Liberal Democrat shadow chancellor Susan Kramer has responded to John McDonnell’s speech at the Labour conference yesterday.
Labour’s proposals lack any recognition that delivering growth, fixing the economy and eliminating the deficit involves taking difficult decisions. They are offering a false prospectus which will stall any economic recovery and would mean more austerity for Britain.
There is no magic pot of money that has up until now been ignored, so Labour’s plans to eliminate the deficit or renationalise major British industries are completely unfunded.
The Conservative Government is choosing to balance the books on the shoulders of the poorest but they can only be challenged by an economically credible opposition that is also socially just. It is now clear that the Labour party have left the playing field.
Liberal Democrats showed in Government that we can take the necessary decisions to rebuild our economy. We are committed to eliminating the structural deficit, but doing so fairly with a credible plan that means that the broadest shoulders carry the largest burden.
Unlike Labour we actually voted against the Conservatives’ unnecessary cuts to welfare, and we voted against the Budget that introduced an inheritance tax cut for millionaires and a cut in corporation tax for some of the richest firms.
It is worth repeating that we have, as a party, shown ourselves to be capable of taking difficult economic decisions where necessary. Reputations for economic credibility are hard won and easily lost.
On the question of credibility, there is a piece in the FT challenging [link corrected again] the idea that there may be £93bn of corporate welfare to be turned off, to pay for, well, pretty much everything.
For example a lower VAT rate on house building costs £7bn compared to the full rate and this is counted as £7bn of corporate welfare. But is it really? Surely if the tax were raised to the full rate, nearly all of that £7bn would be passed on to homebuyers, making housing less affordable and reducing the rate at which homes are built.
Tax credits, too, it is often argued, are a form of corporate welfare that subsidise low wages. But this time it is Labour’s corporate welfare, that the Conservatives have now, only partly, replaced with a higher minimum wage. Vince Cable’s industrial strategy, building on Peter Mandelson’s and now under threat, is also, arguably, a case of corporate welfare.
Frankly, if there were £93bn on the table, government of any colour would take it, show largesse, and get re-elected by a landslide. You don’t really need to look at the details behind the corporate welfare line, damning though they are.
* Joe Otten was the candidate for Sheffield Heeley in June 2017 and Doncaster North in December 2019 and is a councillor in Sheffield.
Follow @libdemvoice.org on Bluesky
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Violent Bonham Carter features on Fake or Fortune?
Have resignations led to a rethink?
High Fell leaflet watch (2)
Two new Makerfield by-election polls gives Burnham 5 and 12 point leads
Peter Martin
Simon
Ben Austin
Matt Wardman
Neil Hickman
60 Comments
Good stuff. A problem is I think McDonnell and Corbyn are coming across as quite likeable at times on the news. McDonnell makes me laugh – I think he’s the brains behind the operation.
To counter this their past of being very soft on terrorism needs to be brought up time and time again. Their economic proposals also need to be shown to be ridiculous, but I still think the way to get around the likeability factor is through bringing up their foreign policy.
The Tories are going a bit too far I think in suggesting if Labour get in the UK will turn into the Weimar Republic, but Corbyn saying things like that last Labour government “spent too little” will scare off voters.
It would be good if someone from the LIb Dems could start saying something about the economy. I do not even recall seeing Susan Kramer at Lib Dem conference, although maybe that was my fault if I didn’t see her.
From what I can tell from Tim’s speech the intention is to continue with the same policies we had before the general election.
Understandably no one wants to say what the implications of that is, given that we rightly opposed more benefit cuts and wrongly decided that we would replace Trident, albeit not like for like.
The party leadership needs to think very carefully about where we are right now. Labour looks like it is making a new start on the economy with lots of interesting ideas and the Lib Dems are looking rather conservative and unimaginative by comparison. What we are not seeing is the hard left Marxist dogma that put people off Labour in the 1980s.
“On the question of credibility, there is a piece in the FT challenging the idea that there may be £93bn of corporate welfare to be turned off, to pay for, well, pretty much everything.
For example a lower VAT rate on house building costs £7bn compared to the full rate and this is counted as £7bn of corporate welfare. But is it really? Surely if the tax were raised to the full rate, nearly all of that £7bn would be passed on to homebuyers, making housing less affordable and reducing the rate at which homes are built.”
The link to the FT doesn’t seem to work.
The totally dodgy £93 billion of “Corporate Welfare” is something that I addressed here over two weeks ago: https://www.libdemvoice.org/a-corbyn-victory-means-theres-not-much-chance-of-a-reunification-of-the-left-47419.html
Ironically, one of the easiest ways to find out what a fiction it is, is to read (with a modicum of understanding) a Guardian article which seeks to support it:
Sorry, link omitted to the Guardian article in early July explaining where this ficticious “£93 billion a year of corporate tax relief and subsidies” supposedly comes from:
http://www.theguardian.com/politics/2015/jul/07/corporate-welfare-a-93bn-handshake
Thanks, link corrected.
http://blogs.ft.com/ftdata/2015/09/28/93bn-of-corporate-welfare-what-nonsense/
That FT link is now throwing up the paywall for me. Possibly just because I have hit it too many times. Does it work for anyone else?
Joe Otten said
” Surely if the tax were raised to the full rate, nearly all of that £7bn would be passed on to homebuyers, making housing less affordable and reducing the rate at which homes are built.”
Really? Are houses affordable at the moment – especially given that the FT says that the housing market is heating up? Can new builds be any lower?
A social liberal.
Yes, housing is unaffordable and in short supply, and levying a higher tax on it will make it even less affordable and even shorter in supply. Isn’t this obvious? What do you think would happen.
Vince Cable’s latest book is out in hardback, with good crits.
Joe
Taking it in conjunction with Corbyns promise of a huge rise in social housing builds and forcing builders to build the amount of houses needed instead of keeping supply artificially low, I could see the price of new builds dropping. It does partly rely on the economy remaining stable but get several hundred thousand new houses out there and the supply/demand tug of war will change, taking the heat out of the housing market.
Social, you’re moving on to another question. We were talking about the effect of increasing VAT on new homes. Do you not think that measure would increase prices and reduce construction?
And an extra tax on homes is austerity by any definition.
Whether his other policies would work is another question.
Joe do you think the economic ‘credibility’ that was so hard won by the Lib Dems in Coalition will be remembered at the next election. Will the voters who gave us a battering last May in seats such as Sheffield Central come flooding back to repay us for that’ credibility’. Just asking.
@Silvio
I think the answer is Yes, to a certain extent it will be. I think a related point is that I expect that by 2016 a lot of voters will start looking back on the Lib Dem period in Coalition rather more favourably than they clearly did in the recent General Election.
@ Simon Shaw
It is highly unlikely we will get any electoral benefit from our economic policies in 2020. There is a possibility we might get some benefit from opposition to the Tories 12 billion cuts to welfare if we keep talking about them and promise to restore welfare funding to an equivalent level in 2020. As Geoffrey Payne points out we need to consider a different economic policy. I think we need to consider the failure of economic policy for the last 35 years that has resulted in huge increases in inequalities and go back to economic policies to limit unemployment to 3% of the working population, even at the cost of increased inflation which hits those with savings. I think the first step would be to replace Susan Kramer with someone who believes in full employment.
If the economy continues to improve I can see the Tories being the party of government for some time. If things do start to go radically wrong, don’t expect people to say “Come back, Lib Dems. All is forgiven.” It’s more likely to be ” Please save us Jeremy, but don’t make it painful”. That is, always assuming Gezza stays the course!
By far the most important issue is remaining in the EU and helping to restructure it, which it desperately needs.
@Michael BG “There is a possibility we might get some benefit from opposition to the Tories 12 billion cuts to welfare if we keep talking about them and promise to restore welfare funding to an equivalent level in 2020”
Putting it bluntly, the majority of those welfare recipients, if they vote at all, will always vote Labour so there will be few votes in it. Many other voters think the welfare bill is too high.
@Silvio “Will the voters who gave us a battering last May in seats such as Sheffield Central come flooding back to repay us for that’ credibility’. Just asking.”
Will you manage to reply to a Joe Otten comment or thread without repeating this same question? Just asking.
Maybe Jeremy Corbyn is another Clement Attlee ? The press did not like him but they could not stop an entirely unpredicted Labour landslide in 1945. There is certainly a mood for change which I have not experienced since 1968 and some people seem willing to pull the house down even in the full knowledge that they could be creating a disaster because they feel they have nothing to lose. The ones who have everything to lose seem like rabbits caught in the headlights and unable to respond.
Ok, enough with the references to Sheffield Central. Our excellent candidate there, one Joe Otten of this parish, spent his time campaigning in the neighbouring seat of Sheffield Hallam, where he was also defending his council seat. Voters in his ward gave him a majority of over 1800, so can we perhaps just put this one to bed once and for all cos it’s getting boring.
Joe Otten
For example a lower VAT rate on house building costs £7bn compared to the full rate and this is counted as £7bn of corporate welfare. But is it really? Surely if the tax were raised to the full rate, nearly all of that £7bn would be passed on to homebuyers,
Er, no. Don’t you understand free market economics?
The price of houses is what people will bid for them. Subsidising house buying doesn’t make it easier, as often supposed, it just means people can bid more, so the prices go up. In a similar way, more VAT on building doesn’t change what people can bid to buy them, so it doesn’t change the price. It means those selling the houses get less rather than those buying them having to pay more.
Eddie
“The Tories are going a bit too far I think in suggesting if Labour get in the UK will turn into the Weimar Republic,”
Goldene Zwanziger
(Banana Republic maybe)
Oh dear here we go again. We will not cut like the Tories, we will spend more then. (Agreed?) We rubbish Labour’s suggestion that tax evasion and Corporate Welfare will bring in the cash to balance the books. Yes, the Blairites certainly got themselves into a muddle on the Welfare Bill- but you cannot seriously suggest that McDonnell is not clear in his opposition to welfare cuts, inheritance tax cuts, cuts in Corporation Tax or improved use of progressive taxation?
It reads as if this speech was written assuming Yvette Cooper not Corbyn had been elected. So notwithstanding that Labour’s current position is nothing like as stated by Susan Kramer I really don’t understand the issue. I have read the LibDem manifesto. I do not see specifically where the extra revenue is going to come form that makes the LibDem commitments, welcome as they are, any more credible. But does it matter? Why knock lumps out of each about how to achieve what we agree needs to be done, while the Tories get on with inflicting the things we are united in opposition against or support?
We should continue to oppose the income loss to families from tax credits but please remember they are what Labour loves the best and that’s a means tested benefits which you have to apply for and which are frequently maladministered and then reclaimed by HMRC. or fraudulently claimed because additional income not declared .We would be much better off to increase tax threasholds again to offset the 2,000 lost by families .Remember low paid families don’t use this money for fancy holidays or school fees but for paying the rent ,child care costs buying food and paying energy bills any thing left is of often spent in the local economy.
Matthew, have you tried applying your logic to the question of duty on cigarettes? Do you agree that that tax pushes the price up?
@Michael BG
” … and go back to economic policies to limit unemployment to 3% of the working population, even at the cost of increased inflation which hits those with savings.”
I think that one of the biggest problems with such a proposal is that one of the things you would need to do is to ditch the Osborne plan for a National Living Wage of £9.00+ per hour by 2020. I can’t honestly see any political party being “brave” enough to do that.
Oh come on Joe. This is really simple economics.
Increasing tax on anything gives the seller a decision to make. He can keep his profits constant by raising the price, if he thinks the market will bear it. Or he can hold his price steady and take all the hit himself, if he thinks that he can only keep his customers by doing that. Or he can do something in between, and that’s most likely what he will do. Increasing tax on business therefore tends to squeeze profits, even if most of the tax is raised via price increases.
Increasing business taxes by cutting “corporate welfare” will therefore have essentially the same effect as increasing tax on fags or on goods in general. It will squeeze profits. It will take money out of the pockets of ordinary people as well. There’s no such thing as a free lunch, and that is a fair point to make to the Corbynites. They would be entitled to respond that in their view, profits do need to be squeezed, in preference to simply loading all the burden onto private individuals. They could also respond that tax increases are to be preferred to massive benefit cuts, to underfunding the NHS, or to what Osborne is in practice doing – allowing the deficit to stay high, nearly ten years after the financial crash that caused it!
Kramer: “Liberal Democrats showed in Government that we can take the necessary decisions to rebuild our economy. We are committed to eliminating the structural deficit, but doing so fairly with a credible plan”
What is this supposed to mean? That the economic decisions taken by the Coalition were all exactly what we wanted to do and that Lib Dem economics is identical with Tory economics? Because the only thing that we “showed” in Government is what that Government actually did.
Now a Lib Dem shadow chancellor might instead want to argue for “eliminating the structural deficit, but doing so fairly with a credible plan” which was quite different from that led by Osborne and pursued by the Coalition. But then the Lib Dem plan would have no relation to anything that had been “shown in Government”.
Let’s stop talking about what the Coalition did. It only gets us into a mess. We’re different from the Tories, ok? So we’re way different from the Coalition too. Or so I trust, because I can’t keep supporting this party if we’re not different from a Tory-led coalition!
Who pays a tax is abit more complicated than either of the two proposals above. Briefly, whichever party in the transacion appears to be paying the tax doesn’t matter. The result will either reduce the number of transactions, increase the price paid by the buyer or reduce the price received by the seller (or both) depending on the elasticities of demand and supply. But you all knew that … Any micro economic textbook covers this. Lipsey is good.
Simon Shaw,
Yes, i remember well the discussion of the Guardian article which showed that while some of the figures were exaggerated many of the “corporate subsidies” do indeed exist… But you know, rewriting history is always a good game for the persistent!
It seems that we need to be working out new Liberal Democrat economic policies, having read the comments above. I certainly don’t recall hearing much about this at Conference, and meanwhile some of what John McDonnell had to say yesterday in Brighton sounded reasonable. I’m no economist, but isn’t it current thinking of those of us pro Keynesian orthodoxy and anti neo-con philosophy that austerity inhibits economic growth? (C.f. the plight of Syriza.) So what are the Lib Dem answers, now that we are no longer limited by the Coalition?
@Katharine Pindar “I’m no economist, but isn’t it current thinking of those of us pro Keynesian orthodoxy and anti neo-con philosophy that austerity inhibits economic growth? ”
Hi Katharine,
I wouldn’t worry about not being an economist, they constantly disagree with each other. I’m afraid people who quote economists tend to be selective, and that can be misleading. For example, I’m going to make a selective quote of Paul Krugman, who said on Newsnight 30 May 2012: “Now, give me a recovery, in the UK or the US, and I will become a fiscal hawk.” (About 11m 54s into the clip) https://www.youtube.com/watch?v=kqA4EJe4j5w
I suspect he’d say something slightly different now that we’ve had seven quarters of economic growth over 2% 😉
Time will tell with John McDonnell. At present Corbyn and McDonnell have put almost all Labour policy under review, so we can’t say for sure what it will be. But what they do say worries me. From what I’ve been able to gleam, as well as seemingly moderate things, they appear to be saying the following: Reverse previous cuts, close the existing deficit with no more cuts, support all strikes (unconditionally), and pay for it all by taxing business and the very rich. Trouble is, if you do that, I fear that’d cause major problems for the UK economy.
Personally, I think a few small tax increases on the rich may be justified – in particular high-end property is undertaxed compared to low-end property. But any more than a little would be dangerous, and that leaves us with very uncomfortable choices if the government is to stop spending more than it’s taking in revenue.
But you’re also right that maybe some of us have been a little inhibited in what we’ve said out of loyalty to those in the party in coalition positions. It’s possible we should slow deficit reduction just a little. I think some of the cuts should be reversed. But I fear, if we’re to get the finances of the country under control, most cust cannot be reversed, at least in the short term.
@AndrewMcC
“Yes, i remember well the discussion of the Guardian article which showed that while some of the figures were exaggerated many of the “corporate subsidies” do indeed exist…”
Your memory is clearly not as good as you think. In fact it wasn’t the case that “many” of this claimed “corporate welfare” exist, but rather that hardly any of them exist. In fact I think there is just one that was agreed on, as follows:
“Insurance, advice and advocacy services: £406m Includes such vital services as the state’s insurance scheme for trading abroad – the export credit guarantee”
That is the only one that could reasonably be described as “corporate welfare”, and amounts to less that half of one percent of the claimed total. So there’s 99.5% of the claimed total about which there are serious doubts.
Interestingly the person responsible for the £93 billion claim, a sociologist called Dr Farnsworth, has started back-peddling rather in yesterday’s Guardian: http://www.theguardian.com/commentisfree/2015/sep/28/corbyn-business-corporate-welfare-taxpayers
However it’s still clear that he doesn’t really understand what he is talking about.
George -“But what they do say worries me. From what I’ve been able to gleam, as well as seemingly moderate things, they appear to be saying the following: Reverse previous cuts, close the existing deficit with no more cuts, support all strikes (unconditionally), and pay for it all by taxing business and the very rich. Trouble is, if you do that, I fear that’d cause major problems for the UK economy.” How is this different to what Kramer and Farron are saying? Other than Kramer pours scorn that Labour will raise enough to pay for this – without saying how she would do it. (The LibDem manifesto does not address this in any quantified measure whatsoever)
By the way supporting an individual right to withdraw labour is nothing like saying unconditional support for strikes -and in any event I understand (and hope) the LibDems are side by side with Labour in opposing that bill. Having cooperated with the Tories in the coalition, why do you need to hold your noses at the prospect of cooperating with Labour?
Has Susan Kramer never heard of Keynes ?
Simon,
My main recollection is you trying to claim that the subsidy to the railways does not exist! And that allowances that companies can claim against tax are not a tax break but just some “Natural Law” even though the rules vary constantly both in the the UK from year to year and between the UK and other countries, and even though I as an employee cannot claim many things necessary for me to do my work against my income tax (where in America I could – I am not advocating adopting the strange US tax system, BTW!)
Thanks for the new link to Farnsworth – he seems pretty sensible. No doubt you also dispute his argument that British companies pay less tax than the rest of the G7: http://www.theguardian.com/commentisfree/2015/jul/10/corporate-welfare-budget-tax-money
@nvelope2003 – I see you keep comparing Corbyn and Atlee, which is completely bizarre.
Atlee was a patriot who had fought at Gallipoli, an honourable man greatly respected across parties, and crucially he had many years of Cabinet experience where he had performed well. How on earth is this anything like Corbyn?????
@AndrewMcC
Once again your recollection is wrong.
You are clearly taken in by Farnsworth, perhaps because your understanding of the area is as poor as his.
Why don’t you read some of the comments from Guardian readers (yes, that’s what I said!) below his article yesterday. Overwhelmingly they say they think he is talking garbage.
As an alternative, read what Vince Cable’s former advisor, and former chief economist at CentreForum , Giles Wilkes writes in the FT about Farnsworth’s erroneous claims http://blogs.ft.com/ftdata/2015/09/28/93bn-of-corporate-welfare-what-nonsense/
£93bn of corporate welfare? What nonsense
Labour should be wary of giving credence to a very suspect number.
The £93bn figure now routinely used to evaluate the scale of “corporate welfare” in Britain is badly misleading. If the Labour Party is to re-establish its economic credibility, it needs to give the number a very wide berth.
First of all, the very concept of “corporate welfare” is tricky and question-begging. When applied to individuals, welfare is easy to understand – it means payments from the state provided on the basis of need. Need usually refers to income, although some needs – having children, being old – are defined in others ways. Significantly, the recipient is not expected to provide a service in return. They may need to show they are working or studying, but welfare recipients are not being paid in return for something else. There is, after all, a term for those sorts of payments, which is “wages”.
The various sums of money now routinely called “corporate welfare” are very different. They are not income top-ups for companies, doled out because the company has convinced the government that it is needy. This semantic point is important, because the £93bn is often treated as if it is a sum that can be easily curtailed, just as a welfare payment might be stopped, with “corporate welfare recipients” the only casualty. For some who argue against the current form of public sector austerity, the idea that there are £93bn of Treasury outgoings that can be easily trimmed is essential for making the numbers add up.
…
…
I dunno why people are going on about this, The fact is the Conservatives are in power, the election is 5 years away and David Cameron is the prime minister. It comes across more as a proxy war between the left and the right of the Lib Dems.
All I’ll say on Labour is I don’t vote for them , but think they’re well shot of the likes of Blair and Mandelson. Can’t we talk about the incompetence of IDS who unbelievably still has a department unlike anyone in Labour, the international laughing stock that is our Prime Minister, the disaster that will unfold as the EU referendum closes in, the further deindustrialisation/job loses in George Osborne’s “northern Powerhouse” and huge cuts that are taking money out of working families pockets. Coz at the moment it’s like charge of the light brigade, sabres drawn, heading down the wrong valley straight towards the cannons. The one certainty is that there is absolutely no chance of any kind of power unless you unseat the people in power and Labour are not actually in power.
Glenn
People are arguing about this because there as a hole where a Lib Dem economic policy should be and some people would advocate the views previously espoused by McDonnell and Cornyn (even if they are now avoiding advocating them directly to stave off scruriniy). The Tories are doing lots of things that need opposing, that doesn’t mean the best solution responce is to addopt the ‘magic money tree’ alternative.
It is a matter of the argument you use to oppose.
@Dave Orbison
Hi David,
Sorry for the delay replying, I hit my posting limit.
I wouldn’t expect Jeremy Corbyn, or Susan Kramer, to be producing an alternative spending review or an alternative budget at this stage.
Kramer does identify two tax cuts for the rich that the Lib Dems are opposing. But then, I presume Labour would do the same.
What worries me is the general promises John McDonnell appears to have made, which have not been made by Tim Farron :- to reverse a series of cuts, and make no more cuts. I’m not criticising McDonnell for not providing detail, but for raising the expectations that this is possible without damaging the UK economy, and thereby endangering the very tax income he’d need to fund this.
Re trade unions, I hope you’ll be reassured by this quote from the New Statesman:
‘Nick Clegg said he shared O’Grady’s “dismay” at the trade union bill, which he denounced as “gratuitous, unjustified, disproportionate and, from my point of view, recycling lots and lots of measures that I consistently blocked within government”‘
http://www.newstatesman.com/politics/uk/2015/09/nick-clegg-trade-unions-should-mourn-loss-lib-dems
What worried me was nothing to do with the new legislation, but Labour offering underconditional support for all strikes. That seems to me very unwise. Of course the following article might be incorrect, if so, that would be reassuring:
http://www.politics.co.uk/news/2015/09/29/the-labour-party-will-now-automatically-support-all-strikes
@ Simon Shaw
“I think that one of the biggest problems with such a proposal is that one of the things you would need to do is to ditch the Osborne plan for a National Living Wage of £9.00+ per hour by 2020.”
This reply from you really surprised me. I thought you understand a little about supply and demand. If there are ten people after the same job the employer doesn’t have to pay high wages, but if no-one applies because the wage is too low then the employer will have to pay more money. I have never heard anyone say that full employment lowers wages. They normally complain that full employment increases wages. And of course it reduces inequalities.
Hi George – I think it is fair to say that Labour has been more specific on issues like Bedroom Tax, Student Loans, tax credits than the LibDems. That both parties have a lot to do about developing a detailed economic policy and McDonnell announced a fairly impressive list of advisors who will work on this. But I think the thrust of your criticism re ‘raising expectations’ applies equally to the Farron and Kramer. What does he mean by being fairer? Farron says “They wanna cut billions of pounds from some of the poorest families in our country” “[we] have a target of building 300.000 homes a year” Saying we ‘just want to be fairer’ as a declaration of intent is all well and good but what does it mean?
re strikes – I think there is an issue of context re the Trade Union Bill. I believe, like McDonnell, that any person has a right to strike. I hope that strikes are used as a last resort and that we have constructive ways of settling workplace disagreements. That must be in everyone’s interest. I believe in workplace democracy. So if a democratic vote has been taken in favour of a strike then I have to respect their decision. Who am I to interfere? I thought LibDems were against state interference. People who strike are not demons or monsters or sheep. They are ordinary people like you or me who are entitled to be treated fairly. In nearly forty years of working I have been on strike for just 2 days. So supporting the rights of free people to strike does not make me irresponsible or strike happy either.
Joe Otten
Matthew, have you tried applying your logic to the question of duty on cigarettes? Do you agree that that tax pushes the price up?
We all need housing. We don’t all need to smoke.
When cigarettes are used, they are gone. We can’t buy them, use them and then sell them on at a profit.
Producing as many cigarettes as is needed to meet demand is easy. Producing as many houses as needed to meet demand is not.
Tobacco plants can be grown every year. Land cannot, we only have what we always had.
This is pretty basic economics, Joe.
Andrew McC
“And that allowances that companies can claim against tax are not a tax break but just some “Natural Law” even though the rules vary constantly”
Are refering to capital allowances which are something like 22bn of the figure?
If so they are not a ” Natural Law” but an attempt to account for depreciation I in a standardised way. Or is it that you don’t understand the logic for excluding depreciation?
Michael BG
“Simon Shaw – ‘I think that one of the biggest problems with such a proposal is that one of the things you would need to do is to ditch the Osborne plan for a National Living Wage of £9.00+ per hour by 2020.’
This reply from you really surprised me. I thought you understand a little about supply and demand. If there are ten people after the same job the employer doesn’t have to pay high wages, but if no-one applies because the wage is too low then the employer will have to pay more money. I have never heard anyone say that full employment lowers wages. They normally complain that full employment increases wages. And of course it reduces inequalities.”
If you want to get unemployment down from (say) 6% to 3%, then you are talking, by definition, about bringing into employment some of the less skilled, least “attractive to an employer” people.
As you know, the National Living Wage is supposed to reach 60% of national median earnings by 2020 i.e. something like £9.30 per hour. That will mean it will be around 65% of median regional earnings if you are outside London and the South East.
I just think there is a genuine doubt that the very least skilled, the very least “attractive to an employer” people are going to be worth (economically) as much as two thirds of the (median) average – that’s economic worth as in ability to add value. If they aren’t, then employers simply aren’t going to want to take them on, and unemployment will go up (as the OBR predict) rather than down, as both you and I would want.
So when you say “I have never heard anyone say that full employment lowers wages” I would respond that it’s rather a case that having a high legally enforceable minimum wage makes it hard to get (effectively) everyone into employment.
I hope that makes (some) sense.
@Psi
“Andrew McC – ‘And that allowances that companies can claim against tax are not a tax break but just some “Natural Law” even though the rules vary constantly’
Are refering to capital allowances which are something like 22bn of the figure?
If so they are not a ” Natural Law” but an attempt to account for depreciation I in a standardised way. Or is it that you don’t understand the logic for excluding depreciation?”
You are quite correct, Psi, and Andrew is wrong. I don’t even know what he means when he talks about them being a “Natural Law”.
Andrew just doesn’t understand. The irony is that when I tried to explain to him two weeks ago why it’s perfectly reasonable for landlords to claim legitimate business expenses against tax, he accused me of patronising him saying “I did not really need a lecture on how landlords claim tax relief on the expenses in letting a property. I understand that perfectly well!” BUT HE DOESN’T!
To assist, here is my response to him re Capital Allowances, which are an enormous part of the Farnsworth dodgy £93 billions:
AndrewMcC – “Tax breaks to industry are another example. Writing off expenses against tax is not available to employees, in general – I cannot even write off daily travel costs which are an absolute necessity to perform my work. Even from running a microbusiness for a few years I know that the rules are very complex and can be manipulated to avoid tax”
MY RESPONSE: But that’s not the main part of Farnsworth claimed £44bn of “tax reliefs provided by the Treasury”. He specifically says “The largest amount was spent allowing businesses to write off billions spent on plants, machinery and equipment among other items.”
(To continue)
(Continued)
You talk about running a small business. You may (or may not) recall how it was taxed. Supposing your accounts showed the following:
£100,000 Turnover
– £65,000 Cost of Sales and General Running Costs
– £10,000 Depreciation on “plant, machinery or equipment”
___________
£25,000 Profit for the year
Because you can decide on whatever basis of depreciation you want, the taxman (ironically, largely to prevent tax avoidance) DOESN’T allow you to include Depreciation in your tax calculation.
So your taxable profits are then £35,000. Instead the taxman permits you to deduct Capital Allowances, which is the tax equivalent of depreciation, calculated under strict HMRC rules. In this year they may come to £8,000.
So your final taxable profit would be £27,000.
The probem, assuming I am not misunderstanding him, is that Farnsworth includes this £8,000 with what all the other businesses’ Capital Allowances and then says “Isn’t it awful, there’s tens of billions of ‘subsidies and tax breaks’ being given to all these greedy businesses as ‘Corporate Welfare’”.
It’s NOT Corporate Welfare – it’s the taxman’s equivalent of depreciation, which is a totally normal and reasonable business cost that needs to be allowed for in calculating your profit.
@ Simon Shaw
Thank you for your considered reply. I can accept that I am talking about “bringing into employment some of the less skilled, least ‘attractive to an employer’ people”. However I still think employers would employ these people at the minimum wage the laws states for their age. At first employers are going to look at ways of increasing productivity but when these have been implemented a company will be left with a choice – employ somebody who is not as productive or not increase production. When there is full employment the employer would when faced with this choice employ the less productive person (as they did in the 1950’s, 60’s and 70’s) if the increased production the person produces is profitable.
The government could provide financial incentives for employers to employ these less productive people to help the situation. We have to find a way to get these people to be employed or we will never create a liberal society.
Simon Shaw
I missed the discussion the other week so I’m catching up. I think your discussion was lead in to a more loaded example.
I would approach it this way:
Imagine a widget factory.
1) The capital allowance is the tax equivolent of depreciation.
2) depreciation is a cost of business as it is the allocation of the plant and equipment (for example) the same as Insurance or the widget designers, water, heating, etc.
3) what is the alternative?
a) allow the purchase of the depreciatable asset at purchase – allowing the tax write off too early (too little tax collected) which is against the logical approach of matching.
b) don’t allow costs of business to be deducted – you have now created a turnover tax, if you want to do that have the honesty to say so and don’t use deception to edge towards it (new politics and all that).
c) distort the economy against capital intensive business (manufacturing) in favour of capital unintensive business (coffee shops and finance) – errr, what? Who put Fred Goodwin in charge of tax policy? Well at least he hats to screw over the makers of Pink Panther Wafers…
@ Simon Shaw
“Capital Allowances – it’s the taxman’s equivalent of depreciation, which is a totally normal and reasonable business cost that needs to be allowed for in calculating your profit.”
I understand this is the case today, but why is it reasonable, but not reasonable for someone to claim their car as a capital expense and so get tax relief of some or all of the cost? Why can’t they claim repairs to their homes like landlords can to their rented property?
These allowance are incentives for doing something. The government thinks that investing in equipment is a good thing. It thinks it is a good thing for a landlord to repair their rental property. But it doesn’t think buying a new car is a good thing or repairing your home is a good thing. I would love to be able to claim against tax the money I spend on having my car serviced every year. There is no natural law that when done by a certain group it is a good thing, but when done by the bulk of the population it is not a good thing. It is a political decision made about economics. A different decision could be taken without it being morally bad. You have made the case that the current arrangements are a good thing, but I suppose someone might want to make the opposite argument and say it is unfair.
Michael BG
“These allowance are incentives for doing something. The government thinks that investing in equipment is a good thing.”
This is a mis representation of what capital allowances are for.
They exist to on one hand keep the consistency of corporation tax being a tax on profit by providing recognition to the costs of fixed assets.
On the other hand they exist to reduce tax manipulation by changing depreciation methods.
Personally I’m not a fan of corporation tax as I think it has perverse incentives, I just don’t know how I would make my prefered method work without holes for evasion. However it is a tax on profit and the least bad option to achieving that out come is capital allowances.
People objecting to them either want a totally different form of tax, which they should be honest enough to say, or they just want to have an illogical system out of some underlying dislike of business.
There may be arguments for allowing some expenses against income tax but that is seperate from corporation tax.
One other possibility I missed is some people aren’t capable of following the basic logic of what capital allowances are for, though it is sufficiently simple those people should be a very small number.
I suspect that in reality those complaining just want a bigger lumpier tax that would be more ‘punative’ but they don’t want to say so as they have experienced having their ideas for these shown to be terrible ideas.
There often seems to be a cross over between people who complain about CAs also favour FTTs while bemoaning ‘big business’ when the approach they advocate would favour ever larger businesses.
Otten’s comment about LD’s hard-won economic credibility almost made me spit out my coffee, but Kramer’s comment is fine.
Simon,
Just to repeat: There is no need to explain to me again how capital allowances work (sigh!)
We are discussing what Farnsworth says, not the workings of capital allowances and other tax reliefs for business (or even their merits, on which I am neutral). I used the word “Natural Law” (sorry Psi – you came into this second time around) because you appeared to be taking the view that there was only one way to do things, and this is how they are done. What Farnsworth says is that taxation on Business is a political decision. (I will certainly concede that it may also be a pragmatic one). He couples the capital allowances with the low overall rate of corporation tax compared to other major economies to suggest that Britain has a generous business tax regime. This is hardly controversial since Cameron frequently boasts about it..
The rules for capital allowances have changed many times over the years and this summary shows that these changes have often been made to introduce or remove incentives, or to close loopholes which were being used by clever accountants to avoid tax http://www.hmrc.gov.uk/manuals/camanual/ca10040.htm#IDAERKIG. This is why Farnsworth calls them “political”. He argues they are part of a “corporate welfare state” and tries to quantify this. Nowhere has Farnsworth (or I ) suggested that £93 million can be removed from business and used in other ways. That has been done by others (including I suspect Corbyn and the Green Party). That would be crazy in my opinion. But what he is saying is that in a world where social welfare is seen as an evil that should be cut, subsidies to private profit should also be examined. Fair enough, I say, without prejudging the results of such analysis. (and just to pre-empt any further discussion of whether Capital Allowances are a “subsidy”, lets just call them “part of a generous tax regime for business”. And note that Farnsworth also discusses National Insurance..)
There are other things that he seeks to quantify, such as the subsidy to private business through outsourcing of publicly funded activity. Tories take a highly ideological view of this – do you?
@AndrewMcC
It’s clear from what you say that you don’t understand Capital Allowances, Business Taxation, Business or even what Farnsworth is trying to do.
If you don’t believe me why not read up on the ever expanding number of commentators who have demolished the dodgy £93 billion claim.
Simon,
It seems very clear to me that Farnsworth is arguing that the financial support given by the British government to Business should be reduced, since it is greater than that given by most other G7 countries. Some of this support is in the form of low taxes, some of it in direct payments (eg outsourcing of public services paid for from taxation)
He has dressed his argument up with a trendy label “Corporate Welfare” to get it noticed
What do you think he is trying to do?
He’s basically doing what you say: He’s making a Hard Left argument dressing it up with a trendy label “Corporate Welfare” to get it noticed. The problem is that he’s a sociologist, not an accountant or an economist, so he gets his facts seriously wrong.
More than two weeks ago I said that parts of the £93 billion COULD be termed “Corporate Welfare”, but the overwhelming majority simply isn’t.
What do you think he is trying to do?
Andrew McC & Simon Shaw
“What do you think he is trying to do?”
I see Farnsworth as responding to the current demand in academia for the work to get ‘coverage’ be that through citations or via news coverage. A sad departure of where the desire was for work to be right. This leads to a desire to lump more and more items in to a piece of work to give a bigger and bigger number, to catch the headlines. In this case, against business, to ensure that it gets repeatedly cited in the guardian and will get a few citations in the Indy, then it will get cited by people like the FT as they show how it is wrong. The oposite angle is to attack the level of benefist to people were to get then it would guarantee it gets cited in places like the Daily Mail (followed by incoherent attacking of it in the Guardian, and possibly logically deconstructed and disproved by someone sensible in a different publication).
Unfortunately people won’t accept when a number that plays to their biases is shown to be ridiculous, so we see it rolled out over and over. As a result the incentive is for more and more research to move away from accuracy to tabloid like creation of sensationalist research.
Farnsworth appears to be trying to walk back following the fisking of this work so extensively with the “it is corporate welfare but I’m not saying that is a bad thing.” Unfortunately the more people reuse these figure the greater the incentive for others to go well beyond the evidence in their claims, as well as over-claim in executive summaries and in briefings to journalists.
Dave Orbison said:
“I believe, like McDonnell, that any person has a right to strike. I hope that strikes are used as a last resort and that we have constructive ways of settling workplace disagreements. …. If a democratic vote has been taken in favour of a strike then I have to respect their decision. Who am I to interfere? I thought LibDems were against state interference. … Supporting the rights of free people to strike does not make me irresponsible or strike happy.
I agree with that, and I hope any real Liberal Democrat would agree with that. But this is what McDonnell actually said:
“The view now is straightforward and I tell you this: If there is industrial action taking place then we should automatically now, automatically come alongside our brothers and sisters in the trade unions and support them.”
It’s one thing to allow boxing matches. It’s quite another thing for a political party, with pretensions to government, to say that they will step into the ring and intervene in support of one of the fighters. Yes, trade unions today have too little power. We should not try to resolve that by going back to the bad old days when they had too much power.
Andrew McC
“part of a generous tax regime for business”
But whether the tax rates are low (something which is a value judgement so rather a circular discussion) is not a matter of whether something is “corporate welfare.”
As I explain above the decision was taken to make a tax on business profits which was called “Corporation Tax” the only logical way to achieve this is to have capital allowances to avoid manipulation (I take it everyone can get on board with minimising scope for manipulation?). Perhaps the treasury should rename “capital allowances” to “tax depreciation” and perhaps that would avoid sociologists stumbling across them and getting confused.
If capital allowances didn’t exist the next claim would be that actually corporation tax was a turn over tax but with “generous allowances” for certain business expenses, which should now be classed as “corporate welfare.”
The truth is that it is not “welfare” just because a government could have taxed more. The amount is income that we are allowed to retain after Income Tax and NI is not “welfare” it is also not welfare that the government could implement a breathing tax on every citizen but has chosen not to.
Welfare is a payment for a purpose, normally to reduce poverty, in terms of corporate welfare there is plenty of that (manipulation of everything to help the over hyped “creative industries”, had outs to politicians “chosen favourites”) but in order to discuss this seriously we need to do away with ridiculous figures that cloud the debate and distract everyone from the actual questions we should be concerned with.
“a lower VAT rate on house building costs £7bn compared to the full rate and this is counted as £7bn of corporate welfare. But is it really? Surely if the tax were raised to the full rate, nearly all of that £7bn would be passed on to homebuyers, making housing less affordable and reducing the rate at which homes are built.”
Yes a lower rate of VAT on new build is corporate welfare! What it means in practise is that the building refurbishment sector is underdeveloped, compared to the new build sector, because it has to pay VAT. This is one of the major reasons why we see sound buildings demolished and (often) a pastiche new build erected in its place and also why builders prefer ‘green field’ to urban regeneration.
As for VAT being passed on to homebuyers, so what? Only those who want a brand new home have to pay it and given that many here would have us believe that the only people buying houses are Buy-To-Let landlords, why would we want the taxpayer to subsidise such business transactions?