growth? “Well, I think that’s a hypothetical question based on something that’s not going to happen ... One of the arguments for Brexit is that it will actually improve our longer-run economic position. In the short-run, I think Stuart Rose, the head of Remain, had a point when he said there would be very small challenges. In a few years probably nothing.

“The most immediate thing would likely be wage increases at the bottom end, which is very important. The people in my view who suffer from the immigration issue are those at the bottom of society, the working poor, which is why I bridle when people ‘oh, it’s a racist issue’. It’s not, it’s about people’s lives.”

More than a decade has passed since David Cameron defeated Davis by 68-32 in the 2005 Conservative leadership contest. The referendum has pitted the two men against each other once more. I asked Davis whether he agreed with the prime minister’s former strategist, Steve Hilton, that Cameron would be a Brexiter were he not in No.10.

“I think it might be true, I think it might be. When you are in that position you’re surrounded by lot of people: there’s the political establishment, the Whitehall establishment, the business establishment, most of who, in economic parlance, have a ‘sunk cost’ in the current set-up. If changes they stand to lose things rather than gain things, or that’s how they see it.

“Take big business. Big business typically gets markets on the continent, maybe distribution networks, supply networks. They’re going to think they’re all at risk and they’re not going to see the big opportunities that exist in terms of new markets in Brazil, new markets in China and so on, they’re naturally very small-C Conservative. Whitehall the same but for different reasons. If you’re a fast-track civil servant probably part of your career will be through the Commission or maybe the end of your career. Certainly in the Foreign Office. When I ran the European Union department in the Foreign Office, everybody wanted a job on the continent somewhere. They were all slanted that way. If all your advice comes from people like that, that’s what happens.”

Davis told me that he did not believe a vote to Leave would force Cameron’s resignation. “If it’s Brexit and he is sensible and appoints somebody who is clearly not in his little group but who is well-equipped to run the Brexit negotiations and has basically got a free hand, there’s an argument to say stability at home is an important part of making it work.”

He added: “I think in some senses the narrow Remain is more difficult for him than the narrow Brexit. You may get resentment. It’s hard to make a call about people’s emotional judgements under those circumstances.”

As a former leadership frontrunner, Davis avoids easy predictions about the coming contest. Indeed, he believes the victor will be a candidate few expect. “If it’s in a couple of years that’s quite a long time. The half life of people’s memories in this business ... The truth of the matter is, we almost certainly don’t know who the next Tory leader is. The old story I tell is nobody saw Thatcher coming a year in advance, nobody saw Major coming a year in advance, nobody saw Hague coming a year in advance, nobody saw Cameron coming a year in advance.

“Why should we know two years in advance who it’s going to be? The odds are that it’ll be a Brexiter but it’s not impossible the other way.”

Does Davis, like many of his colleagues, believe that Boris Johnson is having a bad war? “The polls say no, the polls say his standing has gone up. That being said, he’s had few scrapes but then Boris always has scrapes. One of the natures of Boris is that he’s a little bit teflon.”

He added: “One thing about Boris is that he attracts the cameras and he attracts the crowds ... What he says when the crowd gets there almost doesn’t matter.”

Of Johnson’s comparison of the EU to Hitler, he said: “Well, if you read it it’s not quite as stern as the headline. It’s always a hazardous thing to do in politics. I think the point he was trying to make is that there’s a long-running set of serial attempts to try and unify Europe not always by what you might term civilised methods. It would be perfectly possible for a German audience to turn that argument on its head and say isn’t it better whether we do it this way.”

Davis rejected the view that George Osborne’s leadership hopes were over (“it’s never all over”) but added: “Under modern turbulent conditions, with pressure for austerity and so on, the simple truth is being a chancellor is quite a chancy business ... The kindest thing for Dave to do to George would be to move him on and give him a bit of time away from the dangerous front.”

He suggested that it was wrong to assume the leadership contest would be viewed through the prism of the EU. “In two years’ time this may all be wholly irrelevant - and probably will be. We’ll be on to some other big subject. It’’ll be terrorism or foreign wars or a world financial crash, which I think is on the cards.”

One of those spoken of as a dark horse candidate is Dominic Raab, the pro-Brexit justice minister and Davis’s former chief of staff. “You know what, if I want to kill somebody’s chances the thing I would do is talk them up right now, so forgive me if I pass on that question,” Davis diplomatically replied. “The reason people come out at the last minute in these battles is that if you come out early you acquire enemies and rivals. Talking someone up today is not a friendly thing to do.” But Davis went on to note: “They’re a few out there: you’ve got Priti [Patel], you’ve got Andrea [Leadsom]”.

Since resigning as shadow home secretary in 2008 in order to fight a by-election over the issue of 42-day detention, Davis has earned renown as one of parliament’s most redoubtable defenders of civil liberties. He was also, as he proudly reminded me, one of just two Tory MPs to originally vote against tax credit cuts (a record of rebellion that also includes tuition fees, capital gains tax, child benefit cuts, House of Lords reform, boundary changes and Syria).

Davis warned that that any attempt to withdraw the UK from the European Convention on Human Rights would be defeated by himself and “a dozen” other Conservatives (a group known as the “Runnymede Tories” after the meadow where Magna Carta was sealed).

“They’ve promised to consult on it [a British Bill of Rights], rather than bring it back. The reason they did that is because it’s incredibly difficult. They’ve got a conundrum: if they make it non-compliant with the ECHR, it won’t last and some of us will vote against it.

“If they make it compliant with the ECHR it is in essence a rebranding exercise, it’s not really a change. I’d go along with that ... But the idea of a significant change is very difficult to pull off. Dominic Raab, who is working on this, is a very clever man. I would say that, wouldn’t I? But I think even his brain will be tested by finding the eye of the needle to go through.”

Davis is hopeful of winning a case before the European Court of Justice challenging the legality of the bulk retention of communications data. “It’s a court case, court cases have a random element to them. But I think we’ve got a very strong case. It was quite funny theatre when the ECJ met in Luxembourg, an individual vs. 15 governments, very symbolic. But I didn’t think any of the governments made good arguments. I’m lucky I had a very good QC. Our argument was pretty simple: if you have bulk data collected universally you’ve absolutely got to have an incredibly independent and tough authority confirming this. I would be surprised if the ECJ doesn’t find in my favour and that will have big implications for the IP [Investigatory Powers] bill.”

Davis launched the legal challenge in collaboration with Labour’s deputy leader Tom Watson. He has also campaigned alongside Jeremy Corbyn, last year travelling to Washington D.C. with him to campaign successfully for the release of Shaker Aamer, the final Briton to be held in Guantanamo Bay.

“I like Jeremy,” Davis told me, “but the long and the short of it is that not having been on the frontbench at all shows. I’m not even sure that Jeremy wanted to win the thing. He’s never been at the Despatch Box. He’s up against a PM who’s pretty good at it and who’s been there for quite a long time. He’s playing out of his division at the moment. Now, he may get better. But he’s also got an incredibly schismatic party behind him, nearly all of his own MPs didn’t vote for him. We had a situation a bit like that with Iain Duncan Smith. Because we’re a party given to regicide he didn’t survive it. Because the Labour Party’s not so given to regicide and because he’d be re-elected under the system he can survive it.”

At the close of our conversation, I returned to the subject of the EU, asking Davis what Cameron needed to do to pacify his opponents in the event of a narrow Remain vote.

“He probably needs to open the government up a bit, bring in more people. He can’t take a vengeful attitude, it’s got to be a heal and mend process and that may involve bringing in some of the Brexiters into the system and perhaps recognising that, if it’s a very narrow outcome, half of the population are worried about our status. If I was his policy adviser I’d say it’s time to go back and have another go at reform.”

Davis believes that the UK should demand a “permanent opt-out” from EU laws “both because occasionally we’ll use it but also because it will make the [European] Commission more sensitive to the interests of individual member states. That’s the fundamental constitutional issue that I would go for.”

He ended with some rare praise for the man who denied him the crown.

“The thing about David Cameron, one of the great virtues of his premiership, is that he faces up to problems and deals with them. Sometimes he gets teased for doing too many U-turns - but that does at least indicate that he’s listening.”

George Eaton is political editor of the New Statesman.