Bad news for savers?

Tweet

 

Yesterday’s official figures for government ‘borrowing’ showed that it was down significantly compared to the same month last year. It was reported as though it was unalloyed good news. But the wonders of double-entry book-keeping mean that there is also another way of looking at it: the government took in a lower amount of people’s savings in July this year than it did the previous year. Whether the news is quite as good as it was portrayed as being depends on which side of the equation matters most.

That’s an oversimplification of a complex series of financial transactions, of course, but the basic point is this: debt and deposits must always net out to zero. Every pound of what the government regards as debt is a pound of assets to someone else – and most of those to whom the government ‘owes’ money are UK citizens and companies (and because of the process of quantitative easing, a significant amount of government dent is actually owed to a wholly-owned subsidiary of the government in the form of the Bank of England – effectively it owes that money to itself, meaning it isn’t really a ‘debt’ at all in any meaningful sense).

The Chancellor and government complain about the cost of paying interest on the money which they have ‘borrowed’, but that expenditure on interest looks like income to those who have deposited their savings with the government – a group which includes all those of us who have any sort of pension scheme from a source other than the state. The problem isn’t with the principle of government borrowing, or even with the amount (the Chancellor’s fiscal rules are entirely arbitrary and self-imposed), it is with way the assets and debt are distributed. The debt is treated as a liability for all of us, but the assets are overwhelmingly in the hands of the wealthiest in society, including those who have the biggest pension pots. The outcome of the government’s approach to tax and borrowing isn’t, as they like to suggest, that we are creating debts for future generations to repay, it is that the system is one of the many ways in which wealth ‘trickles up’, not between generations but within them. And it doesn’t seem to matter which party is in government.

Designing our own shackles?

Tweet

 

Perhaps it’s some sort of strange strain of the Stockholm Syndrome which has affected the Labour Party, and in particular its Shadow Chancellor. They know that they are captives or hostages, but end up developing an empathy with their captors which an objective observer would find it hard to understand.

The Office for Budget Responsibility was established by George Osborne in 2010, with the intention of setting a rigid discipline for public finances which would ensure that subsequent governments stuck to one particular version of financial orthodoxy. It was the same orthodoxy, with the core idea that government finances are just like those of a household so that governments can only spend what they raise in tax, which led to Osborne’s successive austerity budgets – and thus to the poor state of many of our public services today. Politically, the sub-plot was to ensure that a future Labour Government would be bound by the same constraints and thus unable to implement anything like a traditional Labour platform. They never expected that any Conservative government would run foul of its restrictions, but then no-one ever expected the ascent of Liz Truss. Not even Liz Truss.

In its political objective, it has succeeded beyond Osborne’s wildest dreams. Not only have Labour bought in, hook line and sinker, to the concept and the underlying financial orthodoxy, it was announced this week that Labour in government will actually strengthen and reinforce the system, making it even harder to escape the rigidity it imposes. Reeves’ delight in presenting this policy is a bit like a slave being pleased at being given the right to design and decorate his own shackles. It’s addressing the wrong problem: the issue isn’t that the shackles aren’t pretty or effective enough, it is that they keep the slave enslaved. The OBR doesn't need to be strengthened, it needs to be either abolished or else given a different remit.

The fiscal rule to which she intends to adhere is entirely arbitrary, as is the particular number attached to the inflation target, but the result of that rule, coupled with accepting the budgets for future years which have been set by the current government, is that cuts to public services have already been built-in to future forecasts. They may not have been explicitly identified, but they are there for anyone who looks to see. The combination of ruling out tax increases, sticking to a rule which requires current expenditure to be paid for out of tax, and increased expenditure in some areas makes cuts elsewhere almost inevitable. The only get-out is for the growth genie to emerge suddenly from the lamp and miraculously increase government revenue. The whole edifice of Labour policy depends on an assumption that by doing very little other than being a bit more competent, investment in the UK will magically increase. It’s an outcome that few serious economists believe is likely.

The comparison with the Stockholm Syndrome is based on an assumption that Reeves and Labour are the captives here, and have developed an empathy with the Tory captors who set the rules. There is an alternative theory though – Labour could be captors as well, just like the Tories. They really, truly believe this guff, and their manifesto is an invitation to the captives – the population as a whole – to participate in the design of our own shackles by voting for a different bunch of captors. In that scenario, it’s the voters who end up suffering from that strange version of the Stockholm Syndrome. History tries to tell us that some slave-owners were more ‘benevolent’ than others. It’s a disputed interpretation of history to say the least. And the bottom line was that the enslaved were still slaves.

Raising taxes to pay for tax cuts

Tweet

 

There is, or should be, something rather surreal about the reports that Jeremy Hunt is considering raising taxes in order to, er, pay for tax cuts. Even more so when it becomes clear that the two tax increases he’s considering are part of Labour’s planned financial plan, and that he and his colleagues have roundly condemned them both, repeatedly. Some might see it as an example of redistribution in action – although taking money from one group of well-off people in order to give it to another group of relatively well-off people (who might as a result feel bribed into voting Tory) is not exactly what most of us mean by the term ‘redistribution’. For an added twist, it seems that one of the attractions of implementing these two Labour policies is that it would prevent Labour from implementing other Labour policies – which Labour were planning to use the money raised to implement. By raising the money himself in advance and then giving it away, Hunt’s cunning plan is to force Labour to say which other taxes they will raise to pay for policies which will thus be left unfunded, and thus expose Labour as a tax-raising party.

There is, of course, an implicit assumption in this that everyone will see tax cuts as being preferable to providing decent public services, an assumption which hasn’t exactly been validated by some recent polling. But then, Hunt probably doesn’t mix a great deal with those who are most dependent on those decent public services. Perhaps the most surreal part of all is that Hunt’s cunning plan has been aided and abetted – not to say directly facilitated – by the stupidity of the Labour Party in committing not to reverse any tax cuts announced by the Tories, even when all concerned know that those cuts are going to be predicated on using new money raised as well as assumptions about unspecified cuts to services at some future date which have been built into the government’s five year plan.

It is a monumental act of self-harm by Labour’s foot-shooting tendency which has managed to convince the leadership that the arbitrary fiscal rules which they themselves have invented have some magical status which makes them unbreakable. It’s an act of stupidity which won’t stop them winning the election (although we should be careful not to rule out the possibility that they will find some other way of making even more holes in their own feet in the coming months) but merely mean that they can’t do very much once they’ve been elected, other than try and implement Tory policies with a little more competence. It’s fair to say that competence in a governing party has been more than a little under-rated recently, and a dose of it might be welcome, but those hoping for real change as a result of a change of governing party are likely to be disappointed. Rapidly. The biggest danger is that they will simply open the door to the new English Nationalist Party (although they probably won’t call it that) which is likely to rise out of the ashes of a merger between the Tories and Reform after the election. We really do need to make a quick exit from the dysfunctional state which the UK is becoming.

Perhaps they don't want to win

Tweet

 

When Labour first announced their plans to spend £28 billion a year, including in the very first year of a Labour government, on action to stop climate change, it was a bold step. It’s true that there was a certain paucity of detail (why is it that politicians and the media like to concentrate so much on the amount of money being spent rather than on what it’s going to achieve?), and the idea that they could get from a standing start to the whole £28 million in less than a year always looked more than a little dubious, but it was setting out a serious ambition to tackle the number one problem facing humanity and raise UK prosperity levels in the process. Or so it seemed.

In an amazing stroke of good luck, their own-goal announcement yesterday that it might actually not happen quite as quickly as they had previously claimed was overshadowed by the Tory own-goal scorer in chief announcing that he was departing in a huff because people were being nasty to him rather than accepting his lies and dishonesty as absolute truth. But Labour’s discharge of a firearm aimed unerringly at one of its own extremities deserves rather more attention than it has been given. The party could have backtracked gently, by saying that whilst the ambition remained unaltered they had always known that they could never deliver that level of spending as rapidly as they might wish, simply because, in practical terms, it would take time to set up schemes and put people and organisations in place. Instead, they chose to say that they would be deliberately deferring action on financial grounds, in order to abide by their self-imposed fiscal rules.

One of Starmer’s aides spelled it out in these terms: “If it’s a choice between the green prosperity plan and the fiscal rules, the fiscal rules would trump the former”. Aditya Chakrabortty of the Guardian has helpfully translated that as “In a choice between planetary life and some bullshit notion of fiscal credibility, we will always choose the latter.” It’s an entirely fair reformulation of what Labour are saying. The fiscal rules by which they insist they must abide are rules they themselves have written. They aren’t laws of nature or even laws of economics, they are rules which have been invented to convince the Tory press that the Labour Party will govern as though they were Tories, in the hope that the Tory press won’t be too hard on Labour in the run-up to the election. It would be nice, comforting even, to believe that it’s all a ruse and that Labour will abandon the self-imposed shackles once in government, but it appears as though they really do believe that they must abide by the rules which they wrote. They really do prefer austerity to prosperity; misery to hope. Perhaps they think that things are so bad they really don’t want to win.

A plague of Hunts

Tweet

 

Poor old Jeremy Hunt. This kind, compassionate Conservative, who set out determined to look after the interests of the poorest, didn’t really want to introduce a lot of the measures he announced yesterday, but he was, sadly, compelled to do so in order to comply with the new fiscal rules introduced by, er, Jeremy Hunt, the cold, uncaring Conservative who is bound by rigid dogma and ideology to look after the interests of the richest in society. New chancellor, new fiscal rules; but the problem with setting a fiscal rule which requires “that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period … [and] that public sector borrowing, over the same period, must be below 3% of GDP” is that the Hunt who set the rules left the Hunt charged with following them with little choice but to introduce measures which will increase taxation, cut public services, and reduce the standard of living of most people by around 7%. (Although, curiously, and I’m sure this is entirely unintentional, it seems that the wealthiest 10% will actually find themselves better off. Who would ever have expected that from a Tory Hunt?)

Whilst the self-styled nice Hunt can only follow the rules, the nasty Hunt didn’t have to set the rules in the way he did. He could, for instance, have set a target that debt must not rise by more than x% of GDP; or that public sector borrowing must not go above 5% of GDP. Either of those would have left him able to properly fund public services and protect the vulnerable. The so-called ‘black hole’ exists only because the fiscal rules have been applied to forecasts; applying different rules to those forecasts could have increased or reduced the size of the so-called hole – or even turned it into a surplus. Setting the rules in such a way as to oblige the Chancellor to impose a new version of austerity tells us only that the rules are doing exactly what the not-so-nice-after-all Chancellor wants them to do – austerity is a political choice, not a necessity.

He claimed yesterday that the alternative was to heap debt on our children and grandchildren, and that this was something that Conservatives don’t do. But in truth, it is exactly what Conservatives (and other governments for that matter) do do, and always have done. The UK has had a national debt since 1692 and has never repaid it all. Individual debts have, of course, been repaid, but only by raising new ones. If we treat a generation as being around 20 years, then in the terms in which Hunts (both of them) describe debt, today’s taxpayers are effectively still repaying the debts of their 14 times great grandparents. And the thing is – it really doesn’t matter; it’s entirely normal. Nobody, as far as I’m aware, is arguing that debt can or should be allowed to rise indefinitely – but neither does anyone, for all their profound statements, know precisely what amount of debt is impossible, and the UK’s public debt as a percentage of GDP is lower than a lot of other countries across the world – including both the US and Japan. The idea that the UK – one of the wealthiest countries in the world – is uniquely unable to provide basic services and standard of living for all its citizens owes nothing to any laws of economics; it is based on a dogmatic view that public spending is always inherently bad. And that’s a view shared by both Hunts, as well as all the other ones in the cabinet. Worst of all is that the Labour Party seems to be hooked on the same dogma, and seem determined to follow a similar set of rules. It seems that nasty Hunts aren't confined to a single party, even if they go under different names.

Problems and opportunities

Tweet

Last week, one Labour MP told us that we should leave the EU because the shrinking working age population in the Eurozone is a “ticking time bomb” which means that taxation inside the Eurozone will need to rise to pay for an ‘army of retired people’.  She’s right on the demographic issue, that’s undeniable, but what is unclear to me is why anyone would not understand that the UK faces exactly the same issue, or why leaving the EU makes any difference.  It is a simple fact that a falling birth rate coupled with increased longevity will create a problem for any country, including the UK, where the state pension is paid for out of current revenue rather than out of past savings.

Such a pension fund has some similarity with a giant, state-sponsored, Ponzi scheme, where payments to the increasing numbers of pensioners depend on recruiting ever more people to contribute to the scheme.  The logic of that is that maintaining the level of the state pension requires that the population continues to grow (which is, incidentally, one of the ways in which immigration by people of working age brings a net fiscal benefit); that the level of taxes paid by those of working age continues to increase; or that the age at which people can claim their pensions continues to rise.  The real question should be about how we move away from a Ponzi scheme towards a properly funded pensions system, but that would be a major project requiring long term political consensus rather than the regular chopping and changing which characterises UK Government pension policy – under both parties.

The issue of population growth, or lack of, was also referred to in the recent Government Expenditure and Revenue Wales (GERW) report.  The report drew attention to the disparity between the population growth in Wales since 2008, at 2.2%, and that of the UK as a whole, which was 4.5%.  This has a number of impacts for those of us concerned about the fiscal gap in Wales.  A higher proportion of pensioners coupled with a lower proportion of people of working age means both that the demand for public expenditure (on pensions and health) is disproportionately high, whilst the revenue raised from people in employment is disproportionately low (without even considering the wage differential). 

The fiscal problem in Wales is exacerbated by a flow of retirees into Wales and a flow of young people out.  Some claim that we cannot be independent until we have resolved that issue; but I’m in the other camp which is inclined to believe that independence is actually a key part of the solution.

Given the impact of humanity on the planet, and the aspiration for ever-higher material living standards, an overall policy which depends on continual population growth is pure folly.  I’m not alone in believing that the falling birth rate in developed countries is a good thing rather than a bad thing; stabilising the world population is a sensible, not to say necessary, aim.  But much of what passes for economic policy seems to be ignoring the demographic, and implicitly assuming that falling population growth is a temporary problem.  In reality, it’s a long term opportunity, but it requires adaptation.

A taxing question

Tweet

Everyone (except 'True Wales') is absolutely clear that giving the Assembly the power to vary taxes is not on the agenda for the referendum in March.  But most people also recognise that there is a problem for any body which can make laws and change policies in ways which affect spending without having to face the consequences of the impact of that on taxation. 

It's easy to understand why many would prefer to avoid any discussion of the issue of taxation before the referendum.  Or indeed, at all.  I fear, however, that simply leaves it as an unanswered question, and looks like a lack of honesty.  Taxation is an issue which isn’t going to go away any time soon, no matter how often some people avoid it.

Part of the problem in discussing the issue is the use of the word ‘raise’, with its two slightly different meanings.  ‘Raising taxes’ means setting the level of taxes and collecting them – it doesn’t necessarily include the other connotation of increasing the level of them.  Yet that is the connotation generally placed on the word by opponents of devolution – it’s a form of verbal sleight of hand in a way, to suggest that ‘devolution = more taxes’. 

In reality, having the power to ‘raise taxes’ also includes the power to set them at a lower level, and reducing some taxes might well be the best way of building a stronger economy in Wales.

It worries me that both Calman in Scotland and Holtham in Wales have concentrated their attention on the right to vary one tax only, namely income tax.  It is, of course, one of the largest and most easily collectable sources of revenue, but it’s also the most ‘visible’ of taxes.  It’s likely to be one of the hardest to vary significantly as a result.  Having one tax that it can vary does, of course, put the Assembly on a par with local councils – it does not, however, put it on a par with other legislatures, which can vary a range of taxes.

That isn’t just about perceived status differences.  Varying income tax does give some degree of fiscal responsibility to a body which is otherwise only spending its ‘allowance’; but it doesn’t give it the same range of options for varying policy.  The power to change income tax alone would be something of a poisoned chalice.  If we want to get to the stage where the Assembly Government can even begin to think about ‘transforming the economy’ as Peter Hain suggested it would do, then it needs to have a greater range of fiscal tools available to it.

At the moment, taxes are collected in the UK, and a portion is then allocated back to the Assembly for it to spend, on devolved matters, as it wishes.  It would surely be better for taxes to be set and collected at a Welsh level, with an agreed amount being passed on to the UK Government to pay for UK level services.  And it isn’t another step on a ‘slippery slope’ to anywhere – it’s a common-sense approach adopted by stable federal systems.

It would give the Welsh Government serious fiscal responsibility, as well as a much better opportunity to vary fiscal policy to achieve its economic objectives.  It would also clarify exactly how much we in Wales are paying for non-devolved services – and that would be no bad thing either.