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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.