Opinion: Public services and tax policy

Nick Clegg shocked me when he said that the UK fiscal deficit is increasing by £400m every day.

Since then we have had a broadly fiscally neutral budget from George Osborne, intended to stimulate the economy. True, VAT rose to 20% but in other ways, this was a give-away budget. VAT is a regressive tax, which we all have to pay, when we buy what we need, whether we can afford it or not. There should be lower rates for household essentials such as fuel. There should be no VAT on the first £1,000 of fuel bills.

The income tax threshold went up, which was good Libdem policy, but the basic rate of income tax remained at the low level of 20%.

I would have expected, given the dire state of the public finances, the basic rate of income tax to be increased, and the threshold for higher rate tax brought down, so that those who can afford to pay more, do so.

Chris Davies MEP has shed some interesting light on what is happening to Government finances. He has shown that Labour’s talk of austerity is misleading. There is a strong argument that the Chancellor has not done nearly enough to balance the budget. Is it really sound to rely on future growth to improve revenue and reduce the deficit, to aim only to reduce the structural deficit by 2015? Government debt will continue to increase at an alarming rate.

We should do more to cut out waste, by mismanagement of Government projects for example. We can make cuts at the Ministry of Defence in Whitehall, stuffed as it is with senior officers, but not in our armed services, which need strengthening. Before the election, Nick Clegg said that our soldiers, sailors and airmen were not paid enough. That is still very true. It is a disgrace that they are treated so badly when they risk their lives in the service of their country. I would like to know what he is doing about this now. The Navy needs its aircraft carriers and should keep the sea harriers as well. What a terrible waste to scrap them. We don’t want nuclear missiles. We should scrap them straight away.

Public spending should by tightly controlled, to bear down on inflation. We must not give in to the trade unions, which are pressing for the featherbedding of those fortunate enough to have public sector jobs, at the expense of hard-working families who have no job security and may be unemployed and living on their savings.

The PM did not treat some Government departments fairly in the last spending round – for example the Ministry of Justice is badly underfunded and under pressure to close courts and cut legal aid. The legal system – which is essential to a free, fair and just society – is in turmoil.

Decisions about public safety should not depend on financial considerations. Releasing prisoners on bail, because there is no space for them in prison, even if they are likely to offend while on bail, to abscond or to intimidate witnesses, is not a sound policy. It causes more work for the police rounding them up again, or they go untried.

This leaves the public enslaved by fear, especially victims who are unprotected from the violent criminals whom they have had the courage to inform on, trusting in police protection.

Local authorities try to maintain and improve services, and should be free to increase council tax, if the voters have voted for that. Central government should not try to micromanage local government.

One tax I would abolish is stamp duty. It leads to stagnation in the housing market, encouraging ‘staying put’. Economic growth is closely linked to the housing market. Low interest rates mean house prices remain far too high. Savers are penalised. Mortgages will not become affordable until house prices come down more. Buyers will not trust lenders to keep the interest rate low in the future, and wisely will not commit to a large mortgage, even if they can raise one.

We as a party badly need some radical, popular policies. If we can make the tax system fairer and target public spending better, we can save the country from the doldrums.

I don’t see this happening unless we become more vocal and engage with the public in this important debate.

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33 Comments

  • I agree with what you’re saying, at least parts of it, but these are all arguments for a vision of society post 2015. With no structural deficit (and no Conservatives) we can really go to town on equalities, assessing what has worked and what hasn’t, and even more tax reform.

  • David Parkes 6th Jul '11 - 4:36pm

    James Blessing took the words out of my mouth, the higher rate of VAT only applies to ‘luxury items’ not ‘essential items’ which attract a lower VAT rate.

    I also agree with his ideas for a green tax on household fuel consumption, provided its backed by grant scheme for home insulation and improving energy efficiency for people on low incomes in particular those in older poorly maintained properties.

  • @David Parkes
    “James Blessing took the words out of my mouth, the higher rate of VAT only applies to ‘luxury items’ not ‘essential items’ which attract a lower VAT rate.”

    It doesn’t matter how much sophistry you use, VAT is still regressive according to the facts – i.e. the proportion of peoples’ incomes that goes towards paying VAT decreases as a proportion of their gross income across all income deciles. VAT is regressive.

  • It is rapidly becoming clear that no political party seems to have the power or the will to control the Billionaires, Oligarchs, and Bankers who walk away with tax concessions and massive bonuses. No matter how immoral or corrupt the individual, company or country is, Britain will take the money for exclusive properties, luxury cars, weapons or football clubs.

    Why should we accept anything less than the immediate implementation of the full £10,000 tax threshold for those on lower earnings who are paid by PAYE and who pay tax on every penny earned.

    No doubt the finances of the country are in a very dire state but the argument that ‘there is no money left’ is simply not true. We have plenty money in the UK but distribution of wealth has gone too far in favour of a select group of billionaires and companies who will blackmail governments with the withdrawl of investment if they are challenged. Whlist others have pay freezes and reductions it seems that bankers simply cannot live without the oxygen of massive bonuses. Let our MP’s get some backbone and start defending the less well off against these sharks.

  • Ian Eiloart 6th Jul '11 - 5:08pm

    VAT isn’t regressive, according to the Institute for Fiscal Studies. That’s because on average you spend what you earn, so it’s no more regressive than Income Tax in principle. The fact that most essential spending (food, childrens clothing, rent, mortgage interest) is not subject to VAT means that people earning below the income tax threshold pay virtually no VAT.

    Oh, and domestic fuel is rated at 5%, though a further discount for low uses would be nice.

  • Grant schemes for home insulation and energy efficiency? Don’t these already exist?

  • I just love the way people (and the IFS) think they can change the definition of something in order to fit their prejudice.

  • Simon McGrath 6th Jul '11 - 7:42pm

    @steve
    ” others have pay freezes and reductions it seems that bankers simply cannot live without the oxygen of massive bonuses”
    So you want to reduce bonuses on which the govt gets 65% tax and NI so banks make bigger profits on which they pay much lower rates of corporation tax. Govt loses billions of pounds in tax.
    Difficult To see what this achieves.

  • According to the Institute of Advanced Economic Analysis (a lobby group I’ve just founded), VAT is really progressive. Right on, man.

    Back in the real world, using the actual statistics and strict definitions used by proper economists…

  • “those fortunate enough to have public sector jobs”

    oh how fortunate I am to work in a job that requires postgraduate study and 60 hours a week for the benefit of society….I laugh all the way home, via the bank, about how much I’m short changing the rest of society and featherbedding my oppulent home at the expense of hard working families without job security.

    grow up.

  • @Simon McGrath
    “So you want to reduce bonuses on which the govt gets 65% tax and NI so banks make bigger profits on which they pay much lower rates of corporation tax. Govt loses billions of pounds in tax.
    Difficult To see what this achieves.”

    What about the tax the government loses by freezing public sector pay? What about the loss of money in peoples’ pockets that would have been spent in the private sector…

    Arguing that banks pay lots of tax therefore they should be allowed to take advantage of their cartels and government bailouts to take huge salaries and bonuses is absurd. Think about the money the bankers are skimming off the productive economy – the misallocation of capital just continues until the country is bled dry.

  • @muxloe
    Quite.

  • Anne Waters 6th Jul '11 - 8:17pm

    @Ian Eiloart

    VAT isn’t regressive, according to the Institute for Fiscal Studies. That’s because on average you spend what you earn, so it’s no more regressive than Income Tax in principle. The fact that most essential spending (food, childrens clothing, rent, mortgage interest) is not subject to VAT means that people earning below the income tax threshold pay virtually no VAT.

    Adult clothing and shoes are essential, . There is VAT on cleaning products, washing powder, soap, toothpaste, toilet rolls etc. I know that these form a large part of my shopping and I consider them as essential unless of course the poor go naked, barefoot and dirty to make the tax less regressive. They could always wash by hand and spread the laundry on a hedge to dry so that they do not need that luxury item, a washing machine.

  • @Anne Waters

    If economists the world over accepted the definition of tax progressivity invented by the IFS then you would be right. However, they don’t, as it would completely contradict the basics of any science (even a science as second rate as economics).

    It’s like me saying I weigh two stone lighter on the basis that I’ve changed the definition of what a stone is.

  • Barry George 6th Jul '11 - 9:27pm

    unless of course the poor go naked, barefoot and dirty to make the tax less regressive .

    Now don’t be giving the coalition idea’s there will you ! 🙂

    I cannot believe that people are still trying to sell the Orwellian belief that VAT isn’t regressive. Its as if they believe that the poor only need to buy certain food products. It seems that the poor can do without vacuum cleaners or washing machines. Fridge freezers , Light bulbs , washing powder, clothes and shoes. sheets and pillows for the bed. toilet rolls and heaven forbid the occasional chocolate bar or packet of crisps…

    Of course if the poor are unemployed then they need a phone and some kind of internet access to apply for jobs. Not to mention paper, pens , envelopes, and maybe printer cartridges and a printer…

    The IFS may say that VAT is not regressive but it is based on so many assumptions that it turns out to be very poor and unscientific research indeed. They conveniently assume many things to come to the conclusion they do…

    First, the poor must have savings… they don’t.
    Second, they must have access to borrowing… they don’t
    Third, the consumption patterns of the rich must be the same as the poor…. and they’re not.

    Its nothing more than a cop out to fall back on the pseudo research of the IFS to defend the indefensible. All you need to do is simply stop and think for a moment. VAT is regressive , always has been . always will be, and trying to fool the voter with Orwellian tricks in language is not going to do the party any favours..

    What next… are people going to start claiming that we have a progressive government ? 😉

  • Andrew Suffield 6th Jul '11 - 9:46pm

    There should be lower rates for household essentials such as fuel.

    And also beer and hookers?

    Fuel is not essential.

  • Barry George 6th Jul '11 - 9:57pm

    Andrew Suffield

    Fuel is not essential

    Well funny you say that. A friend of mine who lives in the countryside recently lost her job. She has been told by the Job Centre that she must be willing to travel up to 25 miles to work or she is NOT entitled to any benefits. Of course where she lives there is only about 2 buses a day that do not run in time for her to get to any standard 9 to 5 job or home again.

    So she must drive to and from any interviews within 25 miles and to and from any minimum wage job she may find…

    Therefore , according to the Department for Work and Pensions, fuel is essential because in certain parts of the country you cannot get any benefits without it…

  • Fuel is not essential.

    So my 90 year old Nan was merely being self indulgent when she turned on her heating this winter during the coldest December for over 100 years…

  • “VAT isn’t regressive, according to the Institute for Fiscal Studies.”

    Actually, what the IFS said was that VAT _was_ regressive expressed as a propotion of income, but that _arguably_ there are different ways of analysing it in terms of which it isn’t regressive.

    For myself, I’ll stick to the standard analysis based on a percentage of income. And according to that criterion, the IFS agrees that VAT _is_ regressive.

  • Its nothing more than a cop out to fall back on the pseudo research of the IFS to defend the indefensible. All you need to do is simply stop and think for a moment. VAT is regressive , always has been . always will be, and trying to fool the voter with Orwellian tricks in language is not going to do the party any favours..

    Referring to IFS figures is Orwellian but chanting “VAT is regressive and always will be” is balanced and thoughtful?

    The figures show that VAT is pretty neutral in income deciles 2-9. Increases do hit decile 1 slightly harder and decile 10 slightly less hard based on current spending. The assumption is that decile 10 put more money into investments and savings and so are less exposed to VAT, which I guess results in a regressive effect – though high earners could certainly decide to buy luxury goods if they wanted to.

    The weird one is decile 1 which, as far as I know, includes students (loans not counted as income) and people living off savings. Hence their spending seems to be abnormally high for their position in the income distribution. Does anyone know if pensions are included in net income?

    Anyway, the progressive thing to do would probably be to re-assess what items VAT is charged on and make more modern essentials VAT free.

  • @Ed
    “Referring to IFS figures is Orwellian but chanting “VAT is regressive and always will be” is balanced and thoughtful?”

    VAT is regressive across all income deciles – it’s not based on chanting – it’s based on the hard evidence in the form of the ONS statistics that show that the proportion of peoples’ incomes that are spent on VAT decreases as a proportion of their salary with increasing salary (across all income deciles). That is the strict definition of tax progressivity/regressivity.

  • “We must not give in to the trade unions, which are pressing for the featherbedding of those fortunate enough to have public sector jobs, at the expense of hard-working families who have no job security and may be unemployed and living on their savings.”

    Have I strayed into the absurdist rantings of a Margaret Thatcher caricature?

    Trade unions represent people. To say we must not give in to them, as if the unions themselves are autonomous sinister individuals rather than representatives of a collective interest of individual people, dehumanises their members. This is a wholly illiberal attitude to take.

    Public sector employment is not a matter of fortune it is a matter of doing the jobs that our society requires in service to the community. The pensions that have been secured over generations for public sector workers are not feather beds. They are not being met at the expense of “hard-working families”, who by the way cannot be simultaneously hard-working and unemployed and living off savings.

    Those in the private sector with their bipolar employment status as you describe, having insecure jobs, or in your fantasy circumstances, also seeming to be independently wealthy and paying taxes during their unemployment for the featherbedded leaches of the public sector to sup from, could if they wished, apply for public sector jobs or fight for a deal that is equally as good as the public sector.

    The attack being engaged in by our government on the people who work for our communities at our request is abhorrent and unjust. Trying to couch it as an attack on the unions is identical with and as contemptible as was the banning of trade unions in GCHQ by Margaret Thatcher on the grounds that union members are necessarily traitors to our country.

    Liberal attacks on trade unions are simply wrong. There can be no social justice in a free market unless bargaining is conducted on a fair basis. A fair basis requires collective bargaining for workers at almost all levels of employment. The right to free association is fundamental to liberalism as is the right to withdraw ones labour. To frame the debate as being a collision between the interests of trade unions and government is a devious and cynical ploy to stir up resentment against good people. If we want to go down this route of casting blame then a more honest attack would be on the private sector employees who allowed their hard won employment and pension rights to be taken from them in order to gain a short term premium in disposable income.

  • Anne Waters 7th Jul '11 - 2:26pm

    @Barry George
    unless of course the poor go naked, barefoot and dirty to make the tax less regressive .

    Now don’t be giving the coalition idea’s there will you !

    Too late, that IS their idea!

  • Barry George 7th Jul '11 - 6:02pm

    Ed said…

    Referring to IFS figures is Orwellian but chanting “VAT is regressive and always will be” is balanced and thoughtful?

    Steve replied…

    VAT is regressive across all income deciles – it’s not based on chanting – it’s based on the hard evidence…

    Thank’s for saving my the effort Steve….

    Would you say that accusing me of “chanting” is balanced and thoughful Ed ?

  • Andrew Suffield 7th Jul '11 - 11:17pm

    She has been told by the Job Centre that she must be willing to travel up to 25 miles to work or she is NOT entitled to any benefits. Of course where she lives there is only about 2 buses a day that do not run in time for her to get to any standard 9 to 5 job or home again.

    So she must drive to and from any interviews within 25 miles and to and from any minimum wage job she may find…

    Therefore , according to the Department for Work and Pensions, fuel is essential because in certain parts of the country you cannot get any benefits without it…

    No, that’s wrong. You’re obliged to travel up to X minutes by whatever means are available to reach the job in question. There is no arbitrary distance limit because the government recognises travelling time is highly affected by geography and available transportation. If she has a car then that’s available and has to be used; if she can’t afford it then she can get rid of it and doesn’t have to use it.

    The problem here is that the front-office “advisors” at the jobcentre are all-too-often ignorant, self-important bureaucrats who hate unemployed people and exaggerate, misinterpret, or just plain make up rules that never existed. Now that’s something you really should be getting angry over. We need to reform the jobcentres.

    So my 90 year old Nan was merely being self indulgent when she turned on her heating this winter during the coldest December for over 100 years…

    Domestic heating is not applicable here – the author was not talking about this (you can tell this because he was calling for VAT to be reduced from 20%, and domestic heating is already at the reduced rate of 5% VAT).

  • Ed Shepherd 7th Jul '11 - 11:44pm

    Why shouldn’t poor people be allowed to have motor vehicles? It is extremely difficult to live without a car in suburban or rural areas. Believe me I have tried it and reduces life to a very lonely existence. Taxes on motor vehicle use just make life more demeaning and more difficult for those on low incomes. The wealthy are little affected by such taxation. Use of a motor vehicle is a key way in which poorer people can change thier lives for the better by allowing them more choice of work, education, socialising and purchasing. I agree with all those who say that VAT is a regressive tax. Would I be right in saying that Nick Clegg and Simon Hughes have said that in the past?

  • Ed Shepherd 7th Jul '11 - 11:46pm

    “The problem here is that the front-office “advisors” at the jobcentre are all-too-often ignorant, self-important bureaucrats who hate unemployed people and exaggerate, misinterpret, or just plain make up rules that never existed. Now that’s something you really should be getting angry over. We need to reform the jobcentres.”

    That’s not my experience of job centre staff. Most of them are very helpful in difficult circumstances. I have met the odd one who was not helpful but no more than the proportion of unhelpful staff in the private sector.

  • Michael Hall,

    In believing that the trade unions or the labour party are able to control either each other or their members you are denying a basic principle of liberalism i.e. that we are all autonomous individuals. You engage in dehumanising categorisations designed to dismiss the concerns of individuals in order to allow them to be attacked and demonised. Teachers and other public sector workers are personally motivated to take action because they are being personally attacked.

    The terms and conditions that are part of the package of employment for the public sector are not generous they are fair. That the private sector does not enjoy such fairness is because they have not fought to retain it. One of the reasons for this is that they do not have the power to fight. Such power comes through collective bargaining and action.

    Those of you who are liberals and accept the egalitarian conclusions to which liberalism leads should fight for and with trades unions as highly unionised societies are far more equal.
    Deficits are reduced by a range of factors. The two relevant ones being growth and cuts. This governments is only focussing on cuts and ignoring growth. The problem is that it is also an incompetent government and cannot manage to enact anything that actually cuts spending. Its privatisation of the NHS will cost more, as will its tuition fees policy, it is already spending huge amounts on redundancy for public sector workers, the pupil premium costs more for less gain, as does the free schools program.

    As for the time when the country was wealthy, well the country still is wealthy, we just refuse to share the wealth fairly. This country produces sufficient to meet the need for all citizens. The problem is that we do this without needing to gainfully employ all working age people. To solve the pension situation what we need to do is change the status quo in distribution of either work or money but preferably both. That means either sharing the work out fairly giving everyone the chance to earn or hand out benefits. By increasing the pension age whilst not reforming the conditions of employment all we are going to do is increase the proportion of working age people who are economically inactive.

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