LibLink: Giles Wilkes – Tax cuts are exactly what we don’t need

In the Financial Times today, Lib Dem blogger (turned FT leader writer) Giles Wilkes – former special adviser to Vince Cable and chief economist at liberal think-tank CentreForum – lays into the party’s flagship manifesto commitment to raise the personal allowance:

Giving hundreds of pounds to millions of people is rather popular. Since this is what raising the income tax threshold implies, it is no shock that both the Conservative and Liberal Democrat parties want it in their manifestos. Sadly it is an idea that gets worse with each passing year.

A commitment to “take people out of tax” first emerged in 2008 at a Lib Dem conference. Strategically it was an astute move, threading between the Conservatives’ preference for inheritance tax cuts and Labour’s obsession with doing everything through welfare. It showed Nick Clegg, Lib Dem leader, wrestling his spending-obsessed party towards a more economically liberal philosophy.

But the nature of a policy changes with circumstance. Barely was the strategy agreed than Lehman Brothers went bust, the economy collapsed and £100bn of tax revenues evaporated. Whoever next governed would face endless deficits that would absorb any easy savings earmarked for the tax cut. Yet when the coalition government was formed in 2010, a large rise in the income tax threshold went into its founding agreement – increasing the need for cuts to welfare and public services, which hurt the poor. Little benefit would accrue to the truly indigent, whose income was below the threshold. The financial crisis had turned a smart idea into a regressive own goal. …

Contrary to some conventional wisdom, the Lib Dems’ membership has not shifted right under the coalition. It is their flagship tax policy that has wandered across the line. This will undermine the prospect of future co-operation with Labour – something most members want. It will also weaken their hand in any future alliance with the Conservatives, since the Lib Dems lose more support than the Tories from further austerity, which a strategy of more tax cuts guarantees.

You can read Giles’s article in full here in the FT (registration required).

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16 Comments

  • I have written such comments, along with a number of other contributors on many occasions on LDV. I am amazed how Libs and Lib Dems have been so easily taken in by such a policy. I can only think that some in our great party, and some of our voters, have mistaken previous “fair tax” policies (eg Local Income Tax, now in the Lib Dem waste bin) because they cut taxes for some, as being similar tax cutting policy. What we need to be about is more fairly redistributing resources down the income spectrum – increasing the income tax threshold, as Giles Wilkes explains does not do that, and significantly increases pressures on the less well off. This occurs both by pressure on public services, which are a greater proportion of their social wage than those with higher income, and by direct pressure on various payments that people are or have recently been, entitled to. This policy needs reversing – and fast!

  • Giles Wilkes wrote —
    “….Barely was the strategy agreed than Lehman Brothers went bust, the economy collapsed and £100bn of tax revenues evaporated. ”

    It has been pointed out to me that Clegg’s Tax Cut positioning came NOT just before Lehman’s collapse but afterwards. 

    Lehmans filed for bankcruptcy on 15th September 2008 – Clegg made his speech on 17th September 2008.

    I think most would agree that this rather important detail of history puts Clegg’s decision in a different perspective.

  • Neale Upstone I think I agree with you, although I am not quite sure I get all your implications! It is not only the economics that is wrong, but the accountancy, and the thinking behind the accountancy. A little while ago there was a frisson in the media over “profit centres”, but it went away again, as these things do! It is this idea that we live in a disconnected society, where there is no “cross – subsidy” which is all wrong. In a smaller world, we should be totally connected. At present we don’t. Our accountancy is totally dysfunctional, and until politicians and business leaders recognise this, and instruct the accountancy bodies that they need to do something about it, we won’t get anywhere. Integration, integration, integration should be our slogan!

  • Just my 2 cents

    Tax cuts for the less well off is what we need ie less means testing it is in fact easy too adjust the starting rate of the £0.40 tax rate so the entire population gets the same annual tax cut.

    The poor will spend the money and help growth not even mentioning that much of the reduced income tax will be paid back into the exchequer via indirect taxes. The reduced tax also will help people to contribute into nest pension which is ideal far better than not saving atall.

  • Neale Upstone is right, and Giles has written a compelling application to be its Chair. The point made about expenses claims puts it into perspective.

    It is absolutely right to ask why, at a time when such huge amounts are needed to balance the books, certain people feel compelled to bounce the party into talking about tax cuts. It would be perfectly right to say that at this point they cannot be afforded. (It would also be right to say, on a point on which for once Stephen Tall and I agree, that the right tax to cut would be NI and not income tax.)

    The pre-manifesto’s big problem was that it ringfenced so many areas of public spending and said so little about tax increases that people will draw obvious conclusions about what would be cut. The concern about the tax threshold policy is partly about popularity, as Giles has pointed out – but read his full article, which makes a number of other relevant points.

  • Eddie Sammon 16th Oct '14 - 2:35pm

    Neale, banks cannot create money and charge interest on it. If they had magic sterling printers in their offices then why would some be going bust? Fractional reserve banking means they have to keep a fraction of deposits in reserve, it’s not multiple reserve banking.

    Where people are getting confused is the difference between the monetary base and the money supply. Printing money expands the monetary base and only central banks have this power.

    I also disagree with economists like Giles and Vince Cable (if you want to call him one) that think fiscal discipline is important, but monetary discipline is not very important. House prices are going up in London by nearly 20% per year, why should someone on a 1.5% tracker mortgage not be asked to pay more?

  • What Neale Upstone said.

    The challenge is especially for social liberals who by and large and with exceptions have rarely bothered to think about how the economy actually works. It’s so much easier to skate over the surface while calling for more ‘rights’ (or tax cuts or whatever polls well) even when it’s clear that the underlying economic plumbing is set up to deliver an outcome most liberals deplore. In a very real sense the rise of ‘economic liberals’ in the Party is because nature abhors a vacuum; even thinking that is linearly descended from Thatcherism and which is a demonstrable failure (except for a tiny plutocratic elite) is better than nothing and will fill the void.

    For example, the big supermarkets are vastly overcharging as has been demonstrated by Aldi and Lidl which are around a third cheaper – yet remain hugely profitable. What passes for ‘normal’ commercial practice by the big supermarkets violates everything economists know about the conditions required to establish a competitive market so they are being permitted to levy what is in effect a highly regressive tax – except that it’s for PRIVATE benefit.

    Simple changes in ground rules that would cost the government essentially nothing to enact would prevent this abuse and make us all better off without means testing or indeed welfare payments of any kind.

  • Eddie Sammon – “banks cannot create money and charge interest on it.”

    But that’s exactly what they do. And it’s also, somewhat perversely, why they are going (have gone!) bust. They are incentivised to create loans which cost them essentially nothing (a few mouse clicks and some paperwork) but gives large interest income. Of course you don’t get ought for nought and the hidden downside was that RISK increased until it blew them up. The Bank of England has described risk in this context as being like unseen pollution that is externalised by the producer with the costs imposed on others.

    I first began to understand this when I read this (slightly wonkish) article by Steve Keen but there is now a huge body of material making the point that banks can and do create money. Even the Bank of England has admitted that this is how it works.

    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

    One corollary is particularly pertinent. The damage to the financial system occurred unseen by 99.9% of economists during the bubble years before the crisis exploded into the news. Everything that has happened since is about how best to manage the fallout and who should benefit and who pay. The obvious plan – letting the banks fail – is just not on (it would wipe out private and corporate bank accounts and therefore economic life). So somehow and by various means it HAS to transfer onto the public balance sheet with whatever devaluation of the currency that might entail – hence the large deficits.

    Bankers and their friends don’t like this because it devalues their newly minted wealth. So the view of Tories and, ahm, some ‘Liberals’ is that deficits must be minimised. In effect they are saying that poor people (who don’t by and large have many assets to be devalued) should pay thorough reduced services or whatever is judged most politically feasible.

  • Eddie Sammon 16th Oct '14 - 4:20pm

    Hi GF, I don’t want to argue over semantics, banks can choose not to lend other people’s money out and only lend out their profits if they wish, but this would lead to significant charges on current accounts instead. Banks are free to operate both ways in the current climate and I think this is broadly how it should stay.

    Regards

  • In 2008 the party adopted a tax CUTTING policy (in Make it Happen). In the 2010 manifesto there was a policy of tax FAIRNESS (ie taking “the rich” more to cut taxes for low earners.)

    Now the party is back to talking about tax cuts – only this time they will benefit middle earners ahead of a 19 year old on the minimum wage. That’s not Fairer Society.

  • David Evershed 16th Oct '14 - 7:51pm

    Initially when the coalition increased the persoanl allowance, the 40% tax threshold was reduced to stop higher rate taxpayers benefiting.

    The key to the policy benefiting only the poor is whether there are such compensations.

    The Conservative policy is to raise the 40% threshold to £50,000. What is the Lib Dem policy?

  • I’m glad to see increasing criticism of this policy. In the context of a overall re-balancing in which multiple other tax changes were directed towards the richer end, the threshold increase was an okay policy. In the context of brutal cuts on welfare and backed up with VAT rises and little in the way taxes aimed at the top end (the welcome rise in capital gains tax being one exception) it’s a grotesque policy. A give-away that primarily goes to middle earners paid for by slashing the money going to the truly poor.

  • Paul In Wokingham 17th Oct '14 - 2:47pm

    @Eddie Salmon – banks do not really “lend other people’s money out”. They create money ex nihilo as debt (a ledger entry) which the borrower must repay with real money produced by the value of their labour. Such fractional reserve banking is a key driver in economic growth and there is nothing wrong with it, unless you go too far.

    Typically, for every pound that a bank has in savings from customers, it can lend £33 to borrowers – this is the leverage ratio mandated by the Basel III agreement. In the case of – for example Northern Rock – it was using a ratio of more than 50:1 at the time that it collapsed. In other words, they were lending in excess of £50 for every £1 they had in customers’ savings.

    Seen in that context, it is hardly surprising that it collapsed: the “smartest guys in the room” got rich by making the amazing discovery that 2 was a smaller number than 3. And their bank went bust when people realised that their capital was at risk and (quite rightly) queued up to withdraw their savings from them.

    As a comment on the subject of the op-ed, I might suggest that there is a further factor that must be considered: the on-going crisis which is now getting its second wind: Europe, Japan, China and the USA are all facing serious challenges as the ability of their central banks to continue dominating the markets starts being seriously questioned. There might simply not be the money available for tax cuts.

  • Eddie Sammon 17th Oct '14 - 3:35pm

    Hi Paul, yes that is the key, there is nothing wrong with it unless you go too far. Good post.

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