A taxing question

The UK needs to spend a lot of money in order to deal with its collapsing public sector. There are daily reports of crumbling schools, poor transport infrastructure, shortages of staff and beds in the NHS and so on. Any new government is going to face the problem of where the money to restore public services will come from.

The question of how to pay for better public services is a much more acute one today than it was a generation ago when Tony Blair came to power. Partly because of this, the present Labour Party sounds almost fatalistic in its lack of ambition. The Shadow Chancellor, Rachel Reeves, talks of funding additional expenditure out of economic growth – but what growth is she talking about? She may well not inherit any growth at all if and when Labour comes to power. So Labour ministers avoid talking about any new spending commitments at all. ‘Wait and see till we’re in government’ tends to be their approach. Is that why we’re meant to vote for them? So we can wait and see what happens if we do?

In fact, it is difficult to see how a future Labour government, whatever the extra money brought in by measures like going for the non-doms, can afford to do very much. It is already giving up ending the two-child benefit cap, watering down its plans for a green revolution and refusing to say that it will spend more on education. But to be fair to Labour, what choice does it have? Isn’t the question of where money for new spending is going come from a real one?

Should the Lib Dems revisit a policy which they were the only party to advocate in 2001 (and which arguably did no harm to their electoral chances at the time), namely a small increase in the basic rate of taxation? As the recent Lib Dem conference recognised, there is a problem here. In 2001, when people were doing relatively well, promising to raise taxes a little was acceptable to a lot of people. In 2023, when there is arguably a more urgent need to spend more and public services are in a state of collapse, it is easy to understand why people might see an extra tax burden as the straw that breaks the camel’s back. Haven’t they just had to deal with inflation and rising mortgage rates? Is the government really going to take away even more of their money? It’s when a tax rise is most needed that it’s least acceptable.

A tax rise may be the wrong approach in such difficult circumstances, but three things are worth saying in defence of examining our tax situation. Firstly, people are much more willing to accept taxes when they know what the money will be spent on. So-called ‘hypothecation’ happens at local level – council tax can go up by 5% rather than 3%, but the extra has to be designated for a specific spending area, care services. And the Lib Dems in 2001 said that the extra penny on income tax they were advocating would be spent on education.

Secondly, although the Institute for Fiscal Studies published a report on September 29th saying that tax levels in the UK were at their highest in 70 years, it also published a study two weeks ago which received much less publicity and which was called ‘British tax system in need of reform’. Both documents are well worth reading. The second document makes clear that there are many possible changes to the tax system (they mention, for instance, the way council tax is based on property values from as far back as 1991, surely an anomaly) which have nothing to do with the level of income tax. So even if Lib Dems don’t want to advocate a rise in the basic rate of income tax, there are plenty of significant changes to the tax system they could suggest.

The third point is that this Conservative government may try to reduce taxes before the next election – or at least promise to do so if re-elected. What are opposition parties going to do then? Will they have the courage to say that even the present level of taxation only puts our tax levels in the middle of the range for developed countries? The present Labour opposition appears hamstrung by its inability even to suggest that taxes could be a benefit to society – the subscription we pay for living in a civilised community..

If it doesn’t win the outright majority some (but by no means all) pundits expect it to win, Labour will need the Lib Dems to give it some backbone. Being serious about how a new coalition government is going to find the money to implement its policies is one way of doing so.

* Mark Corner is a UK national, who teaches economic history and philosophy at the University of Leuven, is married to a Czech EU official and lives in Brussels. He has just published A Tale of Two Unions suggesting that Brexit may damage the British Union unless the UK becomes more positive about the way the European Union is structured.

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  • Jenny Barnes 30th Sep '23 - 12:07pm

    I’ve seen reports that parents of public school children may be planning to pay several years fees upfront, thus avoiding VAT or making donations instead of fee payments and using gift aid to increase what the school gets. It seems that some people think that tax is only for the little people, and “wealth creators” should pay the absolute minimum, if necessary by gaming the system. There are tax and legal experts who make a living out of crafting loopholes for the wealthy, and they make more money than civil servants in HMRC.

  • Peter Wrigley,

    NI contributions were flat-rate stamp cards until 1975 when they became earnings related, collected along with Income Tax under the PAYE procedures.
    Employee NI is 12% today compared 5.5% in 1975 , Employer NI is 13.8% (8% in 1975) and er/ee stakeholder pension contributions are 8%. The reduction in the basic rate of tax has been achieved by increasing NI contributions to compensate. Vat was 8% in 1975 against 20% now.
    I think you are right to say “Taxes are the subscription we pay for living in a civilised community.” The problem comes with who you mean by we.
    In 1975 a breadwinner could expect to feed and clothe a family, buy or rent a family home and a car, head off on annual package holiday to Spain or Greece and so on, all on a single wage. Today, even with two wages coming in to a household, it is a struggle to do the same. The reason is housing costs (including council tax and energy costs) and a higher tax burden on employee wages and consumption.
    For taxes to be on benefit of society they need to be equitably distributed between land, labour and capital with the greater proportion being focused on incomes that are extracted in the form of economic rents from the economy.

  • Steve Trevethan 1st Oct '23 - 8:46am

    Mr Bourke is correct!

    Our tax system is under resourced, opaque and inequitable, with the less well off paying proportionally much more than the well off, who also benefit from the under resourcing.

    This inequity and under resourcing results in inefficient infrastructures which cause ever lower productivity.

    However, if you are powerful enough and greedy enough, .you do not mind the metaphorical cake getting smaller if your slice gets bigger.

    Despite the power and influence of much the most of the mainstream media, including the B B C, acting as ventriloquists dummies to advance the wealth of the top wealth receivers, might our party actively and prominently promote policies of tax understanding, accurate tax data, including that of other countries, tax equity, the reduction of corrupt tax spending, as with some Covid spending, and an assertive mixed economy?

    Such a confident, proportionate mixed economy provides essential competition for both the private and public sectors.

  • Mark Corner 1st Oct '23 - 9:00am

    Thanks very much for these helpful comments on the article. I will remember to use the phrase ‘tax take’ in future – both more accurate and alliterative! There are so many issues where tax is concerned, both what taxes there should be and (as said in the comments above) how to stop people evading the taxes there are. What I really wanted to do was encourage some positive thinking about where the money can come from for urgent spending priorities rather than simply saying, as Labour seems to be doing, ‘We said we’d do this but look, the money’s not there, perhaps if we get some growth it can go back on the table….’ I can see why there’s a lot of nervousness about ‘Magic Money Tree’ jibes or even having a ‘Liz Truss moment’ and sending the economy into a tailspin, but that shouldn’t rule out finding viable ways to make urgent spending plans affordable. Which is why I was hoping for Lib Dems to put a bit of backbone into what may be a Coalition government…..

  • James Fowler 1st Oct '23 - 12:07pm

    A government with ‘backbone’ on tax affairs might:

    Abolish stamp duty but introduce capital gains tax on primary properties.

    Merge income tax and NI.

    Make a review of property values & council tax a statutory mandate every decade and introduce new upper bands with significantly higher rates.

    Raise income tax thresholds in line with pay inflation.

    Lower the basic rate of income tax but abolish VAT exemptions.

    Bring income tax and capital gains tax rates into line with each other.

  • Peter Wrigley 1st Oct '23 - 5:25pm

    Jenny Barnes: You raise an important point. These “tax and legal experts” make themselves sound respectable and even “go-getting” by promising to make your affairs “tax efficient.” They should be force to add the sub- heading,” How to avoid paying your share,” or better, “your fair share.”
    Joe Bourke: Agreed the structure of the tax take has changed. I threw “income tax at 33%” as a shorthand for making the point that higher taxation does not necessarily discourage effort. But we need, as Paddy Ashdown advocated years ago, to switch the emphasis from taxing “goods” (eg employment”) to taxing “bads” (eg pollution, unnecessary use of scarce resources. As the original post points out, piecemeal tinkering is not enough. We need wholesale reform.
    James Fowler gives us a wide selection of possibilities. I hope to have a broader examination of the options on my blog in the near future: watch this space –

  • Rachel Reeves like the Libdems is proposing a basic fiscal rule (the Golden rule) that says (outside of recessions) governments shouldn’t plan to pay for current spending by borrowing From the OBR to new fiscal rules
    Where our policies would depart from Labour is in raising taxes to end the two-child benefit cap and spend more on education. Mark Corner has linked in his article a recent IFS article making similar points on the need for tax reform to those made by James Fowler in his comment.
    Another area where I think we will be differentiated from the Labour Party policy is on borrowing for investment. Rachel Reeves seems not to make much distinction between borrowing for day to day spending and borrowing for investment mostly to achieve another goal i.e. reducing debt as a % of GDP. Hence, the announced delays in capital spending for the Green growth program.
    Simon Wren-Lewis makes the same case as the LibDems for not restricting productive investment that enhances the public capital stock Challenges to the strong golden rule: MMT and bond market paranoia noting you should not have any aggregate rule that restricts public investment. “Paying for investment through borrowing not only makes intuitive sense, because it’s what consumers and firms do, but it also makes sense on fairness grounds. The benefits of investment are spread over time, so the taxes to pay for it should be too. If taxes only have to rise to pay the interest on borrowing this means that future as well as current generations pay for the investment.”

  • Peter Martin 2nd Oct '23 - 3:57am

    @ Joe,

    There are several problems with so-called “fiscal rules”

    1) Even if they may correspond to our own intuition we should bear in mind that this derives from our experience as a currency user. We are a ‘household’ in econospeak. Governments are currency issuers. We probably don’t have any direct experience of that.

    2) In science we tend to get suspicious if a theory has caveats. In other words, if it works here in these circumstances but doesn’t work there, in different circumstance, then there’s probably something wrong with it. The caveats mentioned by Simon Wren Lewis include recessions and the so-called zero bound. I could add wars, covid pandemics, and 2008 style economic crashes.

    In other words these “golden rules” aren’t quite so golden after all! Brass rules maybe?

    3) We also get suspicious if definitions are fuzzy. Just how well separated are capital (investment) and current (capital) spending? Not very IMO. Does it really make sense to say that building a bridge is capital spending or but that maintaining it to prevent it becoming unsafe is current? Or that building a school or hospital is capital spending but staffing them with teachers, doctors etc to enable them to function is current?

    I doubt if Rachel Reeves actually believes all the guff she puts out. At least I hope she doesn’t! It’s nothing to do with economic reality. It is to do with creating a false impression to win an election.

  • Peter Martin 2nd Oct '23 - 4:59am

    @ Joe,

    I often agree with Simon Wren-Lewis but not in the reference you give. In which he says:

    ” The unreasonable (MMT) argument is that interest rate increases do not reduce aggregate demand and inflation, and therefore fiscal policy has to play the macro stabilisation role at all times. ……it contradicts the large amount of evidence that higher interest rates do reduce aggregate demand and inflation…….”

    He’s confusing the rate of change of interest rates with their absolute level. There is no contradiction. If we compare the 5% or so interest rates we have now which are meant to reduce inflation there is no correlation with when we’ve had similar rates previously and inflation has been high and even increasing.

    It is a change of interest rates which encourages everyone to borrow and spend more or less in the short term. This doesn’t necessarily give anyone more or less spending power in the longer term in the same way that a change in fiscal policy would. It’s bringing forward future spending power, the case of a rate reduction, or increasing future spending power in the case of a rate increase.

    Therefore we can argue that the level interest rates per se are closer to demand neutral in the longer term. If we consider that the recent increase in interest rates has added something like £100 bn to the govt’s interest bill and so has added this amount to govt spending we can go further and say that it looks potentially to be inflationary in the longer term.

  • Steve Trevethan 2nd Oct '23 - 12:05pm

    What does balancing the government books really mean?

    Why does the government borrow money when it can and does create money?

  • @Steve Trevethan “Why does the government borrow money when it can and does create money?” … because (roughly speaking) creating money devalues the money that is already in circulation, and can often lead to inflation. Think of it like this: Say you create some new money, increasing the total amount of money by 10%. That means you now have 110% of the ‘paper’ money: But the trouble is, the total amount of real wealth (infrastructure plus goods etc.) in the country hasn’t changed: You just have more paper money chasing the same amount of goods. That means that the true value of each £1 of paper money has just gone down by 10%, so you haven’t really gained anything, and all your citizens will probably pay via higher inflation.

    That’s a very crude argument – I’ve massively oversimplified to fit it into one paragraph. But it hopefully it gives a sense of why it’s generally considered a bad idea for Governments to just create money when they want to spend it.

  • Peter Martin,

    the evidence suggests that interest rates follow (not lead) increases or decreases in nominal GDP. When nominal gdp is increasing at a fast rate ,as it is has been seen 2021 as a consequence of high rates of inflation, market rates of interest will rise. The Fisher Effect describes the causal relationship between the nominal interest rate and inflation. It states that an increase in nominal rates leads to a decrease in inflation. The key assumption is that the real interest rate remains constant or changes by a small amount.
    Hence, it is not the absolute level of nominal interest rate at any time it is its level relative to the rate of inflation.
    When public debt levels are at 100% interest payments become a significant element of government spending and give rise to higher deficits. Deficits themselves are stimulatory and hence potentially contribute to inflation. Increasing government spending by £100 billion would normally be expected to be highly inflationary when the economy is already near full employment. However, interest payments are a special case. The marginal propensity to spend interest income appears to be quite low compared with other forms of government transfers i.e. it tends to increase the levels of savings (at least in the short-term) rather than stimulate spending. The impact of increased interest costs for borrowers, however, is felt immediately and has an instant impact on household spending and to a lesser extent business investment.
    That can be seen by, for example, the way increased bank profits are distributed. They are utilised for share buybacks and dividends that increase share prices and therefore offset capital losses in the real value of financial assets arising from the fall in the purchasing power of money.

  • Steve Trevethan,

    money creation is an accounting process that simultaneously creates an asset in the form of a promissory note and a bank liability in the form of a deposit.
    When the Bank of England creates money it has an asset in the form of a taxpayer promise to pay given to it by government legislation (i.e. the taxpayer liability) and creates a bank deposit for the government to use until tax receipts or household savings come in to repay the taxpayer liability created. No wealth or assets are created by money creation. It is always a double-entry accounting record.
    The creation of money gives the government (as the agent of taxpayers) a claim on the value produced by the Land, Labour and Capital utilised in the economy i.e. purchasing power.
    It is that value produced that determines the level of resources that can be claimed by the government on behalf of taxpayers.
    Governments have three ways they can effect money claims over real resources – taxes, borrowing of household savings (i.e. deferral of taxes to the future) or by inflating away the real value of money they have created (the so called inflation tax). The last option, when used to any great extent for the purchase or real goods and services, eventually leads to loss of faith in the currency and a breakdown in the ability to collect taxes. Money creation can be used to stop the nominal value of house prices and financial assets like stocks and bonds crashing/deflating as was the case in the aftermath of the 2008 financial crisis.

  • Peter Martin 2nd Oct '23 - 3:40pm

    @ Simon R,

    Steve asks:

    “Why does the government borrow money when it can and does create money?”

    You reply:

    “because (roughly speaking) creating money devalues the money that is already in circulation, and can often lead to inflation.”

    This would be a fairly typical response. The problem is that when anyone lends the government money , they (or their commercial bank) might buy some bonds or put the money into a NS account they don’t feel they’ve lost their money. Do you? I certainly don’t. So if we haven’t lost our money and we can get it out to spend when we like, how is the ‘money supply’ reduced?

    I lend it to the Government for save keeping and because I don’t need it right now. Plus they give me some small interest in return.

    So the correct answer is that the Government borrows the money because lenders want to lend it. They are like a bank. If they want us to save more they raise interest rates. If they want us to go out and spend they lower them.

  • Peter Martin 2nd Oct '23 - 3:54pm

    @ Joe,

    I think all you are saying is that the BoE chooses to raise interest rates when the economy is running fairly hot which sometimes corresponds to a higher rate of inflation. Isn’t this well known?

    So the theory is that the Govt/BoE puts up interest rates to supposedly reduce the money supply but when it is pointed out that this means the Government is spending an extra £100 bn or so extra in interest payments, which would be dismissed as highly inflationary if it were spent on anything else, you say:

    “However, interest payments are a special case”

    And offer a “propensity to consume” argument. This is a valid argument in itself but if its really about this, why is the extent of the money supply so important? It can’t be if it’s about what we spend rather than the total extent of the money in existence. If I lock away a large sum of money in a safe how does everyone in the rest of the economy know it’s there and so start to increase prices in response ?

    This is money that I have a zero “propensity to consume”. Therefore its not having any effect at all on the economy but it is still contributing to the “money supply”.

    You could equally well argue that a valid counter inflation policy would involve us all paying some of our income to the Duke of Westminster. He’d be a lot less likely to spend the money than you or I!

  • Steve Trevethan 2nd Oct '23 - 6:24pm

    Thanks for the comments!

    Might it be that direct government spending/money creation seems to be considered inflationary when it is proposed or done to reduce/prevent the increasing hardship of the poor but not when it is done to support collapsing banks as in and around 2008?

    Can anyone explain why socio-economic planning seems to be/is skewed for the benefit of the wealthy and powerful as “Economics” is presented as being an objective science?

    What does balancing the government’s books mean in reality/practice?

  • Peter Martin,

    Demand-pull inflation occurs when consumers demand goods, possibly because of a larger money supply, at a rate faster than production. Cost-push inflation occurs when the input prices for goods tend to rise, possibly because of larger money supply, at a rate faster than consumer preferences change.
    The BofE will rarely react to transitory cost-push inflation, but will react to monetary inflation. It’s aim is to reduce new credit creation in the commercial banking system which is normally the source of excess demand relative to potential supply in the economy rather than government deficit spending that is financed by borrowing back part of the existing stock of money savings in the economy.
    To maintain a stable economic environment at full employment the government aims to keep net increases in bank lending broadly in line with a sustainable rate of nominal gdp growth based on available resources. With a 2% inflation target that might mean nominal gdp growth of 4% for the UK NGDP targeting
    How much is spent in the economy is based not only on the amount of money in circulation buts its velocity. Newly created money in excess of nominal gdp growth capacity has to actually circulate in the economy at a constant or higher velocity to cause inflation. Inflation is relative—not absolute. In other words, prices tend to be higher than they otherwise would have been if more currency is involved in economic transactions and more transactions are being conducted.

  • @Peter Martin “So if we haven’t lost our money and we can get it out to spend when we like, how is the ‘money supply’ reduced?” I didn’t say the money supply is reduced: I said more like the opposite: The value of each £1 you have goes down because the money supply has increased.

  • @Steve Trevethan “direct government spending/money creation seems to be considered inflationary when it is proposed or done to reduce/prevent the increasing hardship of the poor but not when it is done to support collapsing banks as in and around 2008?” I don’t think it’s anything to do with helping the poor vs helping banks. The spending/money creation was done in 2008 despite the potential inflationary consequences because it was considered that it was an emergency situation where the economy faced potential collapse, and therefore not spending the money would cause more harm then spending it. Same with Covid – the Government spent huge amounts of money that it didn’t have to put people on furlough because it considered that the alternative was worse. You can debate whether or not they were correct (for both 2008 and 2020), but either way we are living today with the inflationary consequences and a cost of living crisis that was at least in part caused by that excessive Government spending in 2020-21 (although also aggravated by things like Ukraine and Brexit).

  • Steve Trevethan,

    tax or debt financed government spending is not inherently inflationary, if there is adequate capacity in the economy to absorb increased spending. The bank bail outs were money creation and share investments in banks to prop up their liquidity and solvency during the credit freeze that followed the Lehman bankruptcy in the USA. The financial assets and corresponding liabilities held by the banks had already been created by the banks before the crisis. The QE at that time involved buying bonds from investors – mainly government bonds – reducing borrowing costs and shoring up bank reserve accounts. The money was not directly spent into the real economy on goods and services although there were significant deficits for several years that served to offset private sector deleveraging and contraction of the money supply.
    Contrast that with the Pandemic where QE was done to reduce/prevent the increasing hardship of the poor and unemployed . Bank of England economist, Huw Pill told the House of Lords economic affairs committee, that the Bank played a part in driving up inflation through its QE programme that pumped £450billion into the economy during 2020 printing money – and lockdown – fuelled inflation crisis.
    Balancing the books means managing the public finances equitably and fairly (on a counter-cyclical basis) so that people can go about their daily business without having to worry that their pensions or savings will become worthless over a few years or that they will have enough left after taxes in their pay packets to meet their mortgages/rent costs and other living expenses.

  • Peter Martin 3rd Oct '23 - 7:59am

    @ Simon R @ Steve,

    “Why does the government borrow money when it can and does create money?”

    A good question so I’ll have another go at answering it.

    Consider the situation where a government was moving onto a totally fiat currency for the first time. Maybe they used lumps of silver or gold before that. In the first year they would create and spend 100bn units into the economy. Not all of them would come back as tax so let’s say 90bn did come back.

    In the next year the government would still need to spend create 100bn units and so again 90bn would come back.

    Where is the other 20bn? It’s obviously in the hands of the good taxpayers. In the third year they would kick up a fuss about the government “printing money”.In an attempt to pacify them the government would offer to look after their money and pay some interest on on it.

    So that’s it really!

    It works politically. Even though paying out the extra money in interest does, in the long run, add to the inflationary pressures the good taxpayers were worried about in the first place.

  • Steve Trevethan 3rd Oct '23 - 9:06am

    Again, thanks for the answering comments!

    If “balancing the books” means running the public finances equitably and fairly”, which seems to me an excellent general definition, then might the books have not been “balanced” for far, far too long, as the child hunger data indicates.

    Indeed, it seems to make the absolutely crucial point that separating the “book keeping” from the equitable welfare of all citizens, and their children, which seems to be presented and promoted by current (neoliberal) economic theory and practice, is a cruel deceit.

  • The OBR forecasts for 2023-24 expect the public sector will raise from taxes and other sources of revenue £1,058 billion, equivalent to around £37,000 per household or 41.1 per cent of national income and spend £1,189 billion, equivalent to around £42,000 per household or 46.2 per cent of national income i.e. a deficit of £131.6 billion. .
    In 2023-24, we expect central government departments to spend £421.7 billion on the day-to-day (’current’) running costs of public services, grants and administration. This is 35 per cent of public spending. The biggest items are health (£176.2 billion), education (£81.4 billion) and defence (£32.4 billion).
    We also expect the public sector to spend £133.6 billion – 11 per cent of the total – on capital investment (such as roads and buildings) and on loans to businesses and individuals and 8 per cent of capital investment is on business and student loans.
    Cash transfers through the welfare system are expected to cost £294.5 billion in 2023-24. 51 per cent of these are paid to pensioners, with state pensions the largest item at an expected £124.3 billion. Other big items include universal credit and the tax credits and benefits it is replacing (£83.0 billion) and disability benefits (£35.3 billion, around two-thirds paid to people of working age).
    During the last financial year, the government spent £111bn on debt interest – more than it spent on education How much money is the UK government borrowing, and does it matter?. That is expected to be higher this year.

  • The above OBR forecasts expect a deficit of 5.1% of GDP. To increase public spending requires either idle resources that can be brought into use or competing with the private sector for those resources. Current rates of inflation and unemployment do not suggest there are significant idle resources.
    Simon Wren-Lewis writes Wage inflation, unemployment and what you wish to believe “…UK real wages didn’t fall over the last two years because the profits of most UK firms rose. They fell because the profits of mainly overseas energy and food producers increased. Trying to shift this real wage cut onto the profits of other UK firms will not work, and instead just generates inflation. It is also why nominal wage inflation, not real wage inflation, is the crucial variable here. We could debate whether it would be a good idea to see real wages recover at the cost of falling profits, but it hasn’t happened so far and is unlikely to happen in the future unless excess demand is replaced by excess supply”.
    Canada is considering price controls on food but as Wren-Lewis writes in his blog “…In the 60s and 70s, before oil price hikes made a bad situation worse, UK politicians and some economists were unwilling to see unemployment rise enough to stop inflation rising. Instead they tried to use price and wage controls to keep both inflation and unemployment low. This failed, and UK inflation rose from around 2% in the early 60s to 8% in the early 70s, before oil prices rose fourfold. But permanent aggregate controls stop productive firms attracting workers from unproductive firms, which damages long run real wage growth. Inevitably governments come under pressure to relax aggregate wage and price controls, and therefore all controls do is postpone the rise in inflation”

  • Public spending will need to increase at least in line with inflation but this will not provide for improved services or benefits.
    To increase the level of public spending and redistribution we need to both raise additional taxes and make the existing tax system more progressive.
    To make the tax system more progressive, I would start with making council tax proportional to property values with homeowner allowances based on the local authority local housing allowance to reduce council tax for median priced properties and renters while increasing it for higher priced properties, landlords and 2nd homeowners. That is a revenue neutral reform that redistributes the burden of tax from lower to higher income households.
    To raise additional taxes, I would introduce a land value tax. The tax base would be the rental value of the property in excess of the local authority housing allowance and include imputed rents for owner-occupiers. The tax rate applied to rents in excess of the local housing allowance would be the existing income tax rates i.e. 20%, 40% or 45%. Lower income households or those not fully utilising their existing personal tax allowance would typically suffer no additional taxes.
    The additional tax would be directed at reducing the deficit for day to day spending after providing for above-inflation increases in benefits. The deficit would be simultaneously increased to provide for capital spending required for the Green recovery of up to 3% of gdp and a job guarantee scheme for long-term unemployed introduced that would also aid in strengthening automatic fiscal stabilisers for smoothing of troughs and peaks in the business cycle. On monetary policy, I would replace inflation targeting with nominal gdp targeting with an initial target of 4% nominal economic growth (inclusive of 2% inflation).

  • Peter Martin 4th Oct '23 - 8:42am

    @ Joe,

    SW-L and MMT are on the same page about wages and prices. The idea is that everyone is guaranteed a job at a fixed hourly rate, and this rate becomes a new de-facto standard for the currency. So, by definition, there will be no more wage led inflation.

    I understand the economic rationale behind it but there are going to be a few problems in getting the left to agree to having fixed wages and the right to agree to having guaranteed jobs.

    “UK politicians and some economists were unwilling to see unemployment rise enough to stop inflation rising.”

    This is a point Lib Dems might want to give some thought to. For all the high sounding principles of wanting to abolish poverty, the system Lib Dems support does rely on the creation of poverty as a disciplinary measure.

    SW-L gives us this example of the deliberate creation of unemployment as a counter inflationary measure.

  • This is an earlier SW-L post on the job guarantee Some thoughts about the Job Guarantee. making the point that the JG rate needs to be below minimum wage to prevent wage induced inflation.
    In my comment above, I have specified a job guarantee scheme for long-term unemployed (6 months or more). This kind of scheme would pay the national living wage as it targets structural unemployment and does not impact short-term frictional unemployment.
    Cyclical unemployment generated by downturns in the business cycle would be addressed by nominal gdp targeting that can address the dual concerns of macroeconomic policy, inflation and jobs, with a single policy target. It would allow for a looser,expansionary monetary policy during recessions and help reduce the impact on jobs and growth in the longer run.
    The policy approach combines automatic fiscal stabilisers with a loosening of monetary policy during downturns in endeavouring to maintain a relatively stable path of nominal gdp growth and contains inflation during periods of overheating.

  • Peter Martin 4th Oct '23 - 7:11pm

    @ Joe,

    “making the point that the JG rate needs to be below minimum wage to prevent wage induced inflation”

    If you do that, you’re simply lowering the minimum wage. The JG rate is the de facto minimum.

    It wouldn’t necessarily create inflation to have a higher JG rate. Inflation isn’t just about the so-called “money supply” or, more correctly, the amount and speed that money is being spent. It is about what there is to buy with that money too. JG workers will also be making a contribution to that, so should be paid the same as any other worker.

  • Peter,

    yes, Inflation isn’t just about the so-called “money supply” or, more correctly, the amount and speed that money is being spent. This paper On Price Stability with a Job Guarantee concludes that once policymakers’ incentives are considered, the job guarantee does nothing to help stabilize prices. The authors find that, compared to NGDP targeting,a JG is severely lacking in its capacity to serve as an inflation management tool.
    That is not to say that a job guarantee program should not be implemented to both address persistent unemployment and add to automatic fiscal stabilisers. But, when it comes to managing inflation in the economy there are better tools.
    Robert Skildelsky wrote a long essay advocating a job guarantee program in 2019 The Case for a Guaranteed Job

  • Mick Taylor 4th Oct '23 - 10:25pm

    The whole point of our policy of GMI is that it moves away from insisting people seek work and guarantees them a Guaranteed Minimum Income whether they work or not. Whilst I welcome a guaranteed job, what is the party’s attitude to those who don’t want paid employment?
    Only this week the chancellor launched yet another attack of ‘scroungers’. Whilst I accept that requiring people to work really isn’t Liberal, there’s a lot of people out there who think that ‘scroungers’ really should be dropped upon from a great height.
    It seems somewhat contradictory to talk about GBI and at the same time go on about guaranteed employment.

  • Mick,

    benefits are never going to be preferable to a suitable job offer, even at minimum wage, for those keen to get work but struggling to find any employment at all.
    A voluntary Job guarantee program for long-tern unemployed is not an alternative to benefits. It is an opportunity to get into the labour market or retain basic work skills until you can find a better paid job elsewhere.
    GMI benefits remain means tested even with less sanctions involved.
    We need a concerted focus on benefits, jobs, rents and inflation/cost of living to get anywhere with poverty alleviation.

  • “making the point that the Job Guarantee rate needs to be below minimum wage to prevent wage induced inflation”

    “The JG rate is the de facto minimum. JG workers will also be making a contribution to that, so should be paid the same as any other worker.”

    As people who take up a Guaranteed Job will have been on benefits, then the amount of money they receive should be related to their benefit, assuming that their benefit pays 100% of their rent or their mortgage interest and they receive benefit for every one of their children. It will be the government that pays those on a Job Guarantee scheme. Therefore paying people £60 a week on top of their benefits and 100% of their travel costs should be enough to encourage people to take up a Guaranteed Job. Paying just the minimum wage would result in them having to claim Universal Credit. Also their hours should be restricted to only 30 a week and no more than seven and a half per day. Hopefully, to stop employers taking on someone on a Job Guarantee scheme rather than employing someone and paying them the rate for the job. Also to provide someone on a Job Guarantee scheme with time during the working day to apply for jobs.

  • Peter Martin 6th Oct '23 - 7:02pm

    @ Michael BG,

    “As people who take up a Guaranteed Job will have been on benefits…”

    Possibly not. They may be young people looking for their first job. They may have recently lost a non-JG job. They may have previously not qualified for benefits because of a working partner.

    The details of how the JG should work, how much workers should be paid, how many hours they should be able to work etc have will have to be determined by the democratic process.

  • Peter Martin 6th Oct '23 - 7:36pm

    @ Joe,

    “This paper On Price Stability with a Job Guarantee concludes that once policymakers’ incentives are considered, the job guarantee does nothing to help stabilize prices.”

    This is because they haven’t understood the concept properly. The JG program will set the basic minimum. Other workers will establish their rates as JG + 10%, JG + 20% etc If workers and their unions push their demands too far they will lose their +20%, or whatever jobs, and will be back onto JG + 0%.

    So if everyone’s wages and salary are defined in this way there won’t be, by definition, any wage induced inflation. This is not to say there will be no inflation. If there is a supply shock prices will rise. There’s no getting around that whatever economic system is applied.

    The concept is fine economically. The politics behind it is the problem. I’m not sure if I don’t have a few misgivings myself!

  • I would expect a Job Guarantee scheme to only be open to people who have been unemployed for three months. I envision a parallel Training Scheme for unemployed people with similar pay levels to the Job Guarantee scheme and entry conditions. So a young person looking for their first job would go into the Training Scheme as they don’t have any work skills that need to be kept up-to-date via a Job Guarantee. Benefits are means-tested on a basis which assumes that two people in a relationship is a household and assess benefits as a couple. Therefore if a person was not working and their partner was then they would not be eligible for my Job Guarantee scheme. These schemes are to help unemployed people get back into work by either allowing them to do work to keep their skills up-to-date or by allowing them to train for another role and then do a Guaranteed Job to get the relevant work experience.

    When I talk of a Job Guarantee scheme it is not the same as one envisioned by Modern Monetary Theory which is a job of last resort and works as an automatic stabiliser and a means to control inflation.

    If a political party had a full Job Guarantee scheme as policy it would be that party if it became the government that would set the details of how the JG should work, how much workers should be paid, how many hours they would work.

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