How does the UK finance ‘Building Back Better’?

If the UK ‘s economy and society are to recover from the shock of the COVID pandemic, the damage inflicted by Brexit and the after-effects of several years of austerity, it needs a long-term increase in public investment. Boris Johnson has promised to ‘level up’ Britain’s poorer cities and towns, to ‘Build Back Better’ after Brexit and COVID, and to tackle the costs of social care. The Brexit campaign promised to spend more on the NHS. British chairmanship of the Climate Conference in November will risk embarrassing failure unless our government commits to an ambitious programme to move towards Net Zero.

Yet a substantial proportion of the Conservative Party and of the well-funded think tanks that feed ideas to them resist any idea that public spending might rise significantly, or that the level of taxation might be raised. Daniel Hannan, arch-Libertarian and Brexiteer, even repeated the illusory Laffer curve in the Telegraph over the August Bank holiday – arguing that cutting taxes can increase government revenues and so eventually allow for modest increases in expenditure. Briefing and counter-briefing over whether to break their manifesto pledge and raise the level of national insurance has already broken out across government. Chancellor Rishi Sunak will have to decide how far to honour his Prime Minister’s extravagant spending promises or impose further cuts in education, benefits, transport infrastructure and hospitals.

So the most important political divide in British politics in the final months of 2021 will be between spenders and savers – above all within the Conservative Party itself, but not only there. I hope that the Liberal Democrat response will be that the UK should be spending more, and investing more, to reshape our economy and rebuild our society. We will differ from any Conservative advocates about what the priorities for spending should be, how higher taxes should be distributed, and how far local government rather than central government should control and distribute what is spent. But we are a social liberal party, not an economic libertarian party, and we recognise that public spending – and fiscal redistribution – are part of the necessary glue that holds a democratic society together.

It’s 130 years since Gladstone stepped down from the prime ministership. His commitment to ‘retrenchment’ as well as to peace and reform was entirely logical when most of the national budget was spent on the army and navy. In the first post-Gladstone budget Harcourt as Chancellor sharply increased death duties, to the fury of Tory peers. The People’s Budget of 1909 was justified in terms of social investment and welfare. The Beveridge Report outlined a further increase in spending on health, education, housing and public services. The revolt of economic liberals against postwar spending was driven by their suspicion of the state as such and their insistence that the profits of free market enterprise would somehow trickle down to the poor and the left-behind.

Margaret Thatcher’s government managed to reconcile a lower level of taxation than our continental counterparts with a higher level of spending on public services and welfare than the USA through using North Sea Oil revenues and sales of public assets to fund current spending. That’s no longer an option – and the scale of the challenges we face is now much larger. Local government is close to bankruptcy; education spending has fallen in real terms by 9% over the past 10 years; even Jeremy Hunt is calling for a sharp increase in NHS funding. Climate change and technological innovation require public as well as private investment. Increasing longevity means rising demands for social care.

Liberal Democrats should challenge the Tories on how progressive the burden of taxation should be, on the gross over-centralization of public finance and spending, and on the priorities between spending programmes. But we should vigorously condemn those populist reactionaries who are still calling for lower taxes and the spending cuts that they will enforce.

* Lord Wallace of Saltaire is a Liberal Democrat member of the House of Lords. He has taught at Manchester and Oxford Universities and at the LSE.

Read more by or more about .
This entry was posted in Op-eds.
Advert

63 Comments

  • Peter Martin 6th Sep '21 - 9:28am

    Higher taxation, relative to govt spending, is only necessary if inflation starts to become a problem. I don’t wish to trivialise economic theory but there is really not much more to it than that. There are only so many resources available in the economy so the trick is to use most of them but not try to use too many and cause inflation.

    “Margaret Thatcher’s government managed to reconcile a lower level of taxation than our continental counterparts with a higher level of spending on public services and welfare than the USA through using North Sea Oil revenues and sales of public assets to fund current spending”

    Margaret Thatcher’s govt was probably the first one to take a relaxed view both about the value of the pound on Forex markets and the state of the current trade account. The pound fell to $1.08 at one point in 1985 and the trade account was nearly always in deficit. The thinking at the time was that a floating pound would naturally lead to a more balanced level of trade but it didn’t work out like that. Many countries were determined, by hook or by crook, to run a trade surplus which meant that those who weren’t too concerned either way were usually in deficit.

    This enabled even Margaret Thatcher’s govt to deficit spend without causing excessive inflation. This is mainly “where the money came from”. So it can well be argued that it is a good thing for trade to be in deficit. The extra imports are real resources which are a cover for some extra Govt spending.

  • Jayne mansfield 6th Sep '21 - 10:30am

    I hope that all opposition parties will be that the UK should be spending more and investing more to rebuild our economy and society.

    Boris Johnson’s promise to level up was always something one should have taken with a pinch of salt. The most immediate battle ought in my view , be a concerted cross- party effort to stop the raising of National Insurance to finance social care. It is the most unfair way of raising money for our broken care system, because it will unfairly and disproportionally affect the young ,and working people who are less well off.

    I am in favour of raising taxes to rebuilt the fabric of a caring society, but to expect those who may never be able to afford a home to subsidise those like myself, who have benefitted from the unearned income of rising house prices, to protect the inheritance of our eventual beneficiaries is to to me, yet another Johnson obscenity.

    The rationale of some Tories who are rebelling, is based on the issue of breaking a manifesto promise, others that there should be a decrease in taxation of any kind let alone a rise, but there are Tories who are genuinely disturbed and angry because they too believe that it is the least fair way of financing social care.

  • Barry Lofty 6th Sep '21 - 11:17am

    However social care is funded this country has to find a way to resolve the crisis we find ourselves in, a crisis our country should be ashamed of. Driving a wedge between the generations serves no purpose, after all any improvement in our woeful care system would benefit the young of today as they age as it would would the present recipients, this is a problem for people from all walks of life and whatever class.

  • jayne mansfieled 6th Sep '21 - 11:18am

    I hope that all UK parties will be in agreement.all uk parties will be in agreement.

    The mental and physical deterioration of old age that comes to some of us more than others, is no fun!

  • John Marriott 6th Sep '21 - 11:28am

    Like Jayne Mansfield I am and always have been “in favour of raising taxes to rebuild the fabric of a caring society”. However, to take the present dilemma of how to boost funding for the NHS in general and social care in particular, any increase in funding should come WITH strings attached. I do NOT want to see extra cash just handed over to the owners of Care Homes, be they individuals or businesses, for them just to take a bigger profit, for example. A ceiling on what can be charged to ‘customers’ and a commitment to enhanced salaries for care workers would be a good start.

    As the recipient of a state and an occupational pension, on which I pay income tax but not NICs, I object most strongly to other people helping to finance the possibility of my requiring residential care in the not too distant future, without my making a personal financial contribution.

    Therefore, I would be in favour of an increase in the basic rate of income tax. It is typical of the Labour Party that it seeks to avoid grasping this particular nettle. For them, it appears always to be other people, usually defined as ‘the rich’, who should pay. Come on guys, face reality. Nobody likes paying more tax; but, if this is necessary, then at least it should be based on an ability to pay, and, deep down, there are a lot of people, who could pay and, according to opinion polls, ARE willing to pay a little more, if it can be demonstrated that the service provided will be better and more equitable.

  • Jenny Barnes 6th Sep '21 - 12:04pm

    There are a lot of people who could pay…. I suggest a large increase in fuel taxes. Which would help encourage the shift to electric cars, public transport & active travel, and discourage people from buuying 3 tonnes of SUV to move around in. Its very strange to think that it has become normal to use 3 tonnes of machinery to move a 100 kilo or less human around. Yes, I know, special pleading for rural, near poor people (although truly poor people can’t afford any sort of car). Use some of the tax to start to fund UBI to compensate.

  • Jayne mansfield 6th Sep '21 - 12:06pm

    @ John Marriott,
    I am in total agreement with every point in your post.

  • Barry Lofty 6th Sep '21 - 12:33pm

    Jenny Barnes @ I am sorry but why does every solution have to be attached to global warming and punishing everyone for a certain, and for some, a necessary lifestyle, compromise and reality should be enough to keep everyone on board in solving the social services dilemma.

  • Good questions from Lord Wallace. The UK has a reasonably settled norm of public spending at around 40% of national income with some 36% coming from taxation and the remaining 4% from other sources of income and borrowing. Fluctuations in the economic cycle may mean spending and deficits as a % of GDP is higher or lower in any given year, but the trend is fairly stable over time and the tax take remains pretty constant as a proportion of national income.
    There are two important issues to bear in mind. Firstly, selective spending cuts do not mean macroeconomic austerity in fiscal terms. Increased health and pension spending has for many years past been offset by cuts on defense spending and since 2010 by selective cuts to local authority financing, welfare and per pupil school funding.
    Secondly, fiscal stimulus is a short-term economic boost (primarily delivered via automatic stabilisers), not a substitute for long-term investment in public infrastructure and services. It is employed to offset deleveraging when the short-term debt cycle enters a trough period or to jump start the ‘animal spirits’ that spur private sector investment.
    Maintaining consistent levels of private and public sector Investment in both physical and human capital are crucial to productivity. And it is increased productivity that ultimately drives living standards.
    Demographic changes mean that above inflation increases in health and higher spending on public/state pensions will continue for decades and can no longer be offset by cuts in defense spending or others areas. Consequently, it is inevitable that tax as a proportion of GDP will have to increase while borrowing for productivity enhancing investments and to effect the transition to net zero has to be maintained.
    There is an alternative to increasing national insurance to fund social care and it is based on the inter-generational equity of a Land Value Tax https://www.libdemvoice.org/a-residential-land-value-tax-approach-to-funding-adult-social-care-59639.html. Coupled with a Guaranteed minimum income as the base of the welfare system and a job guarantee program for the long-term unemployed, these can provide the kind of economic security that most people would likely welcome.

  • Peter Martin 6th Sep '21 - 2:55pm

    @ Martin,

    Can I suggest you look up the word Lexit? I’m not too keen on these portmanteaus, even Brexit, but I’ll not get too upset if anyone refers to me with that term. The EU isn’t an issue which causes a polarisation on traditional left and right lines. Whichever way we voted in the referendum we’d have ended up voting the same way as someone else we didn’t particularly agree with.

    I’ve sometimes pointed out that Osborne’s and Cameron’s austerity economics was a misapplication of a counter-inflation policy in mistake of a reduced govt policy. I couldn’t actually accuse Mrs Thatcher of that. There certainly was an inflation problem to be tackled when she came to office. It was the way it was tackled which caused the objections.

    The Thatcher govt reduced the rate of inflation from over 20% at the start of its term in 1979 to about 3% in 1986. So far so good. But then they blew all their gains by letting it go back up to nearly 12% in 1990. The mistake they made was to assume that inflation was a consequence of Govt spending being higher than the income they received from taxation. When the deficit shrank in the late 80’s, and actually turned into a surplus for a short time, they assumed their inflation worries were over. They neglected to take into account the total spending in the economy, much of which was fuelled by the Lawson credit boom.

    It’s not too hard to figure all this out for yourself if you take the trouble to do it. Economics is unfortunately quite unlike any other academic subject. Economists are incapable of coming to a consensus. There’s no real alternative but to do it all yourself.

  • @Jenny Barnes – “I suggest a large increase in fuel taxes. Which would help encourage the shift to electric cars, public transport & active travel, and discourage people from buuying 3 tonnes of SUV to move around in. Its very strange to think that it has become normal to use 3 tonnes of machinery to move a 100 kilo or less human around.”

    The promotion of electric cars doesn’t discourage people from buying 3 tonnes of machinery… Although the price difference might: ICE Vauxhall Corsa from £15,485, electric Corsa from £26,640.

    Given the revenues the government currently gets from fuel we can expect them to transfer these on to the electricity used to charge vehicles.

    @Barry Lofty – The trouble is that turning our backs to the pending perfect storm, doesn’t make it go away. So “Building Back Better” is and should be used as an opportunity to mitigate the worst effects of the storm on UK society.

  • Peter Martin 6th Sep '21 - 3:24pm

    @ Joe,

    “…..fiscal stimulus is a short-term economic boost (primarily delivered via automatic stabilisers), not a substitute for long-term investment in public infrastructure and services. It is employed to offset deleveraging when the short-term debt cycle enters a trough period or to jump start the ‘animal spirits’ that spur private sector investment.”

    You’ve said all this before but you’ve never actually said where it comes from. You’re good at quoting others so maybe you can provide some reference on this.

    The point about the Government is that it should , er, govern. And regulate. If everyone else is spending too little the Government needs to do the opposite and spend some extra and/or or cut taxes to enable total spending to rise. On the other hand if everyone else is spending too much, and there is an inflation issue, then the Govt needs to do the opposite. Spend less and/or tax more.

    There’s nothing “short-term” about this, any more than there is anything short term about applying the brakes and pressing on the accelerator when needed when you’re driving your car. You can’t sit back, at least not unless some expensive computer equipment is fitted, and let the car drive itself. Otherwise it crashes!

  • William Wallace 6th Sep '21 - 3:27pm

    Peter Martin: to repeat, Thatcher funded a regime of low taxes and high spending partly by selling public assets and North Sea oil to fund current spending. We have avoided repeated exchange deficits leading to a sharper decline in the pound by accepting (even encouraging) foreign takeovers of UK assets. There’s a limit to how long such policies can be sustained.

  • Peter Martin 6th Sep '21 - 4:07pm

    @ William Wallace,

    If Thatcher supported the economy from sales of public assets and oil revenues why the need to ‘borrow’ anything at all?

    The point about Nationalisation is that it really doesn’t cost anything. If it did the postwar Labour Govt wouldn’t have been able to afford to nationalise 20% + of the economy. It’s just an asset swap of bonds/govt stock for shares. Conversely privatisations don’t raise any extra spending money. They are just the same asset swap but in reverse.

    Oil is different. That can raise spending money but as Norway has discovered it can lead to the Dutch disease. So it isn’t always a blessing. You might want to Google that.

    https://qph.fs.quoracdn.net/main-qimg-d8a6ff2cfd456758569a185c68043de2

  • Thatcher shifted taxation from the better off to the worst off..The top third of households saw their standard of living rise the rest saw it fall; with the worst off seeing the largest fall… She failed in just about every section of her promised ‘revolution’..

  • Nonconformistradical 6th Sep '21 - 4:53pm

    “Thatcher funded a regime of low taxes and high spending partly by selling public assets and North Sea oil to fund current spending.”
    Meanwhile as I recall Norway put their oil loot into a sovereign wealth fund…

  • Nonconformistradical 6th Sep '21 - 4:54pm

    @Peter Martin
    “If Thatcher supported the economy from sales of public assets and oil revenues why the need to ‘borrow’ anything at all?”
    What do you do when you’ve sold all those assets and still fund yourself short of funds?

  • Nonconformistradical 6th Sep '21 - 5:00pm

    @Jenny Barnes
    “I suggest a large increase in fuel taxes. Which would help encourage the shift to electric cars, public transport & active travel”
    What about those working people who can’t afford to make the switch to electric cars but who for good reasons e.g. needing to carry round a large and heavy toolkit for work purposes still need their own road vehicle?

  • Peter Martin,

    automatic stabilisers do most of the work of smoothing business cycle fluctuations. Discretionary fiscal stimulus is by its nature is temporary and designed to offset abnormal falls in demand during recessions.
    As an economic recovery is stabilised, the stimulus is discontinued and there is a sort of handoff, in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. The source for this – John Maynard Keynes in 1937: “The boom, not the slump, is the right time for austerity at the Treasury.”
    Saying “There are only so many resources available in the economy so the trick is to use most of them but not try to use too many and cause inflation” is just another way of saying that fiscal stimulus should stop when the output gap is closed. This is what virtually every Chancellor attempts to do.
    The problem is that policy operates with a lag, so the relevant output gap is not the present one but the one that would prevail in the future, perhaps a year or more ahead. The second more important difficulty was the weight put on the estimation of the output gap itself. The problems were demonstrated by the ‘Barber Boom’ in the UK from 1971 to 1973.
    A Bank of England paper published in 2001 points to the role played by real-time mismeasurement of the output gap. Barber based his policies on the Treasury’s estimate of a large and growing output gap during what was then described as the ‘depression of early 1972’. Later analysis by the Bank of England suggests there was no output gap, at least as measured at the end of 1972. This resulted in inflation building to almost 10 per cent ahead of the 1973 oil crisis.
    An even more stark example occurred during the 1976 chancellorship of Dennis Healy, when the Treasury estimated the output gap to be 7.5 per cent. The government launched an economic stimulus designed to deliver 5.5 per cent annual growth for 1976-1979. This resulted in rampant inflation, peaking at 25 per cent and remaining at high levels for the rest of the decade. Subsequent analysis revised the estimate of the 1976 output gap down from 7.5 per cent to 0.7 per cent.
    Budgets and fiscal policy have to be planned in advance and on realistic assumptions (independently reviewed by the OBR). If you wait until inflation takes hold to act, it is already too late and will likely require inducing an economic recession to bring back future stability.

  • Brad Barrows 6th Sep '21 - 5:23pm

    @Peter Martin
    I’m confused by your initial post. A balance of payments deficit on current account is ‘paid for’ by a surplus on capital account – the point of the Balance of Payments is that they balance. Deficit spending by the government is a different thing completely from a current account deficit – deficit spending is when government spending exceeds government revenue, resulting in growth in National debt. By the way, while some imports can be of ‘resources’, your suggestion that ‘extra imports are real resources’ does not follow without an alternative definition of resources than usually used in economic discussion.

  • John Marriott 6th Sep '21 - 5:37pm

    You guys slay me! Fiddling while Rome burns doesn’t do justice to your point scoring! We don’t need a history lesson. We need to find solutions. We have a SERIOUS problem with caring for an ageing population. Whether we reform our systems or not, they still have to be paid for. From my primitive understanding of fiscal matters, there would appear to be four sources of ready cash, in no particular order, namely, VAT, Income Tax, NICs and borrowing. We’ve already borrowed up to the hilt because of Covid, so let’s look at the other three. VAT depends on your ability to afford the price. It’s a bit hit and miss in my opinion. NI excludes the very people, who are likely to benefit in the near future. So that leaves us with Income Tax. That’s the one I’d go for.

    I’ve got no quotes or links to offer you, no famous names from the past to draw to my defence. What I have got is 16 years as a County Councillor dealing with Social Services and, since February this year, seeing my wife’s elderly cousin, over whom she and another cousin had POA enter a care home and slowly succumb to death from Alzheimer’s. She had plenty of money, which had been steadily declining over several years as she required more care in her home (which we were about to sell, before probate kicked in). She received marvellous care at all times; but at a cost – towards the end nearly £1000 a week – and, had she survived, would have soon emptied her bank accounts.

    There must be thousands of people with a similar story to my wife’s cousin up and down the country. Who knows, at my age, I could be joining them soon. So, stop prevaricating and making excuses. Put your hand in your pocket and PAY THE PRICE!

  • John Marriott,

    a social care solution was provided in the 2014 Care Bill https://www.gov.uk/government/news/government-publishes-care-bill that provided for a cap on the costs that people had to pay for care and set out a universal deferred payment scheme so that people will not have to sell their home in their lifetime to pay for residential care.
    The legislation was not brought into force by the successor government and has been sitting awaiting new proposals since.
    Norman Lamb as Care minister said at the time:
    “For the first time in a generation we are addressing the pressing need to support people when they reach crisis point and need help most. People will finally be able to plan for their later years and not have to fear being saddled with catastrophic costs to pay for care.
    This, coupled with the new national eligibility criteria, security that our care is not lost if we move to a different part of the country and giving everyone who is eligible access to a personal budget, will greatly improve the outlook for later life.”
    Social care is, however, a relatively small part of the challenges Lord Wallace references when he says ” Local government is close to bankruptcy; education spending has fallen in real terms by 9% over the past 10 years; even Jeremy Hunt is calling for a sharp increase in NHS funding. Climate change and technological innovation require public as well as private investment. Increasing longevity means rising demands for social care.”

  • What would levying a fixed percentage of inheritance tax on all estates bring to the exchequer? How much or little would it fund free personal care for everyone?
    I genuinely have no idea of the amounts involved and it obviously depends on the percentage levied but having to give up part of an inheritance for which you have contributed nothing seems not unreasonable.

  • Barry Lofty 6th Sep '21 - 6:09pm

    John Marriott @ Well said John, none of us like paying taxes but this should be a cause dear to everyone’s heart.

  • Jayne mansfield 6th Sep '21 - 6:31pm

    @ John Marriott,
    I agree with progressive taxation.

    @ Joe Bourke,
    What happened about the idea of a wealth tax with a tax on world wide assets which I think was mooted by the Wealth Tax Commission, the taxing of assets as well as income?

    This government is presiding over a widening gap between rich and poor.

  • John Marriott 6th Sep '21 - 6:48pm

    @Joe Bourke
    I appreciate that I have been selective in my critique. I really am not interested in your regurgitation of history, except perhaps you might have run us past Dilnot instead of quoting Norman Lamb!

    Local Government reform requires more than just cash, as I have written many times and requires legislation. Climate change is a massive challenge that only the whole world can confront. But adult social care, given we already have proposals on the table, is something we could deal with relatively quickly. So, Joe, how about putting 2p on the Basic Rate of Income Tax for starters?

  • Jayne Mansfield,

    David Willetts discusses forms of wealth tax in his New Stateman article https://www.newstatesman.com/politics/uk/2021/02/david-willetts-idea-young-people-are-getting-raw-deal-now-widely-accepted
    He writes ““I personally think the triple lock has come to the end of its life. The triple lock should not be repeated – you should have some gradual long-term link to earnings, and if resources are available they need to go to families and things like maintaining the help through Universal Credit.”
    “…you could certainly do things like reform capital gains tax so there are fewer exemptions and perhaps increase the rate… You could reform council tax, which is very regressive and collects proportionally much more from people in low-value properties than high-value properties. ”
    His other big suggestion is likely to be equally unpopular among both main parties: namely, compelling those with assets to tap into their property wealth to pay for their social care.

  • John Marriott,

    local government may require more than cash but it still requires substantial funding and dealing with climate change is going to require substantial long-term investment. As the OBR has pointed out the longer you leave the more it is likely to cost in economic terms. I have contributed my thoughts on Adult social care in the link above and I believe a residential land value tax is the best option. The NHS alone will require funding equivalent to more than 2p on income tax. This is without the issues Lord Wallace highlights of education funding, public transport subsidies and other public services across the board. I expect we will have to move towards road pricing to replace dwindling fuel duties as more people opt for electric cars. This is why we need manifesto’s and budgets to bring tax and spending plans together.

  • John Marriott 6th Sep '21 - 7:39pm

    @Joe Bourke
    A land value tax? And how long would that take to put in place? What planet are you on? I guess your answer to my question is negative.

  • Peter Martin 6th Sep '21 - 7:53pm

    @ John Marriott,

    “Whether we reform our systems or not, they still have to be paid for.”

    They have to be paid for in the sense that we need to find resources. No-one is disputing that. The question is how and how we do it fairly. Money is never a problem. Resources are. We have to get this right.

    “From my primitive understanding of fiscal matters, there would appear to be four sources of ready cash, in no particular order, namely, VAT, Income Tax, NICs and borrowing.”

    There are lots of other taxes too. Borrowing can be in many forms. We can borrow US$ from the IMF and/or the Americans. We can borrow ££ from the BoE. These have different macroeconomic effects so we need to be clear which one we mean.

    If we borrow from the BoE we can get the money interest free. The Govt can spend it into the economy and due to the multiplier effect most of it, or even possibly more, will come back as Govt revenue. But there still could be an added inflation problem. So I’m not arguing that extra taxes may not be necessary.

    On the other hand if we borrow it from the US or IMF that will be like us borrowing money from a bank. It will have to be repaid with interest.

    My mother has recently passed away and needed some social care at the end so I do have some personal experience of what you are arguing against. Sure, my siblings and myself would have liked the cost of this as an inheritance. Who wouldn’t? But at the same time it can’t be right to burden ‘Generation rent’ with the bill when there was, just about, enough in her assets to cover the cost.

    @ Brad Barrow,

    Yep. The B.O.P. will be always be zero if the currency is allowed to freely float. But some of the capital surplus will be in the form of overseas buyers buying Govt debt. This needs to be recycled into the economy by deficit spending. The Government’s Deficit has to equal everyone’s else’s surplus. This is the sum of net domestic savings plus the surplus accumulated by our overseas trading partners.

    @ Barry Lofty,

    “…none of us like paying taxes but this should be a cause dear to everyone’s heart.”

    True that no-one likes paying taxes. And if extra taxes need to be paid to cool an overheating economy then they need to be paid. Period. But they don’t need to be paid to plunge the economy into a downward spiral of recession, possibly then leading to depression.

  • Peter Martin 6th Sep '21 - 7:54pm

    @ Joe

    “Budgets and fiscal policy have to be planned in advance and on realistic assumptions ”

    Yes this is a valid point. But the same problem applies to monetary policy too. When interest rates, unlike now, are high enough to be both lowered and raised, or monetary policy loosened or tightened, then someone has to make a call about that. Making a call on whether to tighten or loosen fiscal policy is not much different.

    Adjustments in fiscal policy have the advantage that they can be made locally and so, unlike monetary policy, stimuli or anti-stimuli can be targetted where needed. In principle we could have a lower rate of VAT or income tax in a depressed area, for example.

    @ Nonconformistradical,

    “What do you do when you’ve sold all those assets and still find yourself short of funds?”

    The Government is not a local council or a household and can’t be short of funds. Selling or buying assets by the Westminster Govt is macroeconomically inert. Unlike taxation, it doesn’t change anyone’s spending patterns. If the Government sells me some shares, at a fair price, then neither myself or the Govt are worse off. I’m unlikely to do anything differently afterwards than I would have done before.

  • I agree with Lord Wallace’s central premise , we need an increase in public spending but it needs to be accompanied with a fundamental re-evaluation of our tax system. As Liberal Democrats, we should be leading the way in asking the difficult questions. At present income tax, NICS, VAT, Council Tax, Business Rates are a legacy of a twentieth century system unfit for the third decade of the 21st Century.

    As we seek to address the NHS backlog, the lack of affordable housing, education and the climate emergency we need to make the case for taxation to fund society and a system that is fit for purpose. Digital transformation of the economy means increased productivity without increasing employment. A job for life will soon be a memory and people will have to retrain several times over a lifetime.

    The NHS will need to adjust from being a sickness-treating service to an enabler of public health blending the real world , technology, diet, genetics and exercise. Our education system will need to teach creativity and flexibility. The elephant in the room is the need to decarbonise our economy.

    A progressive tax system more focused on spending rather than incomes could be a start. Road usages charges rather than the myriad of vehicle excise and fuel duty charges will be needed. With a decade of QE inflating asset prices, a welath tax should be considered.

    The baby boomer generation benefitting from jobs for life, rising house prices and final salary pension schemes can bear a higher burden of taxation. This should at least be the starting point of a debate on serious reform of our system and our party should lead it.

  • John Marriott,

    I guess you have not read the article https://www.libdemvoice.org/a-residential-land-value-tax-approach-to-funding-adult-social-care-59639.html. If it was included in this autumn’s budget it could be rolled out from April next year. All of the necessary data and systems are already in place. The Land value tax base is simply calculated as the current market value of a residence (land and buildings) less an allowance equivalent to the local housing allowance as a substitute for the value of the buildings. The excess of value over the local housing allowance is subject to a property tax – say 0.5% or about 0.25% of whole property value on average. The social care tax is assessed on property owners only not renters. Neither tenants or owners occupying lower value property for their area would pay the tax.

  • John Marriott 7th Sep '21 - 8:13am

    @Joe Bourke
    I don’t have the kind of filing system, whether mental or physical, to recall everything you write on LDV, especially something that is well over two years old! I know, of course, from your many contributions to this website that you are a great fan of LVT, which, in the long term, may have its day. But not at present, I would agree and certainly not in the chaotic brain of Bozza or the calculating brain of Rishi!

    We need a solution to the problem of adult social (and particularly residential) care now and, as I wrote earlier, there would, according to fiscal experts, appear to be four ways of funding the Dilnot proposals, and LVT is not one of them. My answer would be by a hike in Basic Income Tax, something that has apparently not happened in decades. Out of the four I mentioned, what would be yours? Your sparring partner, Peter Martin, seems to prefer borrowing, if I read him right. I guess, as that comes from him, you would rule that out. So, what’s it to be, VAT, NICs or Income Tax? Or, shall we just carry on this endless debate and get nowhere?

    PS I had this reply ready last night around 9pm; but got the dreaded ‘flood alert’ and wasn’t prepared to wait over three hours before pressing ‘’Send’ again!

  • Peter Martin 7th Sep '21 - 9:16am

    John Marriott,

    “Peter Martin, seems to prefer borrowing, if I read him right.”

    Not quite. Why would anyone borrow what they have the power to create at the tap of a computer keyboard? So I’m certainly not advocating borrowing from the IMF or anyone else, apart from the BoE perhaps. As the Government owns the BoE it’s not really borrowing. Its more like moving money from one trouser pocket to another.

    The argument against is that it does have the potential to cause inflation. This is when the process has to be wound back and tax rises instigated to cool down the economy.

    This is nothing particularly new or radical. It’s how Government has been financing its affairs for the last 13 years.

  • Nonconformistradical 7th Sep '21 - 9:59am

    @Peter Martin
    “The Government is not a local council or a household and can’t be short of funds. ”
    The why do countries sometimes ‘go bankrupt’ and get into situations where no-one will lend them any more?

    “Selling or buying assets by the Westminster Govt is macroeconomically inert. ”
    How so if the government has run out of assets to sell?

    “If the Government sells me some shares, at a fair price, then neither myself or the Govt are worse off.”
    Shares in what – if it has already sold all the country’s ‘family silver’?

  • Nonconformistradical 7th Sep '21 - 10:06am

    I’m in sympathy with Ian Sanderson (RM3)’s post at 7th Sep ’21 – 9:00am

    As a reasonably comfortably off senior citizen I could afford to contribute a bit more – my main concern is the present government’s (in)ability to spend it wisely, based on their track record e.g. Covid testing.

    It bothers me also that some participants here – Joe Bourke and Peter Martin – persist in trying apparently to reduce the discussion to macroeconomics. Why not devote a bit – or a lot even – more attention to ordinary human beings and their needs?

  • Peter Martin 7th Sep '21 - 10:26am

    @ Nonconformistradical,

    The government could have another go at selling off Network Rail, or Railtrack as it once was. They could sell off the Severn Bridge or the Humber Bridge. I wouldn’t support that but it is possible. It wouldn’t give the Govt any more spending money. There wouldn’t be an issue of Govt cheques to give us all our share of the proceeds of the sale.

    The Westminster Govt doesn’t rely on others lending it money. It owns a bank and borrows from that if it is short. But if anyone wants to lend it money at ultra low rates of interest it will accommodate them. Just like my bank doesn’t need any money I may
    lend to it.

    So the Westminster govt can’t go bust. But the Scottish or Welsh govts could because they don’t own a central bank. Neither do the countries of the eurozone.

    All economics is about people and how we organise society. If Govts get it all wrong then ordinary people suffer the most. I’m sure you don’t need me to give you examples to support that statement.

  • Jayne mansfield 7th Sep '21 - 10:35am

    Thatcherism never died. If we want decent public services we have to pay for them.
    The idea that one can have low taxation and good public services is a myth, a denial of reality. There needs to be a change in attitude to the tax, so that instead of it being something to avoid, it is accepted for what it is, the means by which we create a civil, socially just society , that we all benefit from and wish to live in.

    As John Marriott says, the need is urgent , and I believe that progressive, income taxation is the simplest , fairest and most immediate way of raising money,, with those most able with those who earn more paying progressively more.

    As someone who pays income tax, I am never quite sure why paying national insurance ended at retirement when are still leading active lives.

    I agree with John Armah there also needs to be a fundamental re-evaluation of the tax system.

    As for a cap on assets, it is not surprising that the conservative ‘Red Wall’ MPs are feeling worried. A cap of £80, 000 would swallow up the whole fo the assets of many Northern constituents ( minus the £23.350), whereas in the wealthier south , even modest homes are worth millions , leaving those fortunate enough with more . So much for levelling up.

  • On the specific question of social care, William Wallace states, “Increasing longevity means rising demands for social care”. I’m not sure that’s correct. More precisely, the cause is that people are on average spending a higher proportion of their lives unable to look after themselves without help: That’s really the product of our increasingly unhealthy, sedentary, lifestyles – and in the long run, it’s some extent solvable if we can get people to take more responsibility for their own health. Right now, we do need to find more funding for social care to sort out the immediate crisis, and I agree with those arguing that increasing income tax is the fairest way to do that. But we also need to look at the wider issues of how poor health choices today can lead to increased health and social care demands in 10-20 years’ time – otherwise social care demand will keep on growing unsustainably. Ditto demands on the NHS.

    And in political terms, asking people to pay more tax is always a hard sell. It becomes a bit more convincing if we can show that we really have thought about whether there are other ways to solve each problem, rather than always defaulting to, demanding that the Government spends more.

  • Barry Lofty 7th Sep '21 - 10:44am

    Jayne Mansfield @ I happen to live in the wealthy South but I can assure you our modest two bedroom house is certainty not valued in the millions!!

  • Nonconformistradical 7th Sep '21 - 10:48am

    @Peter Martin
    “All economics is about people and how we organise society. If Govts get it all wrong then ordinary people suffer the most.”

    Exactly – it is ordinary people who suffer the most. It is ordinary people who struggle to put food on the table, roof over head etc. They need these issues fixed today – not in a few years’ time.

    Meanwhile the rich get richer. And I it appears to me the rich spend a smaller proportion of their income/wealth than the poor (who don’t have any wealth in the first place and whose income may be precarious).

    Peter – what do you propose to do to help the poor today – not in a few years’ time when some macroeconomic change might eventually have worked its way through the system? Because it seems to me that changes in macroeconomic policy benefit the already well-off in the short-term and hurt everyone else in the short-term and possibly in the long-term.

  • John Marriott,

    the 2019 LVT article is linked above on 6th September 2.22pm. The Japanese solution to the problem of funding social care is a hybrid of social insurance contributions, central and local taxation and user contributions https://www.nuffieldtrust.org.uk/files/final-the-japanese-social-care-system-journalist-briefing.pdf. National and local taxes fund circa 45%, social insurance contributions 45% and user fees 10%. Every member of the population must pay into the system from the age of 40. In the UK where student loans are payable up to age 50 this may have to start later or student loans be curtailed earlier if a similar system was introduced.
    It appears that we are likely to see a hike in national insurance announced today as a means of paying for adult social care in England and central grants to devolved administrations coupled with a lifetime cap on individual contributions. This covers costs of care services only not residential accommodation costs.
    David Willetts has published quite a bit of work on the need for property and/or wealth taxes https://www.resolutionfoundation.org/comment/we-face-a-choice-of-funding-the-nhs-through-capital-taxes-or-cutting-our-childrens-pay-packets/ As he explains
    “… the growing cost of maintaining our existing welfare state. By the end of [this] decade the fiscal gap is set to grow to the equivalent today of £20bn a year, and then to £60bn after another decade. That translates to an income tax hike of 15p in the basic rate by 2040, the burden of which will overwhelmingly fall on the generations following baby boomers.
    Is that kind of tax rise really the legacy we – a generation that owns half the nation’s wealth £13tn of wealth – want to bequeath to our children and grandchildren?
    If we just borrow the extra money to pay for the increasing costs of the welfare state, notably health and social care, then public debt rises to 230% of GDP over the next fifty years [This was before the Covid Pandemic hiked public debt].
    Neither ongoing income tax increases of up to 15p or borrowing at WW2 levels is a realistic permanent funding solution for maintaining the welfare state – printing money even less so. Japan’s social care solution does at least recognise that.

  • William Wallace 7th Sep '21 - 10:57am

    Increasing longevity means rising demands on health provision (I speak from personal experience, hardly having bothered the NHS between the ages of 19 and 60), a likely increase in social care demands, and rising pension costs. (At the time of the People’s Budget, life expectancy was low enough that the majority of men never drew their pensions.) The UK spends much less than comparable countries on public education, research and development, and public investment. The climate emergency imposes additional costs. Government has to respond to long-term needs more than short-term interests.

  • Peter Martin 7th Sep '21 - 11:14am

    @ Joe,

    It’s good you’re mentioning Japan with some approval. They have a National Debt to GDP ratio of 266%. Japan hasn’t sunk into the Pacific quite yet.

    “Printing money” isn’t really necessary in the digital era. Just a few taps on a keyboard and hey presto. It’s still a mixture of the two though. Even the Japanese Yen is either printed or created in a computer. You don’t get gold coins in your change in Tokyo!

    The function of central taxation in Japan, like the UK, isn’t to fund anything. It’s to reduce inflation and give the 100% fiat Yen a worth and a value. So that when Government employees do tap the numbers into their keyboards to spend on Social Care, Education, Defence and all the other things they spend their Yens on they will actually buy something in the marketplace.

  • Peter Martin 7th Sep '21 - 11:33am

    @ Nonconformistradical,

    “what do you propose to do to help the poor today ?”

    For a start make a better attempt to explain why an increase in National Insurance is quite unnecessary at this time. The poor aren’t necessarily the elderly who need social care and the rich, with some exceptions, certainly aren’t ‘Generation rent’ who will have their net wages reduced.

  • John Marriott 7th Sep '21 - 2:27pm

    @Joe Bourke
    As I often say, we on these islands expect Scandinavian levels of public spending at North American levels of taxation. Why is a rise in Income Tax such a hard pill to swallow for some people?

    Despite having paid all my taxes during my working life (1962 to 2017 – from being a student to retiring as a County Councillor – and, since 1966, making contributions, enhanced in my case between 1980 and 1999, to an occupational pension scheme, which actually benefitted my retired colleagues at the time), I am still prepared to pay a little more via Income Tax if that’s what it takes to right a few wrongs. As far as leaving behind an unfair legacy to my children and grandchildren, if that’s what you think, I wonder whether that’s down to a guilty conscience or something.

  • Peter Martin,

    as noted above the Japanese system for funding social care is a hybrid system of national and local taxes (45%), social insurance contributions (45%) and user fees 10%. Japan is a major exporter and earns trade surpluses that substitute for a domestic fiscal deficit in sectoral balance terms.
    One of the reasons Japan has a high level of public debt is the very high saving rate of its aging population. Much of these savings are in post office accounts that are in turn invested in government bonds and recycled as overseas investments making Japan a top creditor nation. That is why Japan has a positive Net International Investment Position NIIP while the UK’s NIIP is a negative position UK NIIP
    That is the point about borrowing. If its invested it can generate economic returns to offset a declining or stagnant domestic economy and the fall in the purchasing power of money over time. If the borrowing is for consumption then the NIIP will decline as will a country’s financial position and creditworthiness as reflected in comparative sovereign bond rates.
    Japan had its financial crisis at the end of the 1980s and had had a low growth, low inflation economy with stagnant real wage growth ever since, despite numerous rounds of QE and fiscal stimulus over the past 30 years.
    Our financial crisis was in 2007-2008 and we have experienced the same result as Japan without the offset of a trade surplus and consequently a worsening NIIP.
    So William Wallace is right when he says “Government has to respond to long-term needs more than short-term interests.”

  • John Marriott,

    As Lord Wallace comments above increasing longevity means rising demands on health provision, a likely increase in social care demands, and rising pension costs (both public sector and state pensions) as well as education and addressing the climate emergency.
    I expect a 2p rise in income tax is the minimum we will need as well as increases across the board in most other taxes including VAT and national insurance to maintain a acceptable level of public services.
    However, for funding adult social care specifically, I believe that property taxation has distinctive merits and can meet the aspirations of many to leave their family home (without too much debt attached) to their children.

  • It’s debateable whether the Johnson ‘revolution’ in social will make much difference to the people on the receiving end. What it will undoubtedly do is to put profits in the pockets of the private for profit providers.

    Care home operators are making up to £1.5bn a year in profits with hundreds of millions of pounds going to offshore investors.Many of the firms that provide most of the UK’s 465,000 care home beds are owned or backed by hedge funds, while some of the biggest are based in overseas tax havens.

    The Centre for Health and the Public Interest (CHPI) estimated that £1.5bn a year – 10 per cent of the care home industry’s £15bn income – “leaks” in the form of rent, dividend payments, loans, directors’ fees, and profits – money not going to front line care. The CHPI report said it is “very difficult” to find out where the £15bn spent on care homes each year goes.

    I’ve yet to hear Liberal Democrats challenge this situation.

  • Behind the title question about financing lurks another larger and more difficult one – how do we reverse the UK’s longstanding slow decline as an industrial and commercial power? In other words, ‘Building Back Better’ is more a question of governance/management than of just finance.

    The post-War Labour-led orthodoxy had delivered many good things, but it hadn’t reversed the UK’s decades long industrial decline and by the 1970s it was steadily unravelling, finally collapsing in the 1978/79 Winter of Discontent.

    Thatcher’s strategy after 1979 was to use austerity to control inflation and market discipline to restore efficiency. The austerity (quietly reversed under cover of Falklands War spending) was a disaster for exactly the reason Peter Martin has often explained and, while privatisation yielded some benefits, these were mainly grabbed by insiders and financiers. And that created a wedge of powerful people who benefitted mightily from Thatcherism and kept it going long after it should have been abandoned.

    The windfall of North Sea oil disguised the problem for a time but as it reduced from the mid-1990s a replacement was needed. So, voters were kept focussed on and scared of *public* debt while *private* debt was quietly run up – the principal avenues being mortgages and university tuition fees. And those are very big numbers; tuition fees are on course to equal nearly half the national debt in time.

    In short, the Tories have been running the economy as a Ponzi scheme and that cannot end well. We urgently need to develop a new understanding of how the economy should work and a corresponding approach to its proper management as a matter of urgency. That will necessarily include the financial dimension but much else besides.

    Fortunately, that is all perfectly doable, and the answers are squarely in the Lib Dem corner of the political space. The difficulty is that there doesn’t seem to be any institutional framework that can do this – or did I miss something?

  • Peter Martin 7th Sep '21 - 5:49pm

    @ Joe,

    “I expect a 2p rise in income tax is the minimum we will need as well as increases across the board in most other taxes including VAT and national insurance to maintain a acceptable level of public services.”

    Well good luck with getting elected on that kind of platform. The electors will be saying that if 2p is the minimum then then the actual figure will likely be a lot more. Then they’ll be asking what will the rise in VAT be?

    It wouldn’t be so bad if the taxes being raised weren’t so regressive. You can’t get more regressive than a tax rise on National Insurance which is a tax on the jobs of the lower paid.

    And what is this all for? It’s so that someone in a £500,000 house can leave at least £420,000 of it to their offspring who probably don’t need it themselves anyway. So why would anyone living in rented accommodation with some small hope of getting on the housing ladder want to vote for that kind of taxation policy?

  • Peter Martin 7th Sep '21 - 6:17pm

    It’s interesting that some on the political right sort-of-get-it while those on the left who should be standing up for working class interests are more concerned about the inheritances of the upper middle class, and want to reduce workers’ effective income by burdening them with higher regressive taxes.

    As John Redwood points out the so-called Office of Budget Responsibility has a poor track record when forecasting fiscal outcomes. Apparently we have found another £26 billion from somewhere. I wouldn’t quite agree that a reduction in taxes would necessarily reduce the deficit, (it’s inflation that might be a problem not the deficit), but at the same time there’s no need to increase them at the moment. An extra tax on jobs is plain stupid.

    https://johnredwoodsdiary.com/2021/09/06/a-tax-rise-is-a-very-bad-idea/

  • James Fowler 7th Sep '21 - 8:16pm

    @ Peter Martin, some superb points.

  • The Government is intending to raise £5.3 billion for social care over three years between 2022-23 and 2024-25 via a new health and social care levy, funded by national insurance contributions i.e the equivalent of a 1% rise in NI over 1 year or 0.33% per year. IF NI is increased 1% or 2%, presumably any additional funds raised will be directed towards the NHS.
    Following the Dilnot proposals for a cap, from October 2023, nobody will pay more than £86,000 for their social care – regardless of their assets. It is unclear whether the cap will cover just care costs or hotel costs as well – the living costs of someone in a residential home.The Government will fully cover the cost of care for those with assets under £20,000, and contribute to the cost of care for those with assets of between £20,000 and £100,000.
    The OBR has lowered its growth forecast for 2021/22 to 4.0% from 5.5% but compensated by lifting the 2022/23 projection to 7.3% from 6.6%. I imagine that an NI rise of 1.25% (0.3%) of GDP will make little if any difference to that forecast outcome.
    The real issues are long term sustainability as Lord Wallace stresses and as John Marriott likes to remind us from time to time “we on these islands expect Scandinavian levels of public spending at North American levels of taxation.” The Nordic model is a real world example of what can be achieved with well funded public services and welfare systems, just as the USA is a real world example of the societal tensions and financial insecurity that comes in the absence of such systems.

  • Peter Martin 8th Sep '21 - 10:08am

    “we on these islands expect Scandinavian levels of public spending at North American levels of taxation.”

    Do we?

    It really depends on who is paying the extra taxes and what the public spending is for. The extra taxes that are being levied to supposedly support care for the elderly are actually better described as being to support the wealthy elderly. For those with modest financial liquid assets of around £106k or lower the currently proposes changes won’t make any difference. They’ll still have to get down to ~ £20k or lower before they qualify for free care.

    But for those on something like £500k they’ll only need to get down to £414k before they qualify.

    So if you’re looking for a fairer and ‘Scandinavian type system” how about imposing a substantial inheritance tax on all properties? This way the burden is shared out equally and according to ability to pay.

  • I was pleased that Peter Martin mentioned inheritance tax. My earlier reference had received no response making me think that the LDV experts had dismissed it out of hand. It would help the debate if some of these experts could calculate a likely amount that say a 25% inheritance tax would bring the exchequer. Also, what exactly is the total cost of providing free personal care for everyone? The latest government proposals say that this will be impossible to afford, but the Scottish government, for example, seem able to finance such a policy

  • John Marriott 8th Sep '21 - 2:03pm

    @Peter Martin
    You bet they do!!

  • Peter Hirst 8th Sep '21 - 5:06pm

    Once again the remedy is electoral reform. With PR political parties need to reach out to a larger part of the electorate. So to retain or take power they need to appeal to over half the country. This provides an incentive for levelling up.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

If you are a member of the party, you can have the Lib Dem Logo appear next to your comments to show this. You must be registered for our forum and can then login on this public site with the same username and password.

To have your photo next to your comment please signup your email address with Gravatar.

Your email is never published. Required fields are marked *

*
*
Please complete the name of this site, Liberal Democrat ...?

Advert



Recent Comments

  • Peter Watson
    @Paul Barker "we have similar Values as The Greens (outside Scotland) & appeal to similar Voters" Is it the Greens or the Lib Dems who have different value...
  • Fiona
    Too often when people talk about 'dealing with the Greens' it's about whether or not we should do deals with them, or warning that they are not (always) our fri...
  • Denis Mollison
    @Jaz - You say "I can point to a major document signed by multiple transphobic organisations and individuals in the UK that calls for the elimination of people ...
  • Katharine Pindar
    Lorenzo: again you are making a helpful comment, thank you! William, well done the Parliament choir! But I am no longer participating in the great Masses, ju...
  • William Wallace
    Katharine: Do tell us what you are singing at present! I should tell all those who think that Westminster has no redeeming elements that the Parliament Choir ...