Tax is part of the cost of doing business, not an optional extra

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Politicians of various parties seem to be lining up to support a proposal from some in the hospitality sector to reduce the rate of VAT to 10%. There’s no doubt that the sector is currently facing a number of challenges, and it’s easy to see why governments and politicians may wish to aid the sector in order to maintain levels of employment. Tax cuts are probably the easiest way for governments to provide more support, since they can do little about the other costs being faced by those businesses. There is a problem, though, with the basic premise of the campaign, based around the slogan “VAT’s the problem”. The suggestion that ‘tax’ is causing the problem is fundamentally misleading, not to say dishonest: it owes more to neoliberal ideology than practical economics.

It may well be true that if businesses in a particular sector didn’t have to pay so much tax their profits would improve. But it would also be true that their profits would improve if they didn’t have to pay for raw materials, staff wages, or the costs of their premises. It’s not one element of their costs which causes the problem, it is the fact that they are unable to sell enough of their ‘product’ at a sufficiently high price to cover all their operating costs and make a profit. In terms of market economics, any business in such a position is technically non-viable. The most basic law of economics, the one that almost everyone knows, is the law of supply and demand, and that law tells us that if competition is so intense that prices cannot be raised to a viable level, then there is an oversupply in the market. And the natural economic solution to that is to reduce the supply – capitalism requires some companies to fail in order that price levels can rise. It’s another example of supporters of capitalism failing to understand how capitalism is supposed to work.

There may well be social and economic reasons why politicians may not consider that a desirable option, and there’s nothing inherently ‘wrong’ with taking a decision to find a way of delivering subsidies. We should not pretend, though, that a tax cut in such circumstances is somehow not a subsidy. Reducing government revenue in order to cut the costs of private businesses is always going to be a subsidy, however it’s presented. VAT, in particular, is supposed to be added to the bill after the business has set the price based on its costs and profit margin: theoretically, it isn’t paid by the business at all, but by the customer. Reducing it, whilst keeping the final price constant, simply allows the businesses to underprice their product by treating the cash they are no longer handing over to HMRC as part of the revenue generated from their business activity. 

The biggest danger of all is that politicians caught up in the demand for a VAT cut end up reinforcing the neoliberal narrative that tax is in some way an ‘extra’ cost rather than part of the financial environment in which businesses have to operate.

Are productivity and efficiency always good things?

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Will Hayward drew attention this week to the rather defeatist comment by a Reform Ltd MS that “we are not very good in Wales at being efficient in running things”. There’s a sense in which we should not be overly surprised at the comment; it is, after all, in line with the general view held by the unionist parties that Wales is too small and too poor, and Welsh people too stupid, to ever govern ourselves, and that we should defer to our betters in London. For a Reform Ltd politician to express similar views is on a par with the breaking news that the Pope is a Catholic; all he’s done is to repeat a weary old trope in rather more blunt language than that to which we are accustomed.

Leaving that aside, though, the thing that piqued my interest is the inherent assumption that ‘efficiency’ is always and necessarily a good thing anyway. It may seem blindingly obvious, and be a generally applicable rule, that it’s better to achieve a given goal with fewer resources; but being blindingly obvious doesn’t make something true. I’ve been around long enough to know that what’s obvious isn’t always true and what’s true isn’t always obvious. Whilst they’re not quite the same thing, there is a clear overlap between efficiency and productivity, and coincidentally the new Welsh Government announced this week that it will be setting a national productivity target aimed at closing the gap between Wales and the rest of the UK. The announcement itself makes it clear that many of the details are yet to be determined, so it’s impossible to predict the likelihood of success at this stage. The encouraging thing, though, is that it looks as if the target is to be set and monitored at a macro level, rather than being a micro-economic target for individual businesses or sectors.

That difference between the micro level and the macro level is an important one, and brings us back to the question of whether improved efficiency is always a good thing. For any individual business, the ability to produce the same output with, say, half the input in terms of labour is a huge financial advantage, and unquestionably a benefit for that business. But for the economy as a whole, producing the same output with half the input could simply leave half the workforce unemployed, an outcome which few would welcome – even the businesses which have achieved the savings, who could find that half their potential customers can no longer afford their products. Whether reducing the number employed in existing enterprises is a good thing or a bad thing thus depends on whether – or to what extent – those freed up resources can be employed on other useful activities. That is a lot harder to plan for and achieve, and increased use of AI in the drive for efficiency / productivity gains may make it more so.

It also opens up other questions, particularly about how the benefits of improved productivity / efficiency are distributed (increased wages, reduced working hours or increased profits, for example). Changing that distribution goes beyond the current powers of the Senedd, unfortunately. It would, though, be good to see, amongst the yet-to-be-announced metrics which will be used to measure success, an attempt to at least monitor who is benefitting, rather than simply assume that an overall average increase in productivity is sufficient in itself. Sometimes, a simplistic bottom line can obfuscate rather than clarify meaningful progress.

Identifying the right problem

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There was a report of an opinion poll in the i paper a few days ago on the issue of paying benefits to young people who are not in employment, education or training. The article itself is behind a paywall, but the data is available in Table 53 in this report. The headline figure was that 56% of those questioned believed that all benefits should be stopped for such people. As one might expect, the numbers vary between supporters of different parties, with those supporting parties of ‘the right’ most likely to support the proposition. Asked in isolation, it’s easy to see why so many might support that (why, the implication is, should anyone not seen to be ‘contributing’ expect to be supported?), but I wonder whether the implications have been thought through by those responding to the survey.

For people in that ‘NEET’ category, benefits are likely to be their only direct source of income; removing it implies that those 56% of respondents are quite happy for the young people to go without food, clothing or shelter. In reality, of course, many (but by no means all) in that category will be living with their parents, who would presumably be expected to continue paying the living costs for their adult offspring. The key economic fact to note, though, is that the withdrawal of benefits from anyone means that someone, somewhere, has their own spending power reduced. Maybe it’s the individuals directly affected, maybe it’s their parents who are obliged to divert money from their own discretionary expenditure. In economic terms, it matters little to the basic conclusion: somebody’s spending power would be reduced, with a consequent reduction in overall demand. In fact, there’s a more general point which this underlines – if a government cuts spending or increases taxation in pursuit of the alleged nirvana of a balanced budget, someone, somewhere must always have their spending power reduced.

The political question is that the ‘who’ and the ‘where’ are ultimately choices being made by politicians. The claims that ‘benefits’ or ‘pensions’ are unaffordable are not the result of some iron-clad law of economics; they are the direct result of political choices as to who should pay for the entirely arbitrary need to pursue a balanced budget. Worse, they are framed in such a way as to encourage us to believe that governments have no choice but to act to reduce such expenditure, and that the impact of doing so will be felt by ‘someone else’. But if we ask a rather different question, it’s easy enough to expose the lie. That question is, in simple terms, ‘are there enough resources in the UK to provide every citizen with a decent standard of living?’ The answer, unquestionably, is ‘yes, of course there are’. That we ‘choose’ not to use those resources to achieve that aim is down to ideology, not economics.

None of that, of course, provides an answer to the problem of so-called NEETs – but then neither does simply cutting their benefits. The only ‘problem’ that that solves is how we continue to ensure that resources are concentrated in fewer and fewer hands. But that concentration of wealth is the much bigger economic problem.

Curiosity isn't enough to justify an inquiry

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There is no rule or mechanism which guarantees that members of a political party committed to the pursuit of a cause rather than merely power will be any more honest or less venal than mere careerists; nor that they will be any more resistant to temptation when it is waved in front of their noses. But, somehow, we all want to believe that ‘our’ side are more inherently honest and genuine than everybody else. As a result, the conviction, last week, of the former CEO of the SNP (and ex-husband of the former First Minister) somehow comes as more of a shock, to say nothing of disappointment, than the secret £5 million payment to Farage, or a whole host of financial scandals relating to other politicians in recent years.

Having been Treasurer of a party for five years in the 1980s, I’ll admit that I’m somewhat mystified as to how it can have happened. The level of scrutiny to which accounts were submitted back then was intense, and I distinctly remember lengthy meetings examining the budgets line by line looking for potential savings for a party which was perpetually cash-strapped. Things are different now: the advent of devolution has transformed the finances of parties which are now at the centre of events rather than eternally on the periphery. But still… The defence that the auditors had signed off the accounts looks rather weak to me. A thorough audit would surely have checked that expenditure (for large items as a minimum) was properly authorised and had an appropriate ‘paper’ trail in terms of invoices and receipts, but it’s hard to believe that to have been the case in relation to some of the items on the list. I find myself with a number of serious unanswered questions.

It’s true, as some of the SNP’s opponents have suggested, that the guilty plea means that those questions will never be aired in open court. That’s a pity – as much for the members of the party, who are the victims here, as for the wider public – but the idea that that justifies some sort of public inquiry is a strange one. I can see the attraction to the SNP’s opponents of demanding such an inquiry; keeping the scandal running for as long as possible has its political attractions for parties which have been unable to make a serious dent in the SNP’s popularity. But public inquiries are not cheap, and if one were to be set up for every resolved crime that left the curious with some unanswered questions, there would be an awful lot more public inquiries being held. Good news for the lawyers, I suppose, but probably not for the rest of us.

Whether the initial investigation was politically-motivated or not isn’t entirely clear – but the way it was handled, with a ‘murder tent’ outside the house and so forth, certainly looked a lot like a political act. Even the stated cause for the investigation, that money had been raised for one purpose and then spent on another, looked more than a little dodgy; the idea that specific pounds and pennies would somehow be locked away in a special account doesn’t look like a realistic expectation. It seems, though, that they found a real crime, even if it wasn’t quite the one they were looking for. It’s a disappointment, of course – but to return to my starting point, there is no rule which guarantees honesty, even amongst those apparently committed to a cause. Clay feet can appear even where they’re least expected.