From the TUC

Is permanent austerity inevitable?

14 Mar 2012, by in Economics

Last night’s Newsnight started from the premise that demographic change will create an unquestionable black hole in our future public finances. But such a gloomy prognosis does not have to be inevitable. The OBR say themselves that such long-term forecasting is ‘highly uncertain’  – and the idea that at any point in our history anyone has been able to accurately predict how the next 30 years of economic development will progress is obviously wrong.

But it is not just our ability to forecast that is in doubt, it is also the polictical assumptions that such forecasts are often framed by. It is as wrong to conclude that the public of the future will chose privatised health care over a collectively funded service that is free at the point of the delivery as it is to conclude that employment rates (and in particular the labour market participation of women), population growth and productivity will only change in relation to current trends and that income tax revenues will therefore inevitably fall.

Attempting to cover the entirety of this debate was a bit of a stretch in a ten minute panel discussion at 10.30 in the evening, so I thought I’d try and set out something (slightly) more comprehensive here.

Firstly, employment rates can make a real difference. Forthcoming TUC research will show that, even based on the OBR’s demographic forecasts (which, as Paul Mason pointed out at the end of last night’s programme, also shift significantly if we achieve higher population growth through increased migration) the costs of changing demography could be significantly offset by increasing both the employment levels and hours worked by those who are currently under- or unemployed.  For example, if we were to achieve levels of female employment that were close to some of those currently seen by some of our competitors, including Canada and other European states, revenues would clearly rise as social security expenditure fell. So smart thinking about how this could be achieved should start sooner rather than later – as IPPR have recently been highlighting, a stronger childcare offer could more than pay for itself if it provided the scope to significantly boost labour market participation among those caring for children.

Of course we need more than an increase in labour supply if employment is to rise – achieving strong and stable growth will depend on a whole range of factors. Can we reverse our 30 year trend  of low investment? Can corporate Britain start to take a long-term growth perspective? Can our energy intensive industries become the greenest and the most efficient in the world, underpinning an innovative and productive manufacturing sector that fully takes advantage of new global markets? Can we achieve the rebalancing that will reduce our reliance on financial services and create more better jobs? Recent decades have taught us that if the answer is to be yes Government can’t just sit back. We need a state investment bank to channel private sector cash into new technologies and fast growing sectors, a procurement strategy that guarantees every penny of each Government contract is spent on supporting growth (whether that’s through regional targeting, boosting skills or supporting British industry), banks that invest in the real economy not just in financial services and a comprehensive industrial strategy that commits the whole of Government to maximising the strategic support it gives to growth.

Higher growth means more taxes, and rebalancing and higher employment could create a more stable tax base, so it’s pessimistic to assume that revenues will inevitably come under extreme pressure in the years ahead. And while the OBR forecast rightly points out that demographic change and falling oil revenues will put strains on our taxation income in the years ahead, it is clearly beyond the scope of possibility for them to determine both whether higher than expected growth could be achieved and how future Governments will choose to structure the taxation system.  We currently have, even according to HMRC’s arguably low estimate, at tax gap of at least £35 billion a year. Those on the highest incomes of over £150,000 recieve more in tax relief (£15,000) than more than half of women working in the private sector earn in a year, and millionaire bankers who get their bonuses in shares and sell them on pay half the rate of tax that they would do if capital gains and income tax rates were aligned. While very high tax rates would risk negative impacts on economic activity, there is simply no evidence that the UK is anywhere near these levels meaning there is both ample scope for making sure that existing rates are applied more fairly and consistently and for increasing taxes on wealth, which would raise important revenues and create a fairer and more equal society.

Political choices on taxation are being made all the time. This Government has decided to fund corporation tax cuts for big business, despite the fact that corporate cash piles are currently worth around 50% of GDP (over £700 billion) and that business investment fell in the last quarter of last year. Similarly, big decisions are going to have to be made about Andrew Dilnot’s recent report on social care. While a universal social care service free at the point of delivery remains an important long-term aspiration for the UK, the Dilnot proposals would require some people to pay for around the first £35,000 of their care and for any residential boarding costs they incur – who is to say that with the promise of high quality social care and a lower risk of losing all their assets in older age is a proposal that won’t be acceptable to the public as a means to deal with some of the costs of demographic change. There is widespread public recognition of the need to secure enough income to pay for the collective goods provided by the NHS – how can the right possibly claim that the British public of the future will not feel the same way?

Small state conservatives might want us to believe that austerity is the only answer, and that permenant cuts are necessary for our economic and social health. But they are wrong. The sorts of changes that were proposed by some of last night’s Newsnight participants lead us to a bleak and increasingly unequal future that we don’t have to accept. Take further increases in the state pension age (often misleadingly described as increasing the retirement age). To start with such a shift would be massively unfair. Life expectancy in Glasgow City lags Kensington and Chelsea by 10 years, so raising the age at which pensions are paid denies those who are likely to have lived their lives on lower incomes a far higher proportion of their state pension than it does for those from better off backgrounds who will live for longer. In addition, those who have spent their working lives in low paid employment are more likely to be disabled or unemployed by the time they reach their 60s. For this group extending the age at which they can claim their state pension will not change their retirement age, but it will mean that they’ll spend longer on out of work benefits before getting a pension. In contrast, retirement ages for wealthier groups will remain the same – those with private pensions and assets will still be able to choose when they retire.

Importantly, arguing against such a move doesn’t mean denying the impacts of demograhic change, but accepting that there are progressive solutions to dealing with it, that are as credible as those proposed by the right. Imagine a society in which a universal right to flexible working and high quality health and social care services allowed more people to choose to work for longer in jobs where they could make a productive contribution. Where a rebalanced economy meant that more better paid employment was being created, and real action to boost the quality of part-time work meant that it didn’t simply consign most people in these jobs to poverty wages. This could be a world where many people chose to delay their retirement, boosting economic capacity and tax revenues and reducing benefit spending in the process, while those who wanted or needed to could still recieve their state pension at the same point as many do today. Greater taxes on wealth could raise important revenues from the best off, and the economic and social benefits of maintaining universal services could be such that progressive taxation was accepted as a means to fund them. And in a more equal society with higher employment rates our tax base would be far more secure than at present. Utopian? It doesn’t have to be – we have decades to get there. But to do so the political choices that could shape a version of this economic future need to start now.

As Keynes observed in the 1930s (Hat Tip to Duncan Weldon), “we are suffering just now from a bad attack of economic pessimism”. We cannot simply base our analysis of our future prospects on a right-wing idyll of an ever contracting, low tax state full of privatised services where only the best off benefit. Forecasting 30 years into the future is at best an inexact science, and the position we end up in will be influenced by political choices as well as economic realities.  We need to argue for a better and more equal future society with confidence, not accept the proposition of the right that demographics will finally lead us to the end of history.


2 Responses to Is permanent austerity inevitable?

  1. Simon H
    Mar 14th 2012, 12:18 pm

    I suspect that with Labour resolutely failing to get its act in gear that we are heading towards a second tory term, and probably the worst social and economic crisis this country has ever seen (since industrialisation). Certainly comparable to the 1870s.

  2. Eleanor Firman
    Mar 14th 2012, 8:38 pm

    I saw the Newsnight discussion and was appalled by how short a time was given to the guests but thought you made the most of it. It would have been far better to dispense with the editors ‘analysis’ which i thought was a bit redundant, although normally Paul Mason is great.

    In terms of taxing wealth, shifting taxes from labour and consumption onto land is the fairest system as no individual ‘earns’ the rising location value of the land they own. (If they believe they ‘deserve’ it on account of having worked for the capital to buy at the right moment, this is not the same as ‘earning’it in the sense of creating value through their own labour).

    LVT cleans up the economy in many ways eg bringing derelict land and empty properties into use – no-one holds land idle if it bears a cost. LVT tends to lower land values and thus house prices, which means any capital investment in social homes would go further too.

    Countries where property/land taxes are applied (eg Germany) escaped the recent property asset bubble unlike countries with high home ownership rates and favourable tax treatment to landowners (Spain, Ireland, UK).

    Alas, the Mansion tax does not have any of these advantages and its fairly easy to avoid too. It only applies to bricks and mortar rather than land and so will do nothing to solve the dysfunctional land market; it also doesn’t apply to those who own multiple property worth £2m in aggregate so for the measily £1.7bn it could raise it’s hardly revolutionary.

    Applying land value tax at a sufficient rate to replace council tax, business rates and lower VAT to 15% (a total shift of approx £70bn) would leave everyone better off. Only a small proportion of homeowners would pay more in LVT than they would in council tax, (and of course those who rent, would pay no LVT as they don’t own land).

    Admittedly this is a back of the envelope calculation but until all land is registered we cannot identify what total 100% annual rent on all land would amount to, so I try to err on the side of caution ie assume a low percentage of LVT introduced in a fiscally neutral but socially useful way.

    Unless some type of (real)land tax is introduced to stabilise the economy and house prices in particular, the outlook for young people being able to leave home and rent or buy affordable accommodation is very bleak.