Liam Byrne famously left a handover note to his successor as Chief Secretary to the Treasury, David Laws, saying “There’s no money left – good luck!” I was reminded of this as, after a very enjoyable 21 months as Chief Executive of CentreForum, I start on Monday as one of Ed Davey’s Special Advisers at DECC. I suppose the think tank equivalent would be “There are no ideas left – good luck!”
In fact that is far from being the case. One of the joys of running a think tank is that there is never a shortage of ideas to be explored. So before I enter the shadows of the world of being a Special Adviser on Monday what are the issues that I would have liked CentreForum to be researching if I had stayed? And wearing my party hat what are some of the key issues which I think the Liberal Democrats need to be coming up with ideas on for the next manifesto?
Today I will focus on the area of tax, benefits and intergenerational justice. Tomorrow I will focus on other areas such as early years policy, industrial policy and Britain’s place in the world.
Personal tax and benefits
The Liberal Democrats in Government have rightly pushed the agenda of giving a top priority to higher personal tax allowances to take millions out of tax. There is no doubt that the tax credit system introduced by Labour had real disadvantages and led to a situation where for many the state had almost as significant an influence on what your take home pay was as your own effort. But we must ensure that raising the personal tax allowance does not become as much an unchallenged shibboleth for the Lib Dems as cutting the personal tax rate was for the Tories under Margaret Thatcher.
As CentreForum’s recent paper Taxing Decisions: the debate between tax credits and personal tax allowances showed there are some benefits of the tax credit system. Once the £10,000 target for personal tax allowances (and employee’s national insurance which tends to be forgotten) is reached then we at the very least ought to think about whether some more money goes to child benefit to help alleviate child poverty, or indeed whether child benefit should be replaced by an extension of child tax credits.
Green taxes
The party has very clearly pinned its colours to the mast of shifting the burden from taxation on income to wealth and green taxes. There has been a lot of emphasis on some aspects of wealth taxation – the mansion tax and land value tax. But whatever happened to the “green tax switch” campaign of five or so years ago? This is partly an matter of messaging. Why aren’t we presenting the carbon floor price (effectively a carbon tax) and carbon reduction commitments (CRCs) on business alongside cuts in corporation tax as the green tax switch in action? And how does this pan out in relation to taxes on households? There is a desperate need both to develop further new policy ideas in this area and also to “sell” what we are already doing.
Intergenerational justice
This issue has come into sharp focus after the budget with the debate about the so-called “granny tax”. But the issue is much wider having been raised most prominently by David Willetts in his book The Pinch: How the Baby Boomers Took Their Children’s Future – And How They
Can Give it Back and is the subject of the Social Liberal Forum’s next annual conference.
My CentreForum colleague Tim Leunig has been doing some excellent work in this area with a report on fair tax for all, whatever their age, due out soon. But the issue goes much wider. It is why reducing the burden of government debt is important so we do not burden future generations with its repayment. It is why we need to build more houses so that younger people are able to gain access to the housing that their parents took for granted. And it is why we need to strain every sinew to tackle the problem of rising youth unemployment which started in 2004 at the height of the boom.
Until the tuition fees issue the Liberal Democrats had been making great progress in building support amongst younger people. This is a fairness issue which the party can and should make their own and so start to win back the support of younger people.
* Chris Nicholson was until March 2012 Chief Executive of CentreForum the liberal think tank.
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30 Comments
You write, “reducing the burden of government debt is important so we do not burden future generations with its repayment”
The belief that government debt is a burden inflicted on future generations is a crippling fallacy. And one that last held such currency in the 1930s.
The true legacy left to future generations is ‘wealth’. Limiting economic growth by too rapid deficit reduction and a recovery limited by the simultaneous deleveraging of both the private and public sectors reduces the wealth created now and bestowed on future generations.
My parents as a generation suffered from that fallacy when it held sway over the rulers in the 1930s. Our rulers are doing the same today. In fact the political consequences were such that they experienced and fought a war against the dictators who rose to power in those countries most affected by that fallacy. Yet they built the post war society of the NHS, slum clearance, numerous life enhancing inventions and innovations, free higher education and above all peace.
Also, there is much talk of the privileged life that the so called baby boomers (of which I am one) have had and a sense that they should now contribute more to aid deficit deduction. Yet that generation faced a tough early life and thanks to the sacrifices of their parents withstood a number of recessions caused by external shocks, maintained the NHS, expanded higher education, campaigned against wars and injustices such as Vietnam, made war on want and now stand watching as the generation that follows them draws up the ladder behind them, pursues their own advantage, fears the future, taxes the old, consigns the generation that follows them to years of scaring employment, builds a more unequal society and, worst of all,repeats the mistakes of those who ruled in the 1930s.
Frankly I am ashamed of them and what they do with their comfortable lives and the legacies they inherited.
Chris,
congratulations on your new appointment. Centeforum has developed into a more prominent and influential thinktank under your guidance over the past two years.
The areas you highlight are indeed important areas in which Liberal Democrats need to be coming up with ideas on for the next manifesto.
The recent paper reviewing tax credits v tax allowances is a useful contribution and you are right to warn that ” raising the personal tax allowance does not become as much an unchallenged shibboleth for the Lib Dems as cutting the personal tax rate was for the Tories under Margaret Thatcher.
My view is that widespread tax relifs and allowances (so called ‘Tax expenditures’) are a crude tool for directing economic behaviour and such efforts by the state often lead to hugely inefficient outcomes. Far better I thnk to use the tax system almost exclusively for revenue raising and recovering the cost of externalities. Direct grant funding, in the few circumstances where appropriate, is a less wasteful method of incentivising behaviour.
Similarly with benefits, I am of the view that the state should not be making judgements about who is or who is not deserving of help and assistance. Individuals are the best determinant of what is to their benefit, not the state.
A basic universal Citizens Income, by right, can go a long way to tackling longstanding inequality problems and mounting social tensions.
An economic policy focused on Beveridge’s definition of full employment and targeted job guarantees can provide for a more effective use of social housing and housing benefits as well as tackling issues around inter-generational justice.
@Bill le Breton. I too am a ‘baby boomer’ and I agree with the sentiments you have expressed quite strongly. My generation and that of my parents had a genuine desire to ‘make things better – for everyone and anyone’. I knew about being poor because, relatively, everyone was ‘poor’ in my early years – I still have my ID Card and my Ration Book. My parents’ generation, and my own parents in particular, suffered terribly with the Depression and with war, but that left them wanting to ‘give’ rather than ‘take’, if you see what I mean. I think it is very unfair to accuse my generation of having an easy ride and burdening the next generation with debt. I personally have ‘put into’ the state and I have never claimed a penny from it. As Bill points out, our generation worked hard to build the institutions, infrastructure, health systems, education and so on, things that, 40-50 years ago we genuinely believed would bring about better lives. I see this country as infinitely better-off materially than it was when I was young. However, for all that there is frustration, discontentment and unhappiness amongst the people that is sad to witness; perhaps the Lib Dems could help with this – materialism has failed.
Again, I agree that constant raising of the tax threshold is not in itself progressive. Do we really want to go to £12,500, or would it be better to invest that in increasing child benefit up to the levels it should have been if it weren’t for the freeze (the big hit on many families) or, more directly, tax credits (which are bureaucratically administered but fairly effective at targetting low-earners in particular).
Also, the second blade of the scissors in our tax plans has only been partly wielded – higher taxes on the wealthy. It is indisputable that the group which has lost most in percentage terms in this parliament is the top 10%, probably even the top 1%, and this is down to our role in government. But we can go further, and we must if we don’t want to be robbing Peter to pay Paul further down the income scale.
@ Bill le Breton
Very well said.
I think CF has improved dramatically over the past 2 years and even where I disagree with it I value the rigor it makes it’s case.
I am sad to see Joel Kenrick and Duncan Brack leave DECC as SPADs. However maybe they will be top candidates to take over the running of CF?
Bill le Breton ‘s argument has one major fallacy. When we look back at the 1930s and try to compare it with today we are not comparing like with like.
Government debt is the thirties was a fraction of what is is today both in real and percentage terms. Total government expenditure was 19.5% of national income, inflation was negative and taxes were in total 20.2% of national income and the national debt was 1.5%. So of course it was right to argue for an increase in government expenditure to conquer unemployment.
Fast forward to 2011 (most recent figures available) and we see that debt is 60.3% of national income, government expenditure is 44.2% of national income and taxes are much higher than they were in the 30s.
Unemployment peaked in 1932 at 22% (16% as measured today) whereas today’s unemployment was around 7.7% in 2011. This isn’t to condone unemployment, it has to be tackled, but to put it in context.
My point is that the solutions for the 30s don’t work in 2012 and we need new ones. Keynsianism would need drastic changes to be relevent to the UK in 2012. It is always salutory to remember the words of the great man. “When the facts change, I change my mind sir. What do you do?”
Sorry Bill. Harking back nostaligically to the 30s just won’t do.
Good luck Chris. I disagree with everyone on principle. In this case I disagree with you, and with Bill le Breton. Debt IS a burden. It is crazy to think otherwise. Wealth may be a trap, but it is not a burden. Self-satisfaction is a sin.
Are we dealing with debt properly? What I see is many long-term plans, investments with payback periods of 100 years! But what is needed is payback periods as short as possible. Such investments could solve unemployment fast, helping to reduce debt by getting people working. Of course those people will then start buying foreign goods, affecting the balance of payments, exchange rate, … solutions?
Could Centreforum start thinking along these lines? Maybe not as sophisticated, ok, but a lot more practical. What sort of projects produce short-term gains? How can we attach status to them, making them attractive?
I was not looking back nostalgically to the ‘30s, Mickft. Quite the reverse. I was saying that the statement “reducing the burden of government debt is important so we do not burden future generations with its repayment” is lazy superstitious nonsense along with its fraternal partner, expansionary fiscal contraction, now also completely exposed as clap-trap.
Those who are deliberately deflating the economy (and incidentally thereby have already actually increased the debt burden) are reducing the wealth that future generations would otherwise inherit.
If you go on deflating, you will hand on an even smaller economy far less able in fact to repay debt.
Recovery in the 30s began when FDR manipulated the gold price to raise the price level. We should be doing the equivalent – and that is not done when the impact of economic policy is deleveraging in the public and private sectors simultaneously.
Mickft – your figures on govt debt as a % of GDP in the 1930s are just not correct http://www.ukpublicspending.co.uk/uk_national_debt
And we also had to deal with high levels of public debt after WW2 – so the problem is not unique.
And I think that you will find that Keynesians have made significant changes to their prescriptions to address current circumstances e.g. most would accept that a lot more can be achieved through monetary policy so that it is more effective than the pushing on a piece of string of Keynes’s day. And many Keynesian economists would also now advocate that governments can do a much more on the supply side to address the deficiencies of markets – rather than just concentrating on demand management. If you bother to look at modern day economic thinking I think you will find that Keynesians are a long way off being the dead beasts that you might want them to be.
On the intergenerational debate just a few points
– I am genuinely surprised by how many who have come out to support the “granny tax” have not appreciated that it is impact is confined to relatively less well off pensioners who earn less than c£25, 000. Those who earn more will actually benefit from the rise in personal allowances. So the argument the granny tax can be justified because many well off pensioners can afford it really is garbage. If that were the intention then the more appropraite thing would have been to withdraw fuel allowances and TV licences from those pensioners above the £25,000 threshold or reducing the tax free element in respect of large pension lump sums – but I supsect that is something that would have upset a rather large number of Tory Party members.
– I don’t genuinely think that the baby boomer generation intended to take their childrens futures – some genuinely wanted to improve pensions so as to give a more immediate benefit to the previous generation as a debt of honour and most probably felt given the general optimism of the time that higher pensions could be supported.
– even if the baby boomers were over optimistic, it is not right to penalise them once they have become pensioners when they have built up expectations over many years and unlike people of working age have much less capacity to adjust to reductions in their income ( liberals should not need to be reminded of this btw)
– a lot of people retiring now and in the next few years have already borne quite a few hits to their pensions already e.g. the switch from defined benefit to defined contribution schemes, the fiasco of opting out from SERPs. the RPI/CPI change. lower annuity rates etc. – and now some want to hit them even more.
Richard, I think you may be regarding Government debt in the same way as one would regard personal debt. They are totally different. The view of Government debt as a burden on future generations stems from that fallacy.
Bill. Your explanation lacks an axplanation! Please explain further….!
Bill. according to what my educators told me ….
The solution in the 1930’s was not FDR. It was the Second World War. That war had two major effects. First, it reduced the net present value of fixed assets through the risk that those assets would be lost if the wrong side won. Second, it increased the potential value of current assets through the increased demand for munitions.
So, if we want to learn from that, we should reduce the value we assign to long-term investments, such as infrastructure, and increase the value we assign to short term assets, such as confectionery, fashion, and concerts.
Richard, have a quick look at this: http://en.wikipedia.org/wiki/File:1930Industry.svg .
Bill. Looked! Is it reliable I wonder? Wikipedia is very wrong on some things, particularly things like this where the author hasn’t bothered to provide any kind of adequate explanation of what is being presented. It’s someone;s opinion, not necessary a reliable fact (we used to distinguish “facts” from “true facts”!)
But yes, 1938 in the US was just as miserable as 20 years previously, and tinkering with gold may have had a minor effect. Interesting that the graph doesn’t show what happened after the start of the Second World War! Guess what happened then!
Mickft,
We should always remember that Keynes advocated monetary action before fiscal activism and a budget surplus during periods of growth. The deficit spending (over and above automatic stabilizers)routinely adopted as a quick fix during cyclical downturns by post-war governments was never part of his policy prescription – he advocated it as a tool designed to tackle structural problems.
Minsky was a post-Keynesian who recognized that the world had moved on since the 1930’s, to what he called the money manager economy. His agenda for reform favoured a capitalism focused on consumption that maintains full employment and fosters small organizations.
He argued for creation of a comprehensive employer-of-last-resort (ELR) program on the basis that only government can offer an infinetly elastic demand for labour. A job creation program of this nature needs to focus on jobs of economic value.Here we can learns a lesson from the 1930’s when major house construction was a big element of the recovery. In the UK the easiest and fastest way to directly create jobs is investment in construction. Affordable rented and social housing produce an income stream that can provide a direct return on investment.
How such a program is funded becomes a matter of economic leanings. Leveraging private investment in from Pension funds and Sovereign wealth funds through such programs as credit easing is one option. A UK Freddie Mac or Fannie Mae could be another.
Joe,
Is what you said the same as what I said – “capitalism focussed on consumption” = invest forshort payback periods?
I guess a third factor in the Second World War recovery was the potential (but risky) net present value of the spoils of war if the right side won?
A Land Value Tax:
– is a green tax – it encourages efficient land use reducing urban sprawl.
– deals with intergenerational equity. There has been a huge increase in the unearned wealth of the propertied old from increasing land values that all have created.
Vince has explained a couple of times why he actually sees the government’s current course of action as quite Keynesian. He explains that, with currency markets as they are, it is impossible to have both a loose monetary policy and loose fiscal policy; the answer, then , is to have a tight fiscal policy which allows the Bank of England to set interest rates at extraordinarily low levels while restraining inflation. This is also the underlying rationale given in the Budget document. It is, of course, not one usually expounded by George Osborne, not least because it can’t be explained in a quick soundbite,
Incidentally, I think the government needs to plan ahead for the next recession for where it wants to direct its stimulus. Obama’s Recovery and Investment Act has been criticized for having too few ‘shovel-ready’ projects which were truly shovel-ready. I doubt we’ll see any such forward planning under the current management at the Treasury, though.
@Bill Le Breton “The belief that government debt is a burden inflicted on future generations is a crippling fallacy. And one that last held such currency in the 1930s”
The more we borrow the more we have to pay in future. How is that not a burden?
High quality debate – and right to the heart of Coalition economic policy. @Simon McGrath – it’s not a burden if by doing so you cause the economy to grow by so much that tax receipts are increased to the point where they exceed the additional interest payments. The ‘if’ is the central debate of the govt’s economic policy. This is not a debate of absolutes – it’s a question of hitting the right point on the spectrum. The problem with being in govt with Tories however is that they believe in reducing the size of the state as a matter of principle not pragmatism. I agree with other contributors about CF’s growth in stature in the last couple of years, and also with @toryboysnevergrowup that the over 65 personal allowance (whilst frankly unjustifiable in principle) is the wrong lever to pull, as it tapers above £25k and so only benefits less well off pensioners, and that whether or not that was addressed, the Gordon Brown baubles of free TV licences, bus passes and fuel allowances should be subjected to the same treatment as child benefit – i.e. removed for better off pensioners.
Richard DeanMar 24 – 10:54 pm……..The solution in the 1930′s was not FDR. It was the Second World War………….
Under FDR’ ‘New Deal’ the US economy improved rapidly from 1933. ,However,. in 1937, FDR’s policies were blocked by a ‘Conservative Coalition’ under the slogan “Give enterprise a chance, and we will give you the guarantees of a happy and prosperous America.”(Now, does that sound familiar?) but what followed was another recession.
Simon,
The burden or legacy left to future generations is the extent of wealth.
Deflationary policies have severely reduced the wealth that will be left to future generations. The charts showing recovery show clearly the recovery being chocked off in the second half of 2010. Preceisely when deflationary policies kicked in in Europe, the UK and when the Fed took its foot off the peddle.
Now please do not see me arguing this line and then either call me a Keynsian.
I am saying very loudly, though not very skillfully, that it is monetary policy that is wrong. And too restrictive. I realise that with 3 years of apparently ‘low’ interest rates and QE this is a counter-intuitive thing to say, but what have Freidman and Benancke and others told us is a sign of too tight a montary policy: falling inflation/deflation and low levels of Nominal Gross Domestic Product growth. We have both these conditions. Therefore monetary policy is still restraining recovery.
It is so much easier to argue about relatively minor changes in tax incidence than it is to come forward with the sufficiently stimulative monetary policy necessary. (For one reason politicians have surrendered their ability to direct that and the have ‘enjoyed’ a couple of months focused on relatively minor fiscal alterations.
What to do? Obviously renationalise the Bank of England and put monetary policy back into politically accountable hands. Introduce charges (ie negative interest) for private banks keeping excess reserves at the B of E. Tell the world that for 2012/13 and 2013/14 our monetary policy will be targeting NGDP growth of 7% until such time as the pre 2008 NGDP growth trend rate is reached and to then level target NGDP rate at its pre 2008 long term growth rate of 5%. And for Osborne/Cameron and Clegg to say that they will use whatever policy is needed to reach that target.
And now this is where all you Lawites will fall further out with me: I’d launch a major infrastructure/housing investment programme with unsterilzed expenditure – but I am open to the idea that even before that the very fact that markets will see our determination to get back to the long term growth trend (asssited by it being costly to store money) and start investing themselves.
THis owes more to Friedman than Keynes, and there is no reason at all why Liberals can’t be monetarists.
Bill
CentreForum has, of course, already published a paper on what we can learn from the 1930s – you can read about it here http://www.centreforum.org/index.php/14-news/releases/275-cutting-the-deficit-now-release (There is also an FT op-ed last Nov based on it, for those who prefer short to long)
And my FT op-ed last Friday pointed out that the tax allowance was NOT the most appropriate way to “bash granny”. The FT editorial took the same line. My forthcoming CF paper (shortly after Easter) will make the case in more detail.
THat press release contains these words: “The key to recovery then was a clear and credible commitment by the government to a steadily rising price level. Knowing prices would not fall led consumers to spend their incomes, stimulating the economy.”
Can you confirm that the report it refers to also features the renationalisation of the Bank of England?
What would be interesting to know is which of our ministers have found time to read the report.
Richard.
“Is what you said the same as what I said – “capitalism focussed on consumption” = invest forshort payback periods?”
In essence, yes. The US recovery in World War II was the biggest fiscal stimulus in history. From the start of lend lease to the end of the war virtually every able bodied man, woman (and child who could collect scrap for the war effort) was mobilized and war bond sales put household savings directly to work in the domestic war economy.
As regards government borrowing, we need to distinguish between the borrowing(fiscal stimulus) for current spending that we are currently undertaking and borrowing for investment in income producing assets. For example, instead of using the assets of the post office pension fund to repay existing debt, we could use these funds to capitalise a National Housing Corporation. Throw in the money from the sale of Northern Rock and we could get started with a 30 billion capital base. Send out Vince Cable and Grant Schapps to drum up another70 billion in bonds from the private sector (pension funds, insurance companies, big Housing companies) and we will have a 100 billion to get started. Let this housing corporation manage the sale of council houses and the rebuilding of new homes and we will pretty soon have a respectable job creating program throughout the country.
None of that exercise will affect our PSBR or interest rate. The interest rate payable on UK Gilts (like all financial assets) is as much dependent on the actions of the New York Fed as it is on the actions of the BofE or UK Treasury.
Liberal Democrats should not be coy at acknowledging the debt that economics and our party owes to Keynes. When the chips were down in 2008, the entire world turned to Keynesian solutions and the revolution in economic thinking he began, has yet to fully play out. As foregone conclusion notes above “the government’s current course of action (is) quite Keynesian.
Bill Le Breton has made some very interesting and thought provoking comments on new thinking by Market Monetarists. For my generation that grew up with the stagflation of the 1970’s, sterling crises, the IMF bailout and the monetarist experiment of the early eighties there will be concerns around the ability to control inflationary expectations once unleashed. It is a fresh approach though, that we will need to understand better as we go forward.
Running massive deficits over a sustained period can never lead to wealth for the next geneartion, as the great Liberal economist JM Keynes knew.
Running a defcit over a short period of time, to fill with government demand the gap left by the absence of private demand makes sense,. thats why Keynes advoacetd it, and its now such an orthodoxy that even the last, right-wing labour governemnt of brown supported it, as did both the lib dems and most tories.
Thats why brown instogated a massive stimulus, exactly as keynes would advoacte.
And just as keynes would then advoacte cuts when growth returns, and fiscal demand improves, all three paerties proposed that at the 2010 Gneral election, each famously agreeing there would be cuts faster and deeper than under thatcher.
But for Keynes great orthodoxy to work, one must be wary of ignoring the impact of inflation, which causes the public sector stimulus to be made irrelevant if the extra demand created by ther stimulus is eradicated byn inflation.
thats why the withdrawl of public demand must be timed corrcetly, and certainly one cannot have a long period of deficit, as deficits funded by borrowing weaken the currency, making imports dearer……
of course there are some inprecise terms there, such as as what constitutes ‘long term’
but the idea that a sustained defciit has ever workwed anywhere is nonsense, and used only for the purposes of people who wish not tio make hard decisions, thats why all three partioes want to make cuts.
@DThorne
“And just as keynes would then advoacte cuts when growth returns”
And when shall growth return and what does the last Budget do to encourage its return? Since the Coalition came to power we have gone backwards. You will see from Bill Le Breton that even some monetarists are not over worried by inflation at present.
“DELIVERING GROWTH WHILE REDUCING DEFICITS” – A STRATEGY FOR DISASTER?
Recommendations in this report (link in Tim Leunig’s posting above) seem to rely on this statement [page 21]: The [1930’s] recovery was based on increases in expenditure which raised aggregate demand”. But is this realistic for the 2010’s” Two factors seem to suggest not …
First personal debt in the UK stands at £1.5 trillion (http://www.creditaction.org.uk/helpful-resources/debt-statistics.html). Average household debut is about £8k excluding mortgages, or 56k including mortgages. This suggests that most households are locked into mortgage payments and other debts, and so will not respond with the “raised aggregate demand” in quite the same way – or quite as quickly.
Second, around 70% of homes are owner-occupied today, but less than half of that percentage in the 1930’s (http://www.parliament.uk/documents/commons/lib/research/rp99/rp99-111.pdf). What does house building do? Raise the supply of houses and so reduce the value of houses! So in the 1930’s, house building allowed non-owners to buy in the 2010’s it might instead result in negative equity, mortgage failures, and all that pain, and the resultant political fallout.
As always, I recognize my ignorance and stand ready to be corrected. A third factor, not present in the 1930’s, is the mobility of labour – if UK wages inflate we may see increased economic immigration from the EU which was simply not possible in the 1930’s. It looks to me like our problems are very much bound up with those of the EU, so I suggest that our politics and proposals for solutions should take account of this.
Vince Cable’s historic remark! While we have been discussing matters above and I have been banging on about Nominal (or Money) National Domestic Product targeting, Vince has come out in favour of it in an interview with Hutton, published on LDV here https://www.libdemvoice.org/ldvideo-the-sage-of-twickenham-returns-27795.html#comment-202208 The question and the answer start at about 9 mins in.
MOney/NGDP targeting? ” I’m for it.” says Cable. It’s economic logic? “Impeccable”. This is the first British cabinet minister to support it. It won’t be the last. The question is now how quickly can it become a majority view and can it become and be seen to be the Liberal Democrat policy.