Opinion: an alternative to cuts? Be careful what you wish for

While canvassing in South Manchester I have met a number of people who do not accept that cuts are necessary on the scale suggested by the government. The common mantra is that the banks who caused the collapse should be made to pay, not the taxpayer, or, by implication, the poor who rely on the taxpayer.

Telling people on the doorstep about the Banking Levy meets with the response that this has not stopped bankers receiving enormous bonuses. Reminding them that 50% of these bonuses end up in the treasury is just as ineffective. The public seem to want more. They seem to want the banks to pay a lot more than they are currently paying, and there is the rub.

Gordon Brown’s two bank rescue packages effectively nationalised the banks most closely involved in the near-collapse of our banking system. The funds made available £500 billion in loans and guarantees, and the Bank Recapitalisation Fund, that saw the government buy an enormous combination of ordinary and preference shares in the affected banks, was touted as necessary to protect the banking system from imminent collapse. Brown argued that returning the banks to liquidity and eventual profitability would mean that the shares owned by the taxpayer would eventually be sold to recoup the money spent, with a profit for the taxpayer a real possibility. However, by tying the taxpayers investment to the future success of those banks Brown ensured that any measures taken against them could not be punitive, for fear of damaging the value of their shares, now largely owned by the taxpayer.

In effect, if we force the banks to pay more towards cleaning up the mess, their share value could plummet. Since we own the shares we would, in effect, lose billions of pounds belonging to the taxpayer.

Those canvassing on doorsteps in the coming months might do well to remind voters that limits in the amount of action we can take against the banks is yet another facet of Labours mismanagement of the economy, and not due to any reluctance on the part of the coalition. Indeed, even Labour has not (so far) been calling for punitive measures against the banks they nationalised.

If large-scale cuts are to be avoided, and the funds held by the banks are out of reach, what else can we do to reduce the 895 billion deficit, which is currently rising by about six thousand pounds a second!

The left suggest that it can be raised without cuts through the following measures;

§ Make the present, temporary, banker’s bonus windfall tax permanent, raising in excess of £500 million a year.

§ Extend the banker’s bonus windfall tax to other financial institutions – such as hedge funds and private equity houses. An extension to hedge funds alone would raise in excess of £700 million.

§ Introduce a short-term ceiling on total remuneration, given as both cash and share options, saving around £520 million from RSB bonus payments in this year alone.

§ Set a 50% income tax band for gross incomes over £100,000, raising £4.7 billion annually, or £2.3 billion more than the sum raised by setting the band at its present £150,000.

§ Uncap National Insurance Contributions, so that they are paid at 11% on all incomes, including investment income above £110 per week. The extra tax take would be £9.1 billion.

§ Introduce minimum tax rates of 40% and 50% on incomes above £100,000 and £150,000 respectively in order to mitigate the ability of higher earners to displace tax burdens. The tax rates set out above would raise an additional £14.9 billion annually.

§ Institute a 0.05% financial transaction tax on instant sterling transfers between UK financial institutions, raising some £38 billion a year.

§ Take concentrated action to bear down on tax lost within the existing system – the £25 billion which goes missing through tax avoidance; the £28 billion of tax bills which the Treasury Select Committee (November 2009) concluded were agreed but had not yet been paid; the £70 billion which the Public and Commercial Services Union has estimated to be lost through tax evasion, such as illegal non-declaration of income on which tax might be due, or fraudulent claims for unjustified tax relief.

§ Separate retail and investment banking, removing the ‘moral hazard’ in which recklessness within finance capitalism is bailed out by the taxpayer.

§ Establish a High Pay Commission to apply a permanent public interest test into the setting of senior salaries.

These suggestions may be worthy of further examination, but one doesn’t need a calculator to work out that it is still a long way short of the near one trillion pounds of debt we are storing up for our children to repay.

Which brings us back to the question; how else do we raise the money if we want to minimise the cuts? Option could include:

35% tax on incomes over £10,000, 40% on incomes over £100,000 and 50% on incomes over £150,000

£50 up-front payment for each doctors visit.

£250 for each visit to a casualty department.

£10 per child per day to attend a state school.

An additional council tax levied on the ground your home sits on.

A tax on the space where you park your car at work.

Motorway tolls (£1 per mile for the first 10 miles of any journey, 50p per mile thereafter)

Car tax at £1000 per vehicle, rising to £3000 for vehicles over 2 litres

VAT at 30%

Tax on household waste based on weight, paid to privatised refuse collection businesses.

Domestic water supply charged at 20p per litre.

Cigarettes at £15 per packet of twenty.

Alcohol at £5 per unit.

High fat foods taxed an additional 5p per gramme of fat content.

£100 to dispose of household appliances.

Double the cost of electricity used between 11pm and 7am

£10 entry tax to visit nightclubs.

£10 per month tax to use the internet.

£1000 fixed penalty for speeding or failing to comply with automatic traffic signals.

£200 for an MOT. £1000 fixed fine for not having an MOT.

A freeze on assets whenever benefits are claimed, with a demand for repayment if assets are subsequently realised.

The estate of all recipients of benefits to be subject to government audit on death, with the state reserving the right to seize some or all of the estate before bequests are made.

A 10% tax on all foreign holidays, in addition to the current levy on air travel.

A 2% tax on all credit card transactions.

A 5% tax on all mobile phone use

VAT on newspapers and magazines.

An entrance fee for museums and art galleries

A charge to use libraries.

A 10% tax on taxi use.

Congestion charge for every major city.

Those who will protest about the coming cuts should be careful what they wish for. These are just some of the ways additional income could be raised to meet the deficit if enough members of the public decide they can’t stomach the cuts. Those howling at the Lib Dems for their role in the measures being taken to cut the deficit may do well to remember that the alternatives are just as unpalatable. It will inevitably be the public’s choice. Cuts, with the poor and vulnerable protected as far as possible, or no cuts, and everyone stumping up, poor included.

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32 Comments

  • Norfolk Boy 16th Oct '10 - 5:38pm

    You might find more sympathy on the doorstep if you raised taxes for those that can afford to pay them rather than making life harsher for those already on low incomes. It’s a simple idea.

    A very high tax rate on incomes of over, say, £150,000 would find great favour among the vast majority of people who earn nothing like that. Whereas raising tuition fees for people on low or average incomes tends not to go down well.

    Depends what kind of country you want really, one that idolises the well-off, lets them pay as little tax as they can get away with while lambasts the poor and insisting they find non-existant jobs or one that sees the bigger picture for the greater good. There is such as thing as society. Although it’s disappearing fast. And we’re all in it together apparently.

  • Why on earth are you trying to pay so much off in one year??

  • @Norfolk By. You create a false dichotomy I’m afraid when you say:

    How about one that provides a safety net for those that need it, a helping hand for those that want to be trained/set up a business, and freedom for people to live their lives beyond that. Penalising high earnings is, in the end, regressive and a disincentive to achieve. If you want socialism, go and join the labour party. If you want liberalism, then argue for it.

  • Sorry – html screw up. Not all the quote above is a quote. Here is my bit:

    How about one that provides a safety net for those that need it, a helping hand for those that want to be trained/set up a business, and freedom for people to live their lives beyond that. Penalising high earnings is, in the end, regressive and a disincentive to achieve. If you want socialism, go and join the labour party. If you want liberalism, then argue for it.

    And here is the quote I was responding to:

  • People are angry that the bankers levy is set so low at 3 billion and does not get collected till NEXT year .That gives the banks plenty of time to pass on the charges to the public.Why was the levy set so low and not collected straight away
    andy edinburgh

  • tim leunig
    Why on earth are you trying to pay so much off in one year??Of course, nothing is being paid off.

    All the discussion is about the national debt rising a little faster or a little slower.

    The deficit in 2010/11 is likely to be around £150,000,000,000, and around £120,000,000,000 in 2011/12.

    That’s not the national debt; it’s the increase in the already massive national debt, inherited from Labour.

    I take all that to mean that the fabled “£22,000 of debt for every man, woman and child” will rise to around £24,500 by March 2011 and to around £26,500 by March 2012.

  • Mike(The Labour one) 16th Oct '10 - 6:35pm

    And what will it be if cutting too soon and too deeply puts the country back into recession? Or even just lowers growth? If tax receipts fall? If further stimulus becomes necessary?

  • John Roffey 16th Oct '10 - 7:30pm

    Perhaps we should learn from the Icelandic approach.

    http://news.bbc.co.uk/1/hi/8551673.stm

  • It’s not 50% of the banker bonus that ends up in the Treasury it’s is 50% plus 12.8% emplyers NI plus 1% emplyee NI. So of a bonus of £1m the treasury gets £638,000.
    The effect of higher taxes will be to drive financial services away from London. Just 2 hedge fund mzmgers going to Geneva has cost 500m and there are many other leaving.

  • Andrew Suffield 16th Oct '10 - 8:10pm

    Congestion charge for every major city.

    Actually that one’s a pretty good idea in its own right – basically, it’s a higher road tax for overloaded roads, simultaneously covering their higher cost in upkeep, pollution, and accidents, and cutting down on the overloading.

  • Yeah that’ll go down a treat at the door of any postal, local council or NHS admin worker.Or a driver who’s job depends on public service contracts or a street sweeper who’s job is bieng done for gratis by a school leaver in the name of big society.Or that school leaver’s parents who had hoped paid employment would await him after school.A school starved of funds in favour of the local posh acadmy which generousley allows a few underclass kids in.
    And people in general worried sick about their local bus service,elderly relatives, disabled children,mortgage payments and sickness benefits (some claims are genuine you know).worst of all for you will be the informed ones on to your Tory masters plan to use the deficit to take us back to a 1930s society.They will want to know if you are dupes or willing collaberators.And of course there are the poor souls who voted for you in fear of the Tory onslaught and got them anyway.Certainley we cant bury our heads in the sand regurding the financial crisis but people really do not understand why they should suffer so greatly for the crimes/incompetence of investment bankers such as err David Laws remember him.

  • The first and immediate thing we need to do is secure international agreement to do everything possible to ensure the “markets” are forcibly kept quiet for the period needed to rectify the situation. Then decide by consensus how serious it is, and how / how long to take doing it without putting people’s lives at risk. All this bearing in mind we have to tackle the nexus of environmental problems coming down the track, which will be much, much more difficult. If we can’t get agreement and find the political will to tackle this crisis fairly, how on earth are we going to deal with climate change and associated problems in the wings?

  • Norfolk Boy 16th Oct '10 - 8:29pm

    Oh no!

    the people in the investment banks who have bankrupted us might leave and take their ‘skills’ with them.

    what would we do without them.

  • Andrew Duffield 16th Oct '10 - 9:26pm

    Alternatively, amend the 1844 Banking Act and make it illegal for commercial banks to create digital debt-based credit from nothing.

    Billion pound bonuses are mere froth atop the crucible of banking alchemy. To be satisfied with a 50% skimming of this surface scum [sic] is to be in ignorance – or denial – of the true size of the potential pot. Our national currency should be reclaimed and 100% created by the nation-state, with ‘interest’ accruing to the public purse in the first instance.

    A load of new transactional taxes on goods, services and productive endeavour are needed like a hole in the head.

  • Matt, if you are out on the doorstop you might want to re-examine the figures and assertions in your article because some are misleading:

    ‘what else can we do to reduce the 895 billion deficit…?’

    Apologies for being a nerd but I think you are referring to the Public Sector Net Debt (PSND) here – this is all the debt accumulated throughout history that is yet to be repaid. The ‘deficit’ is the public sector net borrowing requirement – the difference between what the government receives in tax revenue and what it spends on goods, services, social transfers and debt interest. The last time I checked it was running at around £150bn a year – but since a chunk of that rolls over the existing debt it doesn’t follow that the PSND will rise proportionately with it.
    I might be wrong but your list of ‘alternative’ measures to address the deficit appears to lump structural and cyclical deficits together: the vast bulk of the deficit is cyclical and should disappear as the economy recovers. Estimates of the structural deficit usually put it at around 3% of GDP (much less than £150bn) – roughly what the overall deficit was before Northern Rock in 2007.

    ‘One doesn’t need a calculator to work out that it is still a long way short of the near one trillion pounds of debt we are storing up for our children to repay.’

    Our children inherit not only our debts but the rest of our economy too – wage rates, unemployment rates and our savings. You could argue that any set of policies that impedes growth or tips us back into recession (like a major fiscal contraction) so our future economy is smaller than it would otherwise be isn’t acting in the interests of their ‘inheritance’.

  • Alex Sabine 17th Oct '10 - 2:59am

    As Tim points out, there is no need to find the money to pay off the entire national debt in one go! Even a deficit hawk like me would limit the task to eliminating the £100bn+ structural hole in the annual budget, in the process slowing the rate of increase in debt, then stabilising it, and then starting to reduce it as a share of GDP from 2013 onwards. That is a daunting enough task, given our current starting point…

    As for the specific ideas floated in the article, most of them are highly undesirable, which I’m sure is the point Matt is making.

    To take a few:

    § Set a 50% income tax band for gross incomes over £100,000, raising £4.7 billion annually, or £2.3 billion more than the sum raised by setting the band at its present £150,000.

    This would be unlikely to raise nearly as much as £4.7bn. Indeed, the IFS reckons top marginal tax rates in the UK are already well beyond the revenue-maximising point, and that the 50p rate introduced this year is likely to raise “approximately nothing”. Lowering the threshold to £100,000 might raise a bit, since it would hit some of the less mobile high earners, but the sums involved would probably be in the hundreds of millions rather than billions.

    § Uncap National Insurance Contributions, so that they are paid at 11% on all incomes, including investment income above £110 per week. The extra tax take would be £9.1 billion.

    Merging NI with income tax – which this proposal would amount to – is a sensible long-term simplification measure. But simply lifting the UEL ceiling would amount to a tax rise of 11p in the £ for earnings above £44,000, taking the marginal tax rate for people at this level of earnings to 51% and to 61% for top earners. This would probably be the highest level of direct taxation in the free world.

    § Institute a 0.05% financial transaction tax on instant sterling transfers between UK financial institutions, raising some £38 billion a year.

    A financial transactions tax like that proposed by the “Robin Hood” campaign is a thoroughly misguided idea. It would do nothing to reduce financial instability since it does not target the key attributes – institution size, interconnectedness etc – that give rise to systemic risk. It is hard to see how a Robin Hood tax would have made the financial system of 2003-07 any safer – although it would have made it less efficient in various ways.

    Moreover, transactions taxes tend to hit end users. Rather than curbing earnings in the financial sector, a large chunk of the burden would be passed on to the users of financial services (both businesses and individuals) in the form of lower returns to saving, higher costs of borrowing and/or increases in final commodity prices. As the IMF concluded when rejecting the case for a financial transactions tax, “it is far from obvious that the incidence would fall mainly on either the better-off or financial sector rents”.

    The proposed tax rate is deceptively small, but remember that a tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production. (This is why most countries have found VAT – which effectively excludes transactions between businesses – to be a more efficient way of raising revenue than turnover taxes).

    For those interested in the technicalities, Giles Wilkes has explained why the seemingly infinitesimal tax is actually huge here: http://freethinkingeconomist.com/2010/02/14/the-robin-hood-tax/

    § Establish a High Pay Commission to apply a permanent public interest test into the setting of senior salaries.

    I’m not convinced of the case for a High Pay Commission, but if there is one it is based on the role that transparency might play in forcing high executive salaries to be justified. The idea that they should be determined by a “public interest test” – presumably adjudicated by a politician seeking votes or a highly-paid quango chief – is a populist gimmick with no economic merit. Anyhow, it would do nothing to reduce the deficit and to the extent that it reduced salaries would also reduce tax revenue. So it is not an alternative to cuts but would necessitate bigger cuts.

    35% tax on incomes over £10,000, 40% on incomes over £100,000 and 50% on incomes over £150,000.

    Since the basic rate of tax is currently 31% including employee NI, and above £44K the rate rises to 41%, this proposal would have the distinctly regressive effect of raising the tax burden sharply on low and middle earners while reducing it sharply between £44K and £150K.

    Other than that, they are great ideas… Submit them to George Osborne without delay!

  • Alex Sabine 17th Oct '10 - 3:17am

    @ Mike S: …the vast bulk of the deficit is cyclical and should disappear as the economy recovers. Estimates of the structural deficit usually put it at around 3% of GDP (much less than £150bn) – roughly what the overall deficit was before Northern Rock in 2007.

    Afraid not. The bulk of our £150bn deficit is reckoned to be structural, not cyclical. Hence the need for large discretionary tax rises and spending cuts.

    The OBR put the underlying or “cyclically adjusted” deficit in 2009-10 8.7% of GDP, compared to the total deficit of 11% of GDP. In 2010-11 the corresponding figures are 7.4% of GDP and 10.1% of GDP.

    Of course, determining where the economy is in relation to its trend – and thus how much of the deficit is structural – is an inexact science. But most independent estimates are that the structural ‘hole’ is of the order of £100bn.

  • John Roffey 17th Oct '10 - 4:13am

    @ Alex Sabine

    Yes, Tim does give a clear idea of how difficult the problem is – I would suggest an impossible problem to resolve by standard political techniques.

    Even if the Star Chamber are able to come up with the ‘best possible’ solution, few if any of the spending departments will be prepared to accept the outcome and will predict dreadful consequences if the proposed cuts go ahead – we have already seen this from Liam Fox for the Armed Services, supported by the Service Chiefs [and Clinton & Obama] – and also by the Police. The budget cuts will be agreed and announced, but I do not believe that those who consist of the Star Chamber will be able to withstand the pressures placed upon them and stick to their guns.

    Continual re-adjustments will be made and the resulting ‘pigs breakfast’ will not provide a satisfactory solution to the problem, this is why I suggested [above] an Icelandic approach to the problem – that is involving the electorate as far as is possible. If it is their clear choice that we lower our military defences or reduce the effort to prevent terrorism or allow the standard of education to fall – then so it be it. In this way those pressing for the cuts to be reduced will be effectively silenced if they know it is the ‘will of the people’ – those they are supposed to be serving.

  • Alex Sabine 17th Oct '10 - 1:25pm

    Involving the public in a systematic way is what the Canadians did through their Program Review in the mid-1990s.

    Rather than just inviting the public to suggest individual wheezes for spending reductions, more effort should have been put into explaining the broad nature of the choices available within the overall spending envelope the government has committed to, and what the implications of a whole host of different measures would be so that they could be compared and evaluated.

    That would have been a good way to re-examine everything – including election promises – from first principles, acknowledging the possibility and indeed likelihood that election pledges would have to be dropped.

    But it would probably have necessitated a big admission – that all 3 parties conducted a sham debate at the last election and that we as a nation now had to face up to the true situation and choices available.

  • Oranje whatever
    I think the people I described in my above posting will be very keen to descuss cuts and the excessive school building and irresponcible job creation schemes of recent years.
    Question what do you know the price of ansver everything.Question what do you know the value of nothing…congratulations you are in the coalition.

  • Orangina
    Good reply must be nice to view the problems real people face as mearley an interesting intelectual paradigam but I ask once again what do you have to tell people on the doorstep about issues effecting their daily lives?.

  • Orangiboom
    No answer then.

  • In what way is wishing a few fair breaks for my children mearley pleasing myself my concern streches to the children of all working famalies who have none of the advantages of the educated professional classes and wealthy.If you dont want an offencive tone from people take a less offencive one yourself.

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