How do we decide who to subsidise?

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There is not a tax-paying business in Wales (or in the wider UK come to that) which would not instantly look more profitable if it didn’t have to pay tax (with the caveat that abolishing tax on that business or that class of business is the only change). However, it does not follow from that assertion that tax is the 'problem', holding business back by making them unprofitable. Yet that often looks like the conclusion that politicians draw, when they demand that taxes be reduced on one or other type of business. The latest example a few days ago was from a Plaid MP in relation to beauty salons; but there are plenty of other examples of MPs in other parties demanding similar concessions for other businesses. But the bottom line is that, in simple terms, a business which cannot sell enough of its goods and services at a high enough price to cover all its costs (including tax) and make a profit does not have a viable business model in a capitalist economy.

The bigger problem, though, is that cutting a tax here or there to make a business viable is a micro-economic approach to a macro-economic question. Even supposing that it were possible to isolate a single tax change, a tax cut in one area might increase the spending power of individuals or businesses in that area, but for those who believe that any changes must be ‘fully-funded’ based on the household analogy (a category which seems to include most politicians in most parties), there needs to be a corresponding tax increase in another area. Overall spending power in the economy then remains unchanged – it’s just that spending power has moved from one group to another.

That’s not necessarily a bad thing. Using taxation policy to encourage some types of economic activity and discourage others is an entirely valid, not to say sensible, approach. Governments trying to determine which businesses should succeed and which should fail at a company level isn’t exactly a policy with a good track record, but identifying that deploying resources into certain types of activity serves the economy and society better than deploying them into others is a worthy aim. And if the limiting factor on growth is, in fact, not a lack of money but a scarcity of real resources, encouraging particular uses of those resources is essential to any policy aimed at achieving higher value growth with better-paid jobs.

Without disparaging in any way the training, skill and professionalism of those working in any particular sector or business, and with no particularly strong view on whether beauty salons per se (or whatever particular type of business for which an MP advocates) do or do not justify special treatment, when I see a call for special treatment – by any MP, for any business – the question I ask myself is whether or not that is the type of economic growth that we want for the Welsh economy, or whether the same resources could more usefully be employed in other activities. Building a strong Welsh economy might just require a certain hard-headedness and, if we’re going to call for subsidies (and that's what selective tax cuts are), maybe we should start by identifying what activities we most want to see increasing, rather than simply responding to those which say they are struggling.

National identity cannot be imposed

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Once upon a time, the statement ‘all swans are white’ would have been regarded in these islands as an inalienable truth – being white was part of the definition of the species. Then some black ones were discovered in Australia. At that point, there were only two possibilities – either the new birds weren’t swans, or else the definition of a ‘swan’ was wrong. Sensibly, humanity settled on the second option. With hindsight it was obvious – but changing a definition in the face of a deep-held belief isn’t always as straightforward as that.

A week or so ago, Tory/Reform politician Suella Braverman declared that she isn’t and cannot be English. She got a lot of criticism in response, but based on her own definition of Englishness, it’s impossible to argue with her. It’s her definition that is dubious, not the conclusion which she draws from it, and her position underlines the difficulty people sometimes have in changing a definition which is deeply-believed. She has struggled – or more accurately, refused – to set out more precisely what her definition actually is, but it seems to be that she regards Englishness as an ethnicity into which one has to be born, whereas Britishness is a ‘mere’ nationality, a matter of legality rather than identity.

Her definition is problematic, and not just for those of a darker hue. Whilst it might be more ‘obvious’ that some people have non-English ethnicity somewhere in their family history, it has a wider effect than that. On her definition, someone born to a Welsh mother and an English father (such as myself, to select a random example) can never be either English or Welsh: they can only be British. Under that definition, I am left wondering just how many people she would really consider to be English (or Welsh, or Scottish) at all, no matter how much their outward appearance might match the ‘norm’ suggested by that definition.

How she defines herself is a matter for her, and I really don’t care. The problem arises not with how someone defines him or herself, but when they try to apply that definition to others. It’s a problem which I’ve encountered many times in ‘nationalist’ circles, and is part of the reason that I prefer the term ‘independentista’. There are those who insist that British is not a nationality at all, or that, if it is, one cannot be both British and Welsh at the same time, and must choose between them. But an objective definition is hard to find. History, language, culture, birthplace, ancestry might all be elements, but ultimately, national identity is a highly subjective concept. It’s possible for someone to identify as Welsh and wish to maintain the United Kingdom, and it’s possible (albeit less likely) for someone to identify as British and wish for Welsh independence.

There is little point in arguing with Braverman over her own self-identity – it’s not a winnable argument in any event. There is every reason to reject – and forcibly – any attempt to impose an identity on others. And I have little doubt that raising it in the way she did was an attempt to do precisely that.

Striking a chord

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The big policy announcement in Badenoch’s speech to the residual faithful yesterday concerned changes to Inheritance Tax (IHT), as a result of which half of those currently paying would end up paying nothing, and the other half would end up paying significantly less. Since only around 4-5% of estates attract the tax currently, it amounts to a tax cut for the very wealthiest in society. It went down well at the Tory conference – whether that’s because they think it objectively a brilliant idea or because their chief donors - and maybe even many of those faithful themselves - are among the main beneficiaries is an unanswered question.

IHT is often described as the most unpopular tax according to surveys. Google’s AI search tells me that “multiple regular surveys by organizations like Hargreaves Lansdown, Opinium, and the TaxPayers' Alliance place IHT as the most hated or unfair tax, with around 24% to 46% of respondents ranking it worst ahead of income or council tax”. My suspicious mind wonders about the methodology and participant selection being used by organisations which start from a predisposition against the tax, but YouGov surveys have also consistently shown a predisposition amongst UK electors for the abolition of the tax, so let’s give them the benefit of the doubt. The question to which I’ve not seen a satisfactory answer is why so many are so opposed to a tax which affects so few, when so many recent surveys seem to show popular support for wealth taxes. It seems that many people whose estates will never come anywhere near the threshold still, somehow, believe that they will have to pay the tax.

It may be, of course, that the industry which has sprung up around methods of avoiding IHT is disguising the true scale of the number of estates which ought to be subject to the tax if those owning large estates had not taken action to avoid it. That doesn’t quite work for me, though: in the first place, the idea that more like a quarter to a half of all estates should really be paying the tax doesn’t pass the ‘feel right’ test for all mathematically-derived answers, and in the second, I’d expect a tax which was so easy to avoid on such a large scale to be more, rather than less, popular than other taxes.

Maybe it’s the power of repeated propaganda. The media moguls who own the increasingly concentrated media are certainly amongst those expecting to pay the tax, and at least some editors and experts in the field might be similarly liable. It would certainly be no surprise if their coverage might not be entirely objective and balanced.

The extent of the disparity still puzzles me though. Widespread support for a policy which deliberately shifts taxes from the few to the many (which is the unspoken implication of cutting IHT) is a strange phenomenon, but one on which she might just have struck a dishonest chord.

Who creates wealth - and who benefits?

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There’s something very American in the idea that a politician seeking high office should publish a book setting out his or her core beliefs. And in the case of Kemi Badenoch’s effort, the content appears to be quite American too. Her call for the deployment of ‘common sense’ as a core principle is superficially reasonable; the problem is that, in the real world, much of what passes for common sense, particularly amongst politicians, is either untrue or else based on unstated preconceptions and ideology.

Take, for example, her statement – absolutely central to her proposed economic strategy – that “business, not government, creates growth”. It sounds obvious, it is widely believed – and it’s total claptrap. At its simplest, economic growth is just a way of describing an increase in economic activity, or GDP. There are three common but different ways of measuring GDP – they all produce (or should, within the bounds of the assumptions and estimates used) the same answer. One starts by measuring output, another by measuring expenditure and the third by measuring income. All three are ‘blind’ to the question of whether that output, expenditure, or income are in the public or the private sector. And it takes only a moment’s thought to understand why that should be. If only the private sector added to GDP, then the act of nationalising a train company or a water company, for instance, would mean that suddenly all that economic activity vanished from GDP calculations – and vice versa, the act of privatising a company would instantly add to GDP. It’s obviously nonsense. Since all spending by one person or organisation ends up as being income to another person or organisation, it follows that on both those measures, every penny spent by government adds to GDP – and an increase in government spending adds to growth. Badenoch’s core tenet is simply wrong: complete and utter tosh.

There is an argument, of course, as to whether government spending is the best or most efficient way to increase GDP. The UK’s history of publicly-owned enterprises isn’t an entirely positive one, to say the least, although whether that’s an inevitable concomitant of public ownership is a question too complicated to be examined in a few words. That isn’t the argument she’s making, though.

She’s not alone in her belief. As suggested above, there’s a fairly widespread belief that somehow the private sector creates wealth and the public sector consumes it. I’ve long wondered whether, or to what extent, that belief is based on confusing two different meanings of he word ‘wealth’. But the private accumulation of wealth and the creation of new wealth in the economy are not at all the same thing; the first might be measured by looking at the bank balances and assets held by individuals, the second is measured by GDP. It is perfectly true that the private sector does more to achieve the first of those, but it’s also true that wealth can be accumulated by some with no overall increase in the total GDP. That goes to the heart of the current economic malaise felt by the many – wealth has been concentrated in fewer and fewer hands. It’s also true that an increase in GDP – the measure by which many politicians, including those in the Welsh Government want to have their success measured – doesn’t always make the many any better off.

The measure on which we should be assessing the economic success of a government is neither the increase in private wealth, nor the aggregate increase in national wealth (GDP), it is the extent to which the wealth generated by economic activity adds to the economic well-being of the population as a whole. Dogmatic assertions about how wealth is created aren’t the right starting place.

Recognising a mandate

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The central flaw at the heart of the whole concept of ‘devolution’ under the English constitution is that power devolved is power retained. All the powers devolved to the Senedd or the Scottish parliament can be withdrawn at any time should the English parliament so decide. Legislating to give the Sewel convention (the idea that the English parliament will not legislate on devolved matters) the force of law proved to be a complete farce. And in a parliamentary system which starts from the assumption that all power resides in the Crown to whom it was given by God, it could never be otherwise, despite the attempts of politicians to claim otherwise using whatever form of weasel words comes to mind at the time.

For all his talk of empowering mayors, Labour under Burnham remains as wedded to that centralism as it always has been. He has talked about devolving a share of income tax to mayors, leaving them free to take spending decisions in accordance with what they see as the priorities for their areas. It sounds reasonable, but it seems that much of the debate between announcement and implementation is going to be about how those mayors can be constrained from doing anything with which Westminster might disagree.

The justification for this approach sounds superficially reasonable: “It would be reckless to hand out new powers without ensuring there are transparent mechanisms to hold mayors to account for their decisions”. What’s noticeable, though, is that all the mechanisms being touted to improve scrutiny and accountability involve Ministers in the English Government, and parliamentary committees. Increasing their answerability to central government isn’t really devolving powers to local politicians at all.

It is, perhaps, easier to understand in the context of national parliaments, like those in Wales and Scotland, than it is when discussing regions in England, but the underlying issue is the same. In a centralised unitary state like the UK, there is not, and never has been, any real recognition of the fact that elected officers and bodies outside the Westminster parliament have their own democratic mandate. Such recognition not only includes the right to do different things, or to do things differently, but also the right to be judged, first and foremost, by those who gave them that mandate: the people who elected them.

More than a slip of the tongue

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Perhaps he misspoke, or maybe it was just a slip of the tongue, but when the Secretary of State for Wales said this week that “Devolution has to do what it says on the tin, which is, it’s up to the Welsh Government to deliver the policy”, I tend to suspect that it was an honest expression of his view about devolution. Insofar as devolution was ever in any sort of tin, delivering policy made by our masters in London is not the label it would have been given, and it isn’t what most of us understood devolution to be. It probably is, though, an expression of what anti-devolutionists wish that it was – a localised way of delivering, rather than making, policy.

In the context, setting up a National Care Service isn’t exactly the hill one might choose to die on; declining to improve care services in Wales might be legally within the purview of the Senedd, but deliberately setting standards lower than those in England would not be a wise choice for a serious Welsh Government. What Kinnock could (and should) have said is that the setting up of an English National Care Service would lead to a Barnett consequential which he hoped would lead the Welsh Government to set up a Welsh National Care Service, the details of which might be different if the Welsh Government saw Welsh needs as being different. It’s impossible to read into his words that he intended anything remotely like that.

It’s a strange thing to pick a potential fight over from his point of view as well – after all, it was his party, when in government at the Senedd, which ensured that the Welsh approach to care was more generous than that adopted in England. Maybe he’s afraid that the Welsh Government might embarrass the English government again: being more generous than a Tory government in London might be OK, but doing the same thing to a Labour government is another kettle of fish entirely.

We don’t know the details of the proposed new service in England as yet, and it looks as though we might not get those details until the next election campaign starts. There’s been enough said already, however, for me to believe that the issue is being seen primarily as a financial one – how much care is to be funded and how the money will be found – rather than looking at the resources and structures required. And that makes it more about protecting the inheritance of the English middle classes than about meeting care needs.

Whilst we shouldn’t set out to be different for the sake of being different, Wales has demonstrated the advantage of being able to do things differently to a degree, even within the limited funding allowed to it by Westminster. It would be a significant setback if the ability to do that were to be undermined by an obsession with standardisation around whatever England decides to do. Yet that is the impression created by the minister’s words.

Abolishing the triple lock avoids the issue of setting the level for pensions

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The pensions triple lock was originally introduced (by a Tory-led government) in 2010 to repair some of the damage done (by another Tory government led by Thatcher) in 1979. Prior to 1979, state pension increases were linked to wage increases, meaning that the basic pension more or less kept pace with increases in earnings. Pensioners’ financial position didn’t improve particularly, but then neither did it worsen. At that point (as this article highlights), pensions were equivalent to around 26% of average earnings. By the time the triple lock was introduced, the state pension had fallen to around 16% of average earnings. Amazingly, Thatcher’s deliberate assault on pensioner living standards didn’t stop pensioners from voting, in large numbers, for her party.

If the moral case for restoring some sort of link was clear to Cameron, it was over-ridden by financial considerations, and rather than immediately addressing the disparity, he put in place a gradual process which would eventually restore the value of pensions. It has worked, to the extent that the basic state pension today is worth more like 30%. In simplistic terms, it looks like job done. There are caveats, though. The pensions system has changed; whilst that 30% ratio might hold for those who reached state pension age after April 2016, those who reached retirement age prior to that date have been left behind on a lower pension which will permanently lag behind the new rate. Only some unfairnesses are worthy of action, apparently. There are also a number of assumptions and calculations in the figures for average earnings, which complicate the situation.

Let us assume, though, that the figure of 30% is broadly correct. Under Burnhams two-and-a-half times lock, that relationship will be maintained by adding an additional (so far unexplained) mechanism to be applied in the event that wages growth powers ahead of both price increases and the 2.5% uplift. Without saying so much in transparent terms, it is clear that Burnham has decided that the ‘right’ level at which to set the state pension is 30% of average earnings. He has produced no explanation as to how he’s reached that figure; he simply expects us all to be happy with a number which exceeds that which applied before Thatcher’s attack on pensioners. It’s easy enough to see why he’d want to avoid a debate on that – much more straightforward to justify having exceeded the pre-Thatcher level than to justify setting a pension level which remains significantly below the annual government-set minimum living wage for a full-time employee.

There is a sense in which it can legitimately be argued that the triple lock has done its intended job (for those on the new state pension at least). What is still lacking, though, is any meaningful debate about the ‘right’ way of setting pension levels. It’s an issue which Burnham, like all his predecessors, seems determined to avoid.

Why wait for electoral reform?

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It might have been a low bar to jump, but Burnham demonstrated yesterday that he can craft and deliver a better speech than his predecessor. And it seems to have cheered up the members of his party, so his immediate mission has been accomplished. How much it means for the rest of us, however, is rather less clear. All his biggest promises are slated for delivery after the next election, and are thus predicated on the assumption that Labour will win that election. It might, of course, happen before the scheduled date in 2029, but if we assume that Burnham is sincere in saying that there will not be an early election, then the programme for government for the next three years, based on his speech yesterday, looks a little thin, to say the least.

Both before and after that election, he seems to have committed himself (again) to sticking to the so-called ‘fiscal rules’ – a wholly arbitrary device which outsources government financial policy to the money men in the City of London, whose main objective is to protect and grow the wealth of the few. It keeps debate exactly where the neoliberals want it to be – arguing about false choices around tax and spending rather than about meeting people’s needs by putting available resources within the economy to good use. It's not a good start.

The dependency on winning another election before beginning to implement the ambitious programme he set out is another wholly artificial constraint. There is no requirement under the English constitution for a party to have mentioned something in its manifesto before doing it (which seems to be the basis for prevarication). If there were, no government would ever be able to react to unforeseen events or changes in the political or economic situation, and no government would ever be able to do anything which was not specifically mentioned in its manifesto. (As an aside, it would also make coalition governments, or minority governments depending on ‘arrangements’ with another party problematic, because literally nobody would have voted for that precise programme.)

Specifically, in relation to yesterday’s speech, there is nothing which prevents the introduction of proportional representation before, rather than after, the next election. Labour has a massive majority in parliament, the Lib Dems, SNP, Plaid Cymru and the Greens all support such a change. Even Reform Ltd have made supportive noises in the past (although whether some of the polls showing the possibility of an overall majority under First-Past-The-Post might cause them to waver is an unanswered question). The only committed opponents are the Tories – and they have only 20% of the seats in the House of Commons. It should take months, rather than years, to get a consensus amongst the other parties, even if Reform Ltd do fall by the wayside on the issue – and such a consensus should sail through parliament. There is time to do this now, and have the next parliament elected on a proportional basis, rather than run the risk – albeit apparently receding – of a Farage-led government in 2029, an eventuality which would kill off most of Burnham's other proposed reforms.

Given that no recent polls show Labour even near an absolute majority on its own, much of what Burnham laid out yesterday would probably be easier to implement under a proportionally-elected parliament which normalised agreement and coalition. So why wait?

Social care - the problem isn't money

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Yesterday, Andy Burnham laid out his ambition for a National Care Service which would provide care free at the point of use to all who need it. His proposal related only to England, but the underlying problem which it seeks to address is a problem in Wales as well, and we face the same issues, probably more so with an even more ageing population than England. There’s a little bit of the ‘jam tomorrow’ about the promise, given that it seems to be little more at this stage than a pledge to put the issue in Labour’s manifesto for the next English / UK General Election. And until we see the detail, it’s hard to be certain whether the ‘problem’ he’s seeking to address is really about care at all – for some, it seems to be more about protecting middle class inheritances.

The political and media response has largely centred on the question of ‘how will you pay for it’ (and the consequent suggestion of tax rises), as though the problem is first and foremost a financial one. It’s completely the wrong question to be asking. The much bigger and more important question is whether the resources are available, or can be made available. Let’s just consider one type of resource – labour. There’s already a shortage of carers, meaning that they are providing what is generally understood to be an inadequate level of care today. And, in typical left-hand-right-hand manner, government obsessions with migration numbers are constraining one of the key ways of increasing the supply. It’s not enough to simply look at the number of vacancies (now and under a better system) and the number of people unemployed and match the two numbers; there are also issues around geographical location, skill sets and attitudes. Maybe attitudes aren’t important to economists looking only at numbers, but to those whose relatives are receiving care, having people committed to providing a client-centred service in a friendly and empathetic way rather than simply going through the motions does actually matter. A lot.

Increasing the wages and status of the job might help to attract more of the ‘right’ people, but that’s about method rather than objective. Whether we use that mechanism or another, the objective of getting more people into a professional career as carers implies a willingness to divert a potentially scarce resource – suitable employees – from other economic activity into providing care. And it is that question, of determining how resources should be deployed in the economy, which is the central one, rather than how it is to be paid for.

It’s a question which isn’t unique to the issue of social care. What sort of economy we want and whose interests it serves are key questions – another example is this story today about campaigners calling for investment in socially useful activity rather than armaments factories. Treating the provision of social care as simply a matter of finance is missing the point, to say nothing of missing an opportunity to push back against the prevailing view that everything revolves around money. Without addressing that issue, tomorrow’s jam might turn out to be rather less palatable once the jar is opened.

Understanding compounding

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There is, apparently, no hard evidence that Albert Einstein ever described compound interest as the eighth wonder of the world, although the quote is widely attributed to him. Whoever did or did not say it, there is an underlying truth about the power of compounding. It is not well understood however. And pensions is a case in point. The pensions triple lock is an example of compounding in action – at least, in the years where both wage and price inflation are below 2.5%. In those years, the third element of the formula – the increase by 2.5% – increases the spending power of the state pension (albeit by a small amount) compared to inflation, but because that increase is a permanent increment to the pension, it is part of the sum on which the following year’s uplift is calculated. Over time, it will serve to increase the spending power of pensioners – which was, of course, the original intention, following the years of decline in pensioner spending power after Thatcher broke the earnings link.

What it means, though, is that those who benefit most from a long term implementation of the triple lock aren’t today’s pensioners, nor those close to retirement age, but those furthest away from retirement age, giving the power of compounding time to work its marvels. It’s strange how poorly understood this is.

This report from Saturday, tells us two things about Generation Z and millennials. Not only are they worried that their state pension will be worth less when they eventually retire than it is today – they are also the group most keen on abolishing the triple lock. On the other hand, those keenest on retaining the triple lock – existing pensioners and those about to retire – are the groups who stand to gain least from it. It's an inversion of the reality.

It highlights a lack of understanding of the basic mathematics of compounding, certainly. But it also highlights two other things. The first of those is an essentially short-term outlook on finances. And the second is the power of relentless propaganda telling us that a slow increase in pensioner spending power over the long term is somehow unfair to those who are working and paying taxes today, ignoring the fact that they will be the beneficiaries. As ever, the questions we should be asking are firstly, what is the ‘right’ level at which to set the state pension, and secondly, who benefits from the abolition of the triple lock. The first is a difficult question; it’s easy to see why politicians and governments try to avoid answering it, because the answer is almost certainly going to be ‘significantly higher than today’s level’. As for the second, well, as long as politicians and governments continue to promote the household analogy for government finances, those who benefit from reduced government spending (and a consequent reduction in taxation) will always be those who hold the most wealth and the highest incomes. What a surprise.