It’s already clear again, the old divide in Britain. Labour stands for the workers. The Tories stand for the rich. Everybody already knew that.
They didn’t know that we stood for the people. But they felt it when they voted in their thousands to elect local Liberal Democrat councillors, and then to choose 72 Liberal Democrat MPs.
Ed Davey knew it when he went round the country in 2020 just talking to people, asking what they want. Now comes another time to prove it.
The cost of living. It’s going up again with the energy price rise this Autumn. The NHS needs money poured into it. Local services need propping up. People on benefits need that £20 a week more than ever. The carers and the cared for, they desperately need our backing.
We should say to this new government of ours: “Don’t deprive old people of their extra heating allowance this winter. Don’t talk about getting rid of food banks but ignore our policy which can do just that. Don’t refuse to tax the wealthiest most. Help the poorest first.”
Lib Dems must say what the Labour government is refusing to say. If there is money to spend, spend it on the people first.
We are the party of Lloyd George. It’s our party which brought in the first old age pension in the People’s Budget of 1909. Tell these newcomers, it’s time now to realise the inheritance we share, and for your government to act accordingly.
It’s time for Liberal Democrats now to stand up for all the people, here and abroad as well. Revive our radical soul, relive our constitution, and refuse to go along with neo-liberal economics. Britain too can share the joy reviving now in America, if we live as we best can. Whatever the weather!
* Katharine Pindar is a long-standing member of the Cumberland Lib Dems
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113 Comments
If you want tax rises on the middle classes you are going to love Rachel Reeves budget
@ Katharine,
“It’s already clear again, the old divide in Britain. Labour stands for the workers…”
Not so fast, Katharine! It’s not that clear. People are only saying this because the Govt has agreed to implement independent recommendations, mainly regarding the pay of teachers and junior doctors.
Of course Lib Dems don’t have to commit themselves either way on this because they aren’t in government. But what do you think should happen? Should the recommendations be accepted or shouldn’t they?
@SimonMcGrath. Who is talking about more tax for the middle classes? We want tax on the obscenely rich both people and corporations. The Tories taxed the poor to pay the rich. Orthodox Rachel Reeves, believing in the nonsense of the Laffer curve and trickle down economics will not actually seriously attack wealth and obscene salaries and bonuses. It is our job to call her out and tackle inequality in the process. Progressive Taxation is the way forward. Mind you, I’m not holding my breath that our party will actually do the right thing
The party can start raising money for the public purse by adopting the plans of PATRIOTIC MILLIONAIRES article ’10 tax reforms to raise 60 billion for public services and a fairer economy’.It deals with the rich and corporations who have had it too easy on producing wealth FOR THEMSELVES by previous govnts.
Katharine is correct – to a point – but credit for Old Age Pensions must go to Asquith not to Lloyd George. Maybe as well if I don’t discuss the greatness or otherwise of LLG.
Asquith, as Chancellor when Campbell-Bannerman was PM, did all the complicated preparatory work (including pensions) for the May 1908 Budget. He became PM on C.B.’s death in April, 1908, and appointed LLG as his Chancellor – but it was Asquith (not LLG) who devised and actually presented the Budget (including pensions) to the Commons in May, 1908. the ‘Peoples’ Budget came a year later in 1909.
The Old Age Pensions Act of 1908 provided the first UK state pensions, financed out of central taxation. The pension was set at 5 shillings (25p) a week. It was means-tested, with the full amount paid to those with incomes below £21 a year and reduced on a sliding scale for those with incomes between £21 and £31 and ten shillings.
Although welcome, it’s as well to remember the provision was modest. It came at age 70 when average age life expectancy for both males and females was well below 60. Allowing for inflation the benefit is equivalent to £ 25 per week now (currently £ 221 per week at age 66).
Simon McGrath illustrates the Lib Dems identity problem, and it will be interesting to see how the 72 vote on the budget. There’s an old saying, “money makes the Mare to Go”.
Yes we should oppose the abolition of the winter fuel allowance. This will have a very deleterious effect on pensioners with total income of up to £25,000.
What baffles me is that , was it not Gordon Brown who introduced the scheme at £200 per household, which has operated for 15 years. Why not simply go back to that, the £600 dated from Covid times but the the £200 precedes the Coalition.
This government appears devoid of simple common sense, if they are not careful they will be forced to retain the £600. Going to £200 will save £5.5b.
Then they have the Private School policy adding it seems 80,000 to the State sector what will be the cost of that?
Peter, I was only commenting on the fact that the new government made it a priority to give some unions their independently-suggested pay deals. Of course I am not opposed to that, just suggesting that we as a party have a broader focus towards all the people.
I’d like now to refer to the very relevant words of a former Labour man, the well-known journalist Owen Jones, who resigned in March from the party which he said had been part of his “sense of self”. He wrote in the Guardian on March 21st to explain why. Among his complaints was that the party wasn’t planning to abolish the two-child benefit cap, wouldn’t bring back a cap on bankers’ bonuses or institute a wealth tax. But what interested me most was his writing that the Labour party was “committed to Tory fiscal rules that lock the country into dismal austerity policies.” Exactly! That is what I fear will prevent Keir Starmer and Rachel Reeves from raising sufficient taxes this autumn to pay for all the good causes we want them to finance straight away.
And Owen Jones then concluded that ” I think those who believe in real change from the Tories’ bankrupt model should vote for Green or independent candidates.” He didn’t mention the Liberal Democrats! I hope that our party will rise now to be the real opposition to the Tory-lite policies of our new government, and ourselves refuse to accept the financial strait-jacket of those fiscal rules.
Mick Taylor. I entirely agree with you, Mick – ‘ It is our job to call her (Rachel Reeves) out and tackle inequality in the process.’ I think the baton of fighting poverty and inequality appears to be passing back to us, and I trust indeed that we are ready to take it up.
Nigel Hunter. Yes, Nigel, thanks, I too noted the ten proposals of the Patriotic Millionaires referenced in another current thread here, and hope that our Treasury Spokesperson Sarah Olney, will be sharpening her sword to try and convince the Chancellor that several of those should be implemented.
@ Katharine,
You, Owen Jones and I are in agreement. All of the left too. Including the Greens and the Morning Star.
Not sure about all Lib Dems though!
https://morningstaronline.co.uk/article/a-bleak-vision-of-britain
Peter Martin. I did not doubt, Peter, aware of many past exchanges, that we agree on the need for Keir Starmer to cast off his austerity cloak! Thank you for the Morning Star reference. It’s obvious that the doubters in the Labour party will be silenced, so that is why we need the Liberal Democrats to step up and be a real opposition voice.
David Raw. Thank you, David, for putting us right – that the Old Age Pensions Act of 1908 brought in the first UK State Pensions (Caron and I didn’t get the exact date right though Michael BG found it in Wikipedia). Thank you also for resurrecting the leading status of Asquith in bringing it in. Just a pity that we haven’t a song for him unlike that for Lloyd George, but hopefully there’s a statue somewhere, and anyway a resurrected memory to honour!
After Starmer’s speech it’s obvious we’re being buttered up for jam tomorrow. This is tragic stuff from labour – nothing fundamental will change, & listening to Rayner who seems to think Wimpy & Barret will get our economy going..As ever those at the bottom will get a few more breadcrumbs off the plate , you might as well be listening to Osborne circa 2010…Before you know it – in 18 months time they’ll be declaring that the green shoots of recovery are finally visible …As we thought – Starmer a neoliberal oozing out of every pore…
Might we pause to look beyond taxation to see that our nation’s current socio-economic structure, namely Neoliberalism aka. Austerity, is both economically inefficient and socially cruel?
Might we start to remedy this ongoing disaster by promoting a better alternative which is the Mixed Economy?
An robust mixed economy enables the following and more!
1) Lower cost and more accessible housing which, besides its obvious benefits, lowers the proportion of pay needed to get homes, thus making our industries etc, more competitive.
2) Full accessible health care which, besides being humane, creates and maintains a fit and positive workforce
3) Better education, not least state funded tertiary education, including apprenticeships, for all which will result in a more capable, healthier and socially cohesive society
4) Not least, competition, preferably cooperative, between private and public sectors
5 Etc., etc.
The Labour Government’s fiscal rules are a major problem. Shouldn’t it possible to increase investment spending to generate enough economic growth so that the national debt will be falling as a share of GDP in the fifth year of the forecast?
Mick Taylor,
It would be good if we had confidence that our party will do the right thing.
Nigel Hunter,
Indeed, the party should consider the Patriotic Millionaires ten tax reforms. I think three might already be party policy.
Theakes,
The document produced after Rachel Reeves’ statement on 29th July (https://assets.publishing.service.gov.uk/media/66ab7c2fce1fd0da7b59319a/E03171937_-_Fixing_the_foundations_-_public_spending_audit_2024-24_-_Web_Accessible_v2.pdf) states that the changes to the Winter Fuel Payments will save £1.4 billion this year and £1.5 billion next year (page 9). Please can you give a link to saving £5.5 billion if the Winter Fuel Payments were changed to just £200 for all pensioners?
It seems some LibDems have forgotten the hard lessons of fiscal reality they learned under the Coalition.
Martin Gray. Yes, it does look as if the Labour government will continue on this track which we will deplore. It’s good to hear that our leader has already called out Keir Starmer on his lack of attention to health and social care needs. We are going to have to press for the extra taxation that will be necessary to cover what all the people will require this winter. New subsidies for everyone facing increasing fuel poverty included. That should take account of the old people who will suffer from withdrawal of the winter heating allowance, if it is not reversed, and everyone else unable to see how the fuel cost increase to come in October can be paid for.
Steve Trevethan. I like your ideas there, Steve, but I think we are going to have to prioritise, convincing our own party that we must ask much better spending outcomes from the new government than they are promising, and pressing the government to act on the desperate needs we are pointing out.
Mark Frankel, I trust you are out of step with the majority beliefs of our party now. That the fiscal straitjacket should be broken, and higher taxation of the wealthiest can and must be carried through.
Needs to be repeated ad nauseam apparently: government investment spending is subject to diminishing marginal utility. It’s not a given that any one project will produce a return beyond the real cost of capital. Such impoverishing returns become more likely the more government “invests”.
The social reforms of the Liberal government in the Edwadian period such as free school meals and medical inspections were in part due to the difficulties the British army experienced in finding able young men to recruit as soldiers for the Boer War Fears over national security. Bismarck had introduced a scheme of old age pensions in 1879 both in order to promote the well-being of workers in order to keep the German economy operating at maximum efficiency, and to stave-off calls for more radical socialist alternatives Otto von Bismarck..
The relatve equality seen in developed countries in the decades following WW2 are not the historical norm, they are the exception to the extreme inequality that has prevailed for much of recorded history.
Today with rising wealth inequality and 2.8 million Brits registered as long-term sick we appear to be rapidly reverting to the norm. Parliament has the power to stop that reversion via public investment and taxation.
Jim Callaghan once said that oil was “God’s gift to the British economy” How Norway got rich from Oil, but the UK didn’t. Not anymore. Today the focus is on renewable energy sources and God’s gift is to those economies that seize the investment opportunities. The potential economic, environmental and social well being payback in weaning the UK off over-reliance on imported oil and gas is enormous
So there is still a smattering of radicalism within the Liberal Democrats welcome the diverse range of views expressed perhaps its time for a “green book” of radical economics, liberty and environmental stewardship to set a fresh chapter for our movement in time for a 2030 general election .
@ Joe Bourke, I’m afraid the Edwardian Liberal Government didn’t provide “free school meals”. What it did was to pass permissive legislation allowing local councils to provide school meals if they wished to do so. They were not ‘required’ to do so.
There was a local scheme in Manchester as early as 1879, but the real impetus came from Jonathan Priestley (Head of West Lane School in Bradford and father of the writer J.B. Priestley) just after the Boer War who persuaded Bradford Council to do it.
In 1906, Fred Jowett, newly elected Labour MP for Bradford East, used his maiden speech in Parliament to launch a campaign for school meals. Jowett and Margaret McMillan, another school board member from Bradford, argued that the government should require all education authorities to provide school meals because the state made education mandatory and should ensure children were properly fed.
The Liberal government of 1906 passed the Education (Provision of Meals) Act, which allowed local authorities to provide school meals but did not require them to do so. The act did provide grants from the Treasury to fund half of the cost of meals. As a result, the number of school meals increased from 9 million in 1906 to 14 million in 1914.
@Theakes. I don’t know about the actual numbers, but I suspect your general approach is right, Some kind of compromise position will have to be found re pensioners winter fuel payments and Labour is using up a lot of political capital very early on. It is clear a threshold set at pension credit level is too low, but equally clear that giving hundred of pounds to richer pensioners with gold platted pensions is profligate.
And VAT on independent schooling is clearly motivated by ideological rather that financial considerations.
Joe Bourke. Extreme wealth inequality already seems to be here, Joe, and you are surely right to call for well-targetted investment, I suppose definitely in renewable energy sources, and probably also in high tech innovation, together with further taxation.
I am interested also n your linking inequality with the fact of the 2.8 million long-term sick, I suppose because of their inability to contribute to the economic benefit of full employment (since we don’t. thankfully, need them as extra soldiers), with their very small resources to invest. There can be no case for reducing their already inadequate welfare benefits, which are too low to encourage investment, and which, more importantly, deny them comfortable living. But an approach which would genuinely advise those wanting to find paid work again, with due attention to their talents, capacities and wishes and with targetted retraining on offer, would I suppose be an acceptable way forward? I hope we can help Labour progress such a plan.
Neil James Sandison. Great idea, Neil, and I trust our party’s radicalism will grow. Perhaps the Liberator Collective writers can be asked to start such a ‘green book’.
Mick Taylor,
“Who is talking about more tax for the middle classes? We want tax on the obscenely rich both people and corporations.”
The only effective way to deliver public services and social security systems comparable with European counterparts is higher taxes across the board including middle-income earners. The old labour argument that taxes on beer and cigarettes instead of doubling taxes on champagne and cigars is an attack on the working class does not work. There were never enough people quaffing champagne and smoking cigars to raise any significant revenues.
The UK does tax higher earnings and dividend incomes at quite a high level compared with many European countries, but taxes middle income earners (particularly as regards social security contributions) quite lightly in comparison. That is not to say that loopholes like the buy,borrow, die tax strategy should not be addressed Buy, borrow, die strategy
Corporation tax rates have to be competitive with other developed countries to keep businsses here and attract new companies to come.
There is a lot that can be done on tax reform. VAT exemptions alone are costed at £70 billion. If you put VAT on food, travel and books/newspapers signficant tax revenue can be raised to fund increased welfare benefits and health spending.
Stamp duty should be scrapped and rolled into a progressive council tax. Stamp duty is a major impediment to seniors downsizing and freeing up family homes. Council tax is one one of the main sources of debt distress for lower income households and should not be levied on tenants.
LibDems have more political freedom then Labour or Conservatives for raising these kind of issues in Parliament and every reason to do so,
Mark Frankel,
What Liberal Democrats should have learnt on fiscal matters from the Coalition is that governments should not cut government investment spending during a recession and that austerity does not reduce the national debt as a share of GDP.
Joe Bourke,
‘Council tax is one one of the main sources of debt distress for lower income households’
Please can you post a link to the details of this?
Joe, much as I have admired many of your suggestions on tax reform, such as Land Value Taxation in some form, I think we need to avoid those which would affect the cost of living, the rise of which is bearing down on ordinary people. VAT on food and everyday household purchases should be avoided. Why not back the first of the Patriotic Millionaires ten suggestions, to apply a 2% wealth tax on assets over £10 million, raising up to £24 billion a year, and affecting apparently only 20,000 people? I think we should take head on the need to tackle the gross inequality which has developed in this country, particularly I believe since Covid, as well as confronting the continuance of poverty.
You have written yourself to suggest how the accumulated capital gains could be taxed, explaining how the wealthy use their passive income to borrow against appreciated assets to acquire more, inflating house prices, rents, energy, food prices and government deficits, and have suggested they should pay taxes instead of buying up the real resources in the country. Real radicalism, welcome!
Michael BG,
Levelling up or knocking down? How the crisis of Council Tax debt is experienced across English local authorities
Katharine,
those who can afford tp spend the most on food, and household purchases benefit the most from VAT exemptions. If VAT exemptions are reduced, then that increases tax revenues to finance spending on increased welfare benefits. Although preferential VAT rates reduce poverty, they are not well targeted towards poor households overall. Existing cash transfer schemes like Universal credit are better targeted https://ifs.org.uk/sites/default/files/output_url_files/09chap10.pdf
“Broadening the VAT base by extending the standard rate to most goods and services would remove many of the distortions to consumption decisions caused by the current system and would raise significant revenue even after more than compensating poorer households on average. For instance, a net £10 billion could be raised, with the rest of the revenues used to help meet the child poverty targets and compensate poorer households, households with children, those with disabilities and pensioners”. At a minimum the £20 UC uplift would have to be restored, the two child limit and benefit cap abolished and housing benefit returned to the average rent level for the area. Those reforms are expensive, but could be easily funded with VAT reform even after compensating increases to lower income households for VAT increases. There are many other public services urgently in need of funding, so a broad range of taxes across the board including taxes that fall on middle-income earners would be needed to redress the balance.
Taxing the wealthy fills some of the existing spending gaps and reduces inequality, but if the aim is to approach Northern Europeam levels of public services and social welfare, then you will likely need Northern European levels of taxation. Denmark has a 25% VAT rate on pretty much all goods and services except newspapers and rents.
Joe Bourke,
Thank you for the link.
Chris Moore,
‘government investment spending is subject to diminishing marginal utility. It’s not a given that any one project will produce a return beyond the real cost of capital.’
Are you confusing diminishing marginal utility with diminishing marginal returns?
As I wrote earlier (https://www.libdemvoice.org/leading-the-way-back-to-hope-75904.html ) about governments not getting a direct financial return.
Diminishing marginal utilities does not really apply to government spending either. If a person purchased a second electric toaster it is unlikely they would get the same enjoyment from the second one as they did from the first, and their enjoyment would be even less from the third. The government does not build new roads, schools, or hospitals unless they see a need for them. If there is a need then the utility from it will be high. Diminishing marginal utility would only apply if the new item was identical to what was already there.
Joe, thank you but I disagree. VAT is deeply unpopular, as the fact that the new Chancellor promised not to raise it suggests. And of all products, the one where VAT should NOT be imposed is food. Why do you think that that most (sadly) successful of charities in terms of demand is the Trussell Trust? Food banks are essential, have grown greatly in the past few years, yet are said to be struggling because people giving to them are themselves effected by the rise in the cost of living – the increased cost of food and household goods especially. It is no wonder that in the cities food banks are often I understand handing out items such as child and personal care necessities as well. The last thing the Food banks need is any rise in the price of food. As it is, ordinary people chat in the supermarkets and complain that prices are still high. And as to welfare benefits, they need to be increased because they are too low, as our party policies state, and they can’t then be substitutes for other costs.
Katherine, Joe does have a point (about VAT on food). We already have systems for distributing welfare to the poor and taxing spending, and if we remove the VAT exemption on food everyone will pay more tax, but increasing welfare payments to cover that increase is bound to be a net gain to the exchequer from middle income and rich families, which could be put to good use.
According to the link below the poorest 10% of the population pay a higher percentage of tax than any of the other decile groups. So we’d need to bear this in mind before simply adding VAT to food and other necessities.
Joe seems to be somewhat inconsistent in his views about taxation. He’s well known for advocating a Land Value Tax which is alternatively known as a “Single Tax” but here he is arguing that:
“The only effective way to deliver public services and social security systems comparable with European counterparts is higher taxes across the board including middle-income earners
Just a few days ago he was arguing that the National Debt could be reduced by 20% and give an extra £40bn of spending power to the Treasury by imposing a wealth tax on the top 10% of families.
There are arguments for doing a mixture of both but unless inflation increases the wealth tax should be the favoured option from a left perspective. I expect we’ll see Rachel Reeves adopt a far less radical approach.
https://citizen-network.org/library/graphic-poor-pay-the-most-tax.html
Andy Daer. Increasing welfare payments to make up for widening the scope of VAT would outrage many people, either because they are thought too low already and should be fixed, or because there are still many folk who disapprove of welfare payments altogether or think they are too easily handed out.
You are spelling my name incorrectly.
Peter Martin. Thank you for your support, and well argued comment.
It was very good to hear our leader Ed Davey speaking on the Today Programme an hour ago, and pointing out that pensioners this winter deprived of the extra heating allowance and facing increased energy costs without the extra support given last winter will be several hundred pounds worse off. Ed is fulfilling our mission of serving all of the people, and demanding a needed rethink from the new Chancellor.
Hello Michael G,
Both will diminish! Build 100 extra hospitals and the next one will be of less use – other things being equal – than number 500 or 502.
Peter Martin,
Land Value tax is a tax on the annual rental value of land i.e. an annual tax on the income or consumption of benefits generated from land. It is broadly based as it applies to all owners of land commercial or residential.
Wealth taxes are a tax on capital over a certain limit. A one off wealth tax can be used to reduce treasury debt and hence the interest cost of servicing that debt. It provides room for borrowing for necessary investment. A one off levy is not recurring.
The IFS review of the last government budget tells us “Factoring in likely spending plans for the NHS, defence, schools and childcare meant other departments would see around £20 billion per year in real-terms cuts by 2028-29, with another £20 billion per year set to be taken out of investment spending”. Rachel Reeves tells us there is a further £22 billion of spending this year that has not been accounted for. The tax raising proposed by patriotic millionaires might just fill these spending gaps but do little to provide for the increases in welfare and public service provision that is required. We need to do both i.e. address rising inequality with higher taxes on wealth accumulation and passive income to prevent spending cuts and increase the tax take across a broad tax base to support increases in welfare support and public service provision. In short, what we see across much of Northern Europe Spending as much as other countries but taxing less is unlikely to be sustainable
@ Joe,
I think we all know what a LVT is by now.
What I think you are saying is that broadly based increase in tax, such a VAT rise, will squeeze demand, and therefore reduce inflation, more than an introduction of a wealth tax which could plug the numbers in the supposed “black hole” but leave aggregate demand much as it is.
If you are saying this (but I’m not totally sure you are!), then I do agree with you.
So we need to be clear what we are trying to do. At the moment inflation is just 0.2% above target so there is really no case for a broad increase in taxation or a reduction in govt spending. Both will depress the economy. This is not a good move when the forecasts are for a likely recession and at the same time the government is looking to grow the economy. If inflation does show an uptick then I agree we may have to reconsider.
Peter Martin,
if tax increases and spending increases are broadly matched there is no net change in the level of deficit stimulus. That deficit was running at 6% of GDP as of 2023 Q4 Government deficitand based on public statements appears to be rising sharply. Historically, that is quite a high level at near full employment and particularly when public investment spending is being constrained. We will see what the situation is when the October budget statement and forecasts are released, but much of the discussion here is based on tax increases designed to offset expected spending cuts to existing budgets and/or increase spending on public services i.e. neutral in terms of the current level of deficit spending.
The purpose of tax reform is to make the tax system both more efficient and more equitable. Broadening the base of taxes like VAT to finance increases in welfare spending are a redistribution meaasure and likewise neutral in terms of deficit spending.
I think a one-off wealth tax levy could be used to reduce the level of public debt and hence the interest cost of servicing that debt. That is a transfer of private wealth to public wealth. As a signifcant element of that interest is likely to accumulate as savings/acquisition of existig assets in the hands of wealthier taxpayers, I would not expect it would have any noticeable impact on consumption spending in the economy. The deficit/public debt may begin to increase again in the shorter-term as investment spending is ramped up, but the expectation would be that investment led economic growth would maintain a sustainable fiscal position without the need to keep increasing taxes beyond comparable OECD levels.
Meanwhile it’s excellent news that Lib Dem MPs will move a motion when Parliament resumes next week to block the Winter Fuel Payments cut which would affect 10m pensioners. The motion if passed will keep the payments in place. Party leaders say that pensioners are facing a winter of £670 increased costs, £300 of which will be due to the Winter Fuel Payments cut if carried through, with the rest because of the rising energy cap and the lost £300 subsidy of last year.
It’s encouraging to know that our 72 new MPs are all supporting this. Hopefully this is an indication that here on Liberal Democrat Voice we are not ‘a voice crying in the wilderness’ for radical action to confront the continuing cost of living crisis, but are in tune with our elected leaders in wishing to challenge the new government’s thinking.
Joe Bourke,
If the government did extend VAT to food I have no confidence it would increase benefits as you suggest. A single person 25 and over on Universal Credit only receives £393.45 a month (£90.80 a week). We believe this should be £110.80 a week. You are proposing that instead of benefiting from £20 a week as we propose, they benefit by much less. (If 80% of their purchases are currently zero rated the VAT increase would cost them £14.53 a week.)
It is good to read that you believe that an increase in government investment spending would lead to economic growth which ‘would maintain a sustainable fiscal position’.
I wonder if it would be possible to get a motion on the agenda for our Conference to consider regarding a one-off wealth tax to reduce the national debt?
Andy Daer,
The level of benefits are not sufficient. According to the Joseph Rowntree Foundation (page 147 https://www.jrf.org.uk/uk-poverty-2024-the-essential-guide-to-understanding-poverty-in-the-uk) a single person needs £174 a week excluding housing costs to live at the poverty level. Under £145 a week they are living in deep poverty and under £116 in very deep poverty. The government is happy for people to live in very deep poverty on £90.80 a week. If a person if under 25 it is even lower at £71.93 a week.
Peter Martin,
An increase in VAT would increase inflation, it is not a way of reducing it, as an increase in Income Tax might.
Katharine,
Indeed, it is good that we are clearly opposing the withdrawal of the Winter Fuel Allowance from about 10 million pensioners. I heard on the Sky paper review last night that if those pensioners who don’t claim pension credits and are entitled to it, received it this would cost more than the stated £1.5 billion saved from the changes being made.
It seems strange that we are saying that pensioners will be £670 worse off because of the changes to the support they receive and the increase in the energy price cap. Most commentators are talking about £500, because the energy price cap from 1st October will be £1717 while from 1st October 2023 it was £1834 which means people on average should be paying £117 less than last autumn.
Chris Moore,
There are no plans to build 100 extra hospitals, even Boris Johnson was only talking about building 40 new hospital by 2030. It is expected that this target will be missed by 8. Diminishing marginal utilities does not really apply to government investment spending because the government doesn’t build enough of the same thing in the same place.
@Michael: Even if the Government doesn’t (in our view) build enough, that doesn’t stop diminishing marginal utility from applying.
Using hospitals as an example, if the Government is being totally rational, then the first new hospital it builds will be the one where there is absolutely the greatest need. The next hospital it builds will be the one where there is the 2nd greatest need – and even if that need is great, it will (by definition of 2nd greatest) be a bit less than the need for the first hospital. The 3rd hospital will meet a slightly smaller need again. And so on. That’s your diminishing marginal utility.
In practice that will be muddied a bit because the Government doesn’t have perfect information and is unlikely to be acting completely rationally, and that will introduce some noise into the measurements. But it will still be approximately true that, the more hospitals the Government builds, the less valuable further ones will be. Ditto for any other investment the Government chooses to make.
(For the avoidance of doubt, this is NOT an argument for not building hospitals. It simply means the Government should be careful and try to direct investment where it will make the most difference).
@ MichaelBG
Both fiscal and monetary measures are advocated by economists to reduce the level of inflation. Fiscal measures involve an increase in the rates of taxation. Monetary measures involve an increase in interest rates.
So they both have the apparent disadvantage of nominally increasing the price level.as the increase is made. So one way to think about it is to consider what happens in the longer term after the step function of the tax rise drops out.
@ Simon R,
You’re obviously keen on the concept of marginal utility. I’ve never understood why it’s necessary to have more than about 4 or 5 pairs of shoes and boots but others may disagree.
As for houses, hospitals and schools, we do need more than an extra 4 or 5. We could build 200,000 new houses 20 new hospitals and 200 new schools and still be nowhere near getting close to any measurable reduction of marginal utility – unless perhaps they were all built too close together which is unlikely.
How many do you think we would need to build to see a noticeable reduction?
Micharl BG,
i don’t think there is time for new motions to conference and it might be useful to see the new Chancellors proposals in October before submitting significant proposals.
There is however a policy consultation Leading the way: Liberal Democrat Policy Direction in the Years Ahead that includes the following:
Boosting Economic Productivity
Including macroeconomic policy, taxation, science and technology, infrastructure, housing, skills, small businesses.
Simon R,
Once a NHS hospital is built it soon reaches full capacity. Once reached, there is no diminishing marginal utility. Can you name a new hospital which is being built that you think will not reach full capacity?
Peter Martin,
Indeed, increasing the bank rate increases inflation. Therefore we should be able to agree that increasing income tax is a better way of reducing inflation than either increasing VAT or increasing the bank rate.
Joe Bourke,
I was not thinking about submitting a motion for this Septembers’ Conference as the deadline has long passed. I was thinking of a future conference. Thank you for posting a link to the paper on our consultation on our policies years ahead.
@Michael BG
Of course it would be political decision to raise income tax rather than VAT. Both have the same deflationary effect. One increases everyone’s tax bill on what they earn. The other on what they spend.
So is one more ” inflationary” than the other? It depends on you measure it! From a strictly economic POV we should take taxes out of it entirely. But, that’s a difficult sell politically.
@Michael; Full capacity doesn’t stop diminishing marginal utility. That will arise because the first hospital is likely (if the Government and the NHS act rationally) to be used to treat the people in most urgent need of treatment. The next hospital, even if full, will be being used to treat the people in not quite such urgent need of treatment. So it may well still have very high utility, but it won’t be quite as high as the first hospital. And so on.
@Peter: You’re correct to the extent that, if we’re only talking about a few hospitals or a few houses, then the extent to which the marginal utility decreases might be small – and maybe too small to measure accurately, but that doesn’t mean it won’t be there. As you build more and approach the point at which people find they have enough hospitals or enough houses for their immediate needs, then the decrease in marginal utility becomes much greater.
In practice, I would suggest that with hospitals, if you’re just physically building hospital after hospital, you’ll quickly reach the point where you can’t find enough doctors and nurses to staff them (do we even have enough to staff our existing hospitals and GP surgeries etc.?), and that will be the first thing that causes a large decrease in marginal utility.
Simon is correct to point out that even in an area like the NHS with large unmet demand capital investment can have diminishing marginal utility. It is not just in the NHS but in other state provided services too. For example a series of potential road improvements could be ranked by reductions in journey times and casualties per pound of investment. Those schemes at the top of the list would provide greater utility per pound of investment than those lower down the list.
@PeterMartin. There is a major difference between raising income tax and raising VAT. Income tax falls more heavily on the rich and VAT falls more heavily in the poor. I think that dissing income tax is a major error by today’s politicians. Income tax is progressive [although not nearly as progressive as it used to be] so the tax burden falls more on the broadest shoulders. VAT is highly regressive. As a Liberal I have always favoured progressive taxation and still think that the worst taxation decision of the coalition was to raise VAT and cut income tax.
Peter Martin,
I am not convinced that an increased in income tax and an increase in VAT reduce inflation by the same amount. If both raised the same amount of government income I still think that because of the immediate inflationary effect of increasing VAT that this would not reduce inflation by the same amount.
Let us hope that the new government will aim to increase greatly overall hospital capacity in our towns and cities, as well as taking measures to increase the number of doctors, nurses and dentists that our country needs. I think it would be good if newly trained doctors could be encouraged to spend a year or two working in their field in this country, rather than departing rapidly to better pay and perhaps conditions in New Zealand and Australia. However, we don’t object to depriving less developed countries of their trained staff, so I suppose that could be seen as fair. I wonder if people in Zimbabwe and Nigeria are missing the numbers of excellent care workers we are grateful to find helping families around us.
Mick Taylor seems correct in commenting that income tax seems more progressive than VAT. However, since the new Chancellor has ruled out both for the time being, I hope she will be taxing capital rather than income, as well as utilising some of the measures proposed by the Patriotic Millionaires, to keep hospitals and local services running and raise the income of the people hardest hit by the rise in the cost of living.
@KatharinePindar. No, Katharine, there is no seems about it. Income tax is paid according to income, with a largish tax free allowance and higher tax bands the more you earn, the very definition of a progressive tax. VAT is paid on most goods and services and you pay the same regardless of income, the very definition of a regressive tax, because it forms a higher percentage of the expenditure of those on low incomes than it does for those with high incomes.
Yes, we’d all like to see wealth taxed as well, but we LibDems ought to be defending income tax as a much fairer way of taxing people than the bucket load of regressive taxes introduced by successive governments (including, sadly, the coalition) to try and kid people that their taxes are lower, because they are not taken out of pay packets.
@Mick Taylor “As a Liberal I have always favoured progressive taxation and still think that the worst taxation decision of the coalition was to raise VAT and cut income tax.”
The raising of income tax personal allowance was a highly progressive measure, sufficiently so to counteract the regressive effect of a VAT rise to pay for it. The problem with the combination is that the progressive element only affects those above the threshold while those below only feel the VAT rise. This too could have been counteracted if UC had been brought in at the rate originally recommended by IDS’s think-tank.
The other effect of a switch from Income tax to VAT is a small one-off wealth tax.
What ifs butter no crumpets. The coalition did not introduce UC as anything like the correct level and the VAT rise hit the poorest much harder. I found that one of the hardest parts of the coalition to swallow
@ Mick Taylor @ Katharine,
I know it is generally accepted that VAT is more regressive than income tax, but how much more regressive is it? Is it quantifiable? If we add National Insurance into the picture the tax on earnings isn’t as progressive as we think it might be if we consider that NI isn’t that progressive at all.
I’ve just Googled and the figures are: 8% on your earnings between £242.01 and £967.
2% on the remaining earnings above £967. I presume these are weekly amounts.
In addition many on higher incomes can take their pay as dividends or capital gains to reduce their tax an NI bill.
Furthermore, as Joe has just pointed out, the way to avoid income tax altogether is to buy assets then borrow against them. The “buy, borrow and die” strategy. The interest rate is much lower than the level of income tax and probably it is quite legal to use interest payments as a tax deduction in any case.
So it’s probably not going to help in dodging VAT on the expense involved in maintaining your assets but I wouldn’t be surprised if there were some wheeze involved by accountants on that too!
Good discussion above. Agreed, Mick Taylor, that income tax is more progressive than VAT, and that UC should have been introduced at a higher level. (But what were the ‘bucket load’ of regressive taxes?) The poorest don’t pay income tax, so the raising of it wouldn’t have affected them, nor would the progressive raising of NI by the Coalition, Peter Davies, so as you wrote they could not benefit, and UC should have been the answer for them (but isn’t).
Peter Martin, should income tax and NI be combined? Meantime, thanks to you and Joe for pointing out the various means by which those on higher incomes can lessen their payment of income tax, and I think our economics spokespeople should chase the government to become fully aware of the many means of tax avoidance and evasion and act against them. Enrich the Exchequer to enable the vast inequality and rising poverty in our country to be tackled as should surely be foremost for a Labour government, though I don’t see Keir Starmer’s Five Missions including that. As I’ve suggested before, we are going to need to be the real Opposition in this Parliament.
Peter Davies
Do you have any figures for how someone on average income was effected in the two tax years 2010/11 and 2011/12 by the increase of VAT and the increase in Personal Allowance?
I wonder if benefits need to be increased by more than the rate of inflation when VAT is increased as the increase in VAT increases the rate of inflation.
For the last three years of the Coalition government benefits were increased by less than the rate of inflation (1% not 2.2%, not 2.7% and not 1.2%). This reduction in the value of benefits and the four year Conservative freeze resulted in benefits being 10.12% less than they would have been if they had been increased at the rate of inflation. This has not been rectified and the longer it goes on the great this gap becomes.
Why would a switch from income tax to VAT be a small one-off wealth tax?
Katharine,
Many people call for income tax and NI be combined, however I think before this can be done, NI needs to be extended and the link between NI payments and the amount of pension someone receives needs to end.
@MichaelBG A rise in VAT reduces the buying power of existing wealth. It’s more or less a flat rate wealth tax so not the one anyone would advocate. Inflation doesn’t have the same effect since any wealth invested in anything but cash tends to rise in value at the same rate.
On figures for the 2010 budget, the personal allowance rise was worth exactly £200 (£400 for a two-earner couple). I don’t have an exact figure but a 2.5% rise in standard rate would probably take about 1% of net income for a typical low-earning family. That’s £100 gain for a person on £10,000 and not eligible for benefits. This is the only group that gained from the budget with the rich up to 2% worse off. With a rise in capital gains tax for higher earners (18% – 28%) the tax measures in the budget were progressive. The rest of it may not have been and subsequent budgets weren’t either.
@ Peter Davies,
The wealthy had an income tax cut the same as everyone else. The rise on VAT would have impacted less on their spending than most. There’s no VAT on most asset purchases such as shares, land and property. This is where most of their wealth is stored rather than as ££ in deposit accounts.
There’s no VAT on international travel. They can buy their private jets and luxury yachts in the Isle of Man or Gibraltar to avoid UK VAT. There’s never been VAT on fees at the posh boarding schools. That might change soon. Or it might not!
I don’t think many of us are shedding tears that their small wealth as stored in £ deposits might not buy quite so many bottles of Dom Perignon as it used to.
@Peter Maartin You are completely missing the point. The income tax cut was a flat value for everyone paying standard rate income tax (It was clawed back from higher rate tax-payers by reducing the higher rate threshold). The increase in VAT is roughly proportional to spending (actually a lower proportion of spending for poorer people) which in turn is roughly proportional to net income.
We’d probably all like the tax system to be progressive in nature. I’m questioning that the income tax system is as progressive as everyone assumes it to be. So just how much more progressive is it than VAT. 10% ? 15%? 20%?
According to link below a single person on about £55k pa with 3 children is paying a marginal rate of income tax at a rate of 80%. This is far too high – especially for those who have to pay high mortgage costs and high rents on family homes.
Anyone running a business would be able to share out their income with their partners or take their income in some other form which carries a lower rate of tax. At least they’d still be paying the same rate of VAT is they did that.
https://wp.inews.co.uk/wp-content/uploads/2024/03/SEI_194014631_c476ba.jpg
“According to link below a single person on about £55k pa with 3 children is paying a marginal rate of income tax at a rate of 80%. This is far too high”
I would agree with that. withdrawal of child benefit is a bad tax in spite of being highly progressive.
This briefing goves an overview of tax Tax statistics: an overview
“Income tax payments are concentrated amongst those with the largest incomes. The 10% of income taxpayers with the largest incomes contribute over 60% of income tax receipts.”
“The Institute for Fiscal Studies (IFS) – an economic think tank – has analysed how much households pay in tax. Their analysis – which covers around three quarters of tax revenues (including income tax, NICs, VAT, excise duties and council tax) – found that, in 2017/18, the 50% of households with the largest incomes contributed around 78% of taxes.”
“Overall, direct taxes (which include income tax, NICs and council tax) lower income inequality. Richer individuals pay a greater share of their gross household income in direct taxes compared with poorer individuals. Council tax limits the extent to which direct taxes reduce income inequality.”
“Measured relative to household income, those with lower incomes pay more in indirect taxes (VAT, duties and so forth). Measured relative to household spending, there is little variation in indirect taxes across the income distribution.”
Richard Murphy notes in The taxing wealth report 2024 that “Charging VAT on the supply of financial services, almost all of which are consumed by those with wealth, might raise £8.7 billion a year, having allowed for existing insurance premium tax payments”.
I think Richard Murphy is rather optimistic. The majority of financial services (which are exempt) are business to business or exported. If we standard rated them, we would gain something from services to UK individuals (though the rich could normally put them through a business and reclaim them) while losing a small amount on all other supplies because financial services suppliers could claim back any VAT on inputs. It’s still worthwhile to make our services more competitive abroad but don’t expect a big revenue boost.
The cutback in money for services announced in Scotland today reminds us that this is expected to happen in England too, when the new Chancellor announces her Budget on October 30th. Lib Dem MPs must oppose this, just as they have already excellently moved to oppose the ending of the winter fuel allowance which will cause hardship to thousands of pensioners. I hope Conference will confirm that necessary services must continue for the NHS and local government, and that we do not accept the financial straitjacket which the new Government has bought into.
The fact is, surely, we are and should remain the main opposition to this government, since the left-leaning Labour MPs are being silenced. And as for the Conservatives, deep in their divisive leadership election travails, one only had to hear one of their eminent seniors, Sir Alan Duncan, denouncing his party in no uncertain terms on The World at One on Radio 4 this lunchtime to wonder whether they will in fact ever recover. Making a coherent opposition out of their 121 rump must be far more difficult than for our leaders to marshall our marvellous cohort of 72 MPs for continuous pressure. As Lord Wallace has written, seize the agenda!
In fact we need our Parliamentarians to speak out now, not only on the cutting off of the Winter Fuel Allowance. The Guardian today reports on new Trussell Trust research showing that households on universal credit are facing a ‘winter of hardship’. The paper writes that the Trust’s research indicates ‘two-thirds of working households on universal credit are struggling to afford food, energy and other essentials’ and points out that ‘Campaigners are challenging the government’s focus on economic growth as the key to tackling poverty.’
Let’s now be the campaigners the country notices, if our leaders take up the challenge. We have the policies demanding that the safety net of welfare be restored; now is surely the time to proclaim them and lead the national campaign for fairness for the thousands of our people dependent on benefit support..
Whatever the arguments about the level of universal credit, what on Earth has UC got to do with the winter fuel payment?
We do need to be realistic that resources are constrained, and the Government can’t just keep handing out more and more money to every group that we feel ideally deserves it. Thanks to triple lock, pensioners have seen almost a 20% rise in the state pension over the last 2 years: Almost no-one not retired will have had their salary go up by nearly as much. In those circumstances, it doesn’t seem unreasonable that an extra payment made to that group of people should be means tested to make sure it doesn’t get paid to people who don’t need it.
It’s really not a good look for us to be a party that constantly angrily demands the Government spend more and more without any thought for what resources are available or whether it’s the best thing to be spending money on.
Hi Simon R,
I think you are very close to the answer when you say “it doesn’t seem unreasonable that an extra payment made to that group of people should be means tested to make sure it doesn’t get paid to people who don’t need it”. However, it is inefficient – either you set up an entire separate means testing bureaucracy to manage a test specific to the payment which costs a lot of money, or even worse you do what Rachel Reeves has done and tag it onto a means test already in place which doesn’t ensure that the extra payment does get paid to people who do need it.
Taxing it isn’t perfect, but nothing is.
However, it is simpler, cheaper and removes the Poverty Trap problem from the whole argument. I hope someone who reads LDV, puts this point to Daisy so she can undermine the government’s position from the viewpoint of it failing to support the “not quite so poor” who just fall fowl of the government’s imposed cut off.
We are so much better than Labour because we look out for all the people of this county, and not just the ultra poor that they focus on.
It is bad for the nation, Simon R., to have millions of families living in relative poverty. People living in poverty don’t have freedom, but from a Tory point of view they can’t contribute to the Exchequer because they can’t pay taxes. And since they often live in poor conditions even if stable, not moving from one temporary house to another to the upset of the whole family, they tend to suffer poorer health and cost the NHS more.
Households with unpaid carers are among those most likely to be poor, as I wrote in my August 16 piece here, and as I quoted the TUC there, 62% of childcare and social care workers are earning less than the real living wage. Over the past 14 years, TUC research showed that on average an additional 1300 children a week fell into poverty in households with at least one working parent.
A 20% rise in any benefit counts for little if the original amount is too low. And UC is too low, as year after year our party has stated in its policies asking for fairness. As to resources, I believe a government issuing its own resources can’t run out of money. And as to whether the party has a good look, personally I am proud to be an active member of the only party which is committed by its Constitution to fighting poverty
@ David Evans. Hi David, thank you for that useful comment, and particularly its last sentence. As you say, we look out for all the people of this country, inclusively.
Katharine is quite right to point out that a government cannot run out of money. However sadly it can run out of value. If the only change the government made was to increase the value of Universal Credit without either raising taxes or reducing spending elsewhere the government would have increased the amount of money in the hands of the people but done nothing to increase the stock of goods and services the people could buy. So the price of goods and services would go up, imports would rise and the exchange rate of the pound would fall. There would be a second round of effects as the Bank of England responded to that situation but I hope the trend I have set out is clear. To raise the living standards of the poorest the government has to act either to bring currently under-utilised assets/labour into play [as hopefully its removal of the ban on on-shore wind farms will do] or alternatively it has to reduce its own consumption of the nation’s resources or that of other consumers in the economy.
As Richard points out in his comment , to raise the living standards of the poorest the government has to act either to bring currently under-utilised assets/labour into play or alternatively it has to reduce its own consumption of the nation’s resources or that of other consumers in the economy.
Everywhere you look around the world- whether it is the USA, Australia, Japan, China or Europe – middle and low income workers are seeing their living standards relentlessly squeezed. Homelessness is on the rise everywhere and there is a Tsunami of smaller shops and businesses closing down in Central London, Los Angeles, San Francisco, New York and Sydney.
In the USA they call it Vibecession
“A vibecession is caused when economic indicators appear to show a strong economy, but the prosperity isn’t shared by most people. The economy isn’t in a recession, but people feel like they’re living in the middle of an economic downturn.
Recent high energy prices, shrinkflation at the grocery store, and astronomical housing prices have affected almost every American in one way or another. So while gross domestic product (GDP), wages, and other economic indicators may be showing signs of improvement, a large number of people have felt left out of an apparent economic recovery — bad vibes, in other words.”
You don’t have to look far to find the cause – debasement of the currency and a rentier economy that is sucking the life out of the real productive economy and real wages with it.
@ Richard and Joseph. Thank you for these interesting points you raise. But, Richard, when you write about increasing benefits causing a problem because the stock of goods and services would not have increased (why not, by the way?) causing prices to rise, I think that poor people would not be able to get more goods and services than they already had, but would just maybe be able to pay for them without scratting around, selling anything they can, borrowing and falling into debt and maybe becoming homeless, as must often be the case today and will become more common as the energy prices rise this autumn.
Joseph, the under-utilised resource of labour in this country could probably be increased if more people became well enough to work, when they live in houses without mould on the walls, can pay for sufficient heating and good enough food, and are offered consistent work with decent conditions. Meanwhile you show us similar hardship suffered by ‘a large number of people’ in America. Don’t we need to call for a revolution, to end this ‘rentier economy that is sucking the life out of the real economy’, apparently here as in America?
Katharine,
the point being made above is that to end public spending austerity the government needs to reduce the consumption of households and increase its own consumption of resources. I expect economic growth will be largely absorbed by the ongoing need for above inflation wage increses in both the private and public sectors to draw people back into work and overcome labour shortages in the health & care sectors as well as education. This shift of resources from the private sector to the public sector is achieved by taxation and redistribution. The economist, Simon-Wren Lewis, estimates that tax rises of 4.5% of GDP (over £100 billion) will be required for day to day spending (excluding investment spending financed by borrowing) How much do UK taxes need to rise to end public spending austerity?
He writes “Of course Reeves is not going to raise taxes on that scale in one budget. However, ending public sector austerity should be a realistic target for Labour to aim for over a ten year period. Labour’s mission on health should involve getting back to how Labour left the health service when it was last in office. If they want ten years in office it makes political sense to raise taxes and spending sooner rather than later. The problem the Chancellor has is that an increase in taxes of the order of magnitude required to end austerity is very hard to achieve while keeping her commitment not to raise income taxes, employees NIC or VAT.”
“an increase in taxes of the order of magnitude required to end austerity….”
Austerity would be prolonged and increased by an increase in some of the highly regressive taxes such as VAT, council tax and National Insurance. Even Income taxes (in the wider sense to include all forms of taxes on income such as capital gains and dividend payments) aren’t anywhere near as progressive as might be supposed.
Austerity really means the government running an overtight fiscal policy when there is no need to do so to control inflation. It doesn’t mean increasing everyone’s tax bill.
Sorry I meant to say “It doesn’t mean lowering everyone’s tax bill! ” 🙂
@Katharine: You ask why increasing benefits won’t increase the stock of goods and services. But there’s simply no reason to expect that it will increase it. The way the stock of goods and services increases is if people work to produce more – there’s simply no other way that it can increase. Having the Government effectively print more money doesn’t magically cause more goods and services to appear out of nothing!
@ Simon R, @ Katharine
The economic theory Simon is describing is otherwise known as Say’s law. The idea is that demand is determined by supply. To quote Wiki:
“Say’s law has been one of the principal doctrines used to support the laissez-faire belief that a capitalist economy will naturally tend toward full employment and prosperity without government intervention.”
We know from experience that this isn’t true. If government wants the economy to grow it has to manage the demand as well as the supply side of the economy. So the difficult trick is to have a relatively warm economy which is conducive to economic growth but not too hot which could cause higher than desirable levels of inflation.
https://en.wikipedia.org/wiki/Say%27s_law
@Peter: That’s not what I’m saying at all. I’m simply pointing out that ‘printing’ money doesn’t in general cause goods and services to suddenly appear. Nothing to do with Say’s Law.
Going into more detail, if the Government creates money and gives it to poorer people, that will create increased demand for the things that those people are inclined to buy. We can surmise that will be mainly housing, energy, and food, effectively shifting the demand curves. Now depending how elastic supply is, this could lead in principle to a combination of companies producing more and to an increase in prices. Unfortunately, supply of housing – the first thing people are likely to want to spend money on – is almost completely inelastic on any timescale less than several years due to the difficulty of building new houses, so we can expect the predominant effect will be that rent and house prices will go up without any significant increase in supply.
@ Simon,
Your comment of 7.59 am describes the supply side of the argument but totally omits mention of the demand side. The emphasis on the supply side would appeal to present day followers of Jean-Baptiste Say, but as the Wiki article (previously linked to) describes, it’s not at all certain that J-B Say meant what they now take him to mean.
Whatever you make of it, the term supply-sider is used as a description of someone who believes in” a macroeconomic theory postulating that economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade.” Some might think this is a description of neoliberalism.
Your point about money creation ending up inflating the housing market is better directed at those pseudo-Keynesians who think that reducing interest rates to stimulate the economy is a better method than applying a fiscal stimulus.
The vast majority of lending ends up fuelling ever increasing house prices.
Modern day Keynesians such as Paul Kruger can perhaps be said to be demand -siders. Although IMHO both sides of the economy are equally important.
https://archive.nytimes.com/krugman.blogs.nytimes.com/2015/11/03/demand-creates-its-own-supply/
@ Simon R,
I’ve been thinking about your sweeping statement:
“I’m simply pointing out that ‘printing’ money doesn’t in general cause goods and services to suddenly appear.”
Firstly we need to establish that all money is either printed or created in a computer. So although you’ve used the term “money printing” to indicate disapproval of the process you are simply describing what governments actually do when they spend. “Money creation” would be a more accurate term. Banks create money as they lend too.
It’s a matter of historical record that money creation can cause goods and services “to suddenly appear”. The is essentially how WW2 was financed by all sides. If conventional economics had been applied we’d have surrendered in 1939 on the basis that we simply didn’t have the money to fight a war.
This understanding carried on for 30 or so years afterwards in the post war period but then Margaret Thatcher became PM and finally did away with all that “Keynesian nonsense” as she would have described it. The process had started several years previously under Callaghan, though. The political right used the opportunity given to them by the inflation caused by rising oil prices to discredit Keynesian economics.
@ Peter Martin. Thank you for taking up the arguments with Simon R., Peter. For my part I am simply amazed at his apparent suggestion that it is a bad thing to give poorer people more money to pay for the things they need, because their demands may lead to increases of prices. As you say, money supply was found to pay for WW2, and I suppose equally to get growth going and many houses built after the war. Surely we need the economic stimulus now (which I suppose Labour is starting correctly with by putting more money in the pockets of unionised workers), to create demand which can be met with faster production of goods and then also more tax takes for the government. At least, that’s how my non-economist possibly Keynesian outlook sees it. And I don’t think you need to be an optimist to think like that.
@ Joe Bourke. Before we meet at Conference in few days’ time, Joe, I should like to gather what you think we should be recommending to our Parliamentarians. Do we ask them to try and persuade the new government to loosen the purse strings so that the NHS and local government services can be properly financed this autumn after all? And if so, are we demanding more taxation in the ways suggested by the Patriotic Millionaires, or/and encouraging further borrowing which at this stage isn’t harmful?
@David Evans “We are so much better than Labour because we look out for all the people of this county, and not just the ultra poor that they focus on.”
The only people who we actually know will be better off under this government are train drivers. There are two groups they care about: the ulta-poor and the unionised.
@ Katharine – you are quite right to point out that I had failed to recognise that increasing the living standards of the poorest part of the working age population should lead to better health and thus an improved labour supply and thus more goods and services. A good economist could crunch the numbers to see if such a policy would ‘pay for itself’.
@Simon and Katherine – I believe the WW2 position is more complex that you suggest. As well as ‘creating money’ the government took many ‘supply side’ steps to increase the supply of relevant goods and services. For example the Ministry of Labour forced an increase in the working hours of that part of the population which was not serving in the armed forces, millions of women were conscripted into the services and .war work’, leisure land (parks and gardens) was given over to food production, land needed for the war effort which was not already in public ownerships was requisitioned, house construction stopped and the supply of consumer goods was drastically curtailed. It is a trivial example (but one which illustrates the general point) my father’s war time diaries record his distress at losing his comb and not being able to buy a new one (as they were not being produced) and his joy when eventually he was given a ‘second hand’ comb. There was increased taxation and compulsory ‘war loans’. The supply side measures, taxation and forced saving reduced but did not eliminate inflation. The UK has the capacity to do all sorts of things but it does not mean th’at all sorts of things can be delivered without making hard choices
Richard, thank you for that interesting description of all the steps that were taken to keep the economy going during World War 2. I suppose the ration books continuing after the war were to prevent demand exceeding supply? But still, the economic situation then must have been dire, and it will have needed the public to continue concerned for everyone, presumably, and not out to hoard personal wealth as happened in our more amoral times of the last few years, more’s the pity.
Katherine,
unfortunately I am not able to attend the Brighton conference. I will be following online.
I do think the arguments need to be made for both increased public spending and increased taxation using the Patriotic millionaires proposal as a starting point to get things moving.
I think SimonR is right to conclude that increased welfare spending will not noticeably increase domestic production of housing or imported energy and food. However, that should not mean that welfare spending is not increasd.
Increased housing benefit may well see increased rents, but the tenant is housed eventhough the landlord and/or mortgage lender ultimately ends up with the money. That excess money in the form of economc rents should be taxed back from Landlords or mortgage lenders in the form of a supplementary land Value Tax for the public benefit.
We need to start with meeting basic needs and then ensure that the ultimate beneficiaries of government deficit spending (the owners of property, shares in energy food and water companies and holders of government debt) are taxed appropriately. In the 1970s that was done by way of a 15% investment income surcharge on unearned income. That could be quickly revived as a measure to at least slow the rapid accumulation of all UK assets – property and mortgage loans, company shares and bonds, farmland and infrastructure, factories and equipment by a small group of super-rich elites around the world to the detriment of the rest of the UK population.
@ Katharine, @Richard @ SimonR
No-one is suggesting that the measures used in WW2 would be either appropriate or applicable now, but they do illustrate the point that the level of economic activity isn’t entirely outside the control of a currency issuing central government. It is possible to regulate the economy to have close to full employment. Too close and we could have too much inflation. There is a well known concept of the Non- Accelerating Inflation Rate of Unemployment -the NAIRU, which is well know to many politicians
but rarely discussed in public.
The monetary committee of the BoE will be concerned about the potential for inflation if the unemployment rate is too low. If could lead them to increase interest rates to slow down the economy.
The currency issuing aspect is crucial. For example: the individual States of the USA, the devolved national governments in the UK are not currency issuers so do not have the ability to control their unemployment rate.
Peter Martin,
I think that graph is out of date following the cuts to National Insurance. However, the high marginal rate starts at £60,000 (https://www.gov.uk/child-benefit/what-youll-get) and its purpose is to reduce the amount a person receives in child benefit, until all of it is gone.
What I think is bad about that graph is the huge drop in marginal rates after the child benefits has been clawed back and the one on earnings above £125,000. Income Tax and NI rates need to be reformed to at least get rid of the second one.
Richard,
The government increased Universal Credit and Tax Credits by £20 a week during the Covid crisis without increasing taxes to pay for it. Therefore it should be possible for the government to increase Universal Credit and the legacy benefits by £20 a week without having to increase taxes to pay for it. This is because the cost of this is only about 0.0034% of the economy. As Joe Bourke states the government could bring currently under-utilised assets/labour into play. Therefore it is important to always remember than increased demand can and does often lead to increased supply.
Even if the whole of this increase led to an increase in inflation this would be less than a third of one percent, not really a large enough increase for the Bank of England to increase the bank rate. Of course increasing the bank rate would not reduce the amount of money most of these people have to spend.
Simon R,
Please look again at my comment of 30th Aug 12.44am where I point out that the poverty level for a single person is £174 a week excluding housing costs, but they only receive on Universal Credit £90.80 and £71.93 a week depending on age (and less if on a legacy benefit). The very deep poverty line is £116 a week.
If those on benefits received £20 a week more they would not spend it on buying a home, and instead would spend it on day-to-day expenses which they couldn’t meet before, such as not getting into debt with their rent and not turning the heating off to save money. This would only cause a small increase in demand, which businesses should be able to meet.
@Michael BG. You are correct to point out that HMG can increase welfare payments without increasing taxation and the measures taken during the pandemic illustrate this. However as Liz Truss’s later great experiment demonstrates increasing HMG’s deficit is not without economic consequences and not all the consequences are benign. The increased welfare payments during the pandemic were part of a large package of measures which increased HMG’s deficit. Going into the pandemic inflation was below HMG’s 2% target but by September 2021 it had reached 3% and 5% by December 2021. I believe it is reasonable to believe the increased deficit contributed to that inflation. (Inflation continued to rise after December 2021 but at that point it becomes difficult to disentangle the impact of Putin’s invasion of Ukraine from the impact of HMG policy).
Hi Peter,
I’m sorry to have to tell you, as I think you really should know it already, but it is absolute rubbish when you say “It’s a matter of historical record that money creation can cause goods and services to suddenly appear” and then cite WW2 as some sort of proof.
I believe you and I both know that nothing ever makes goods simply appear. Closest may be in the very short term some existing stocks may be run down, but in WW2 money creation did not make tanks, spitfires or even bullets appear. Even in times of war, it took months to get factories built, staff trained and raw materials obtained, and it all needed planning and lots of hard work, as Simon indicates
Peter, putting things right is never that easy, is it?
David Evans,
Yes you’re right insofar as it’s a combination of the labour power of workers and nature (the iron ore in the ground etc) which provides the necessary resources to build a tank. The money aspect of it doesn’t do anything for nature but it does provide the incentive for workers to get out of bed and clock in at their factory.
The Keynesian view is that we shouldn’t have workers standing idle and unemployed simply because a bean counter in the Treasury tells us we have no money. The govt is the currency issuer and can use that ability to balance the economy rather than achieve some arbitrary figure on a balance sheet.
@ Joe Bourke. Thank you, Joe, for your very useful summarising yesterday evening of how increased welfare benefits and other urgently needed improvements could be financed. You will be missed at Brighton, but I and Michael can start discussing these measures even before Conference starts with colleagues at the SLF Dinner on the Friday night. From LDV wisdom to persuading some of our new MPs, hopefully receptive!
@Peter. We don’t on the whole today have people standing idle and unemployed because of treasury bean counters. There have been times in the past (1930s and 1980s come to mind) when people have been unemployed and wanting to work but were unable to because – roughly speaking, other people didn’t have the confidence to spend money and employ them. In that situation it makes some sense for the Government to spend money in order to – in effect – put the unused resources to use. But if you already have generally full employment and generally full resource utilisation, then it’s very hard for supply of goods/services to increase – which means any attempt by the Government to spend money in a way that stimulates demand is likely mainly to just cause inflation because you have more money chasing the same quantity of goods/services.
Richard,
There is no comparison between increasing benefits by £20 a week (cost in 2020-21 £6 billion a year) and the largest tax cuts proposed (cost over ££44 billion a year) in the last 50 years in Kwasi Kwarteng’s mini-budget of September 2022. Just the one penny cut in income tax would have cost over £5.4 billion a year. The scrapping of the Health & Social Care Levy (1.5p increase to National Insurance) cost over £63 billion over five years.
The inflation after Covid was caused by the furlough scheme not the £20 a week temporary increase in Universal Credit. Those who received the £20 spent it, but those who received payments under the furlough scheme could not spend all of it because many shops were not open. It was the spending of the money saved during the lockdowns which caused inflation to increase after July 2021 and the problems with supply chains worldwide. Inflation is not caused by the deficit, it was caused in this case by the pent-up demand being released and not all of it being met by increased production.
“it’s a combination of the labour power of workers and nature (the iron ore in the ground etc)” and the fossil fuel energy to run the factories, smelt the iron dig up the ores etc etc….and create the diesel to run the tank once it’s been made.
@ Richard. Belatedly, thank you for acknowledging in your September 5th 9.23 pm comment that increasing the living standards of the poorest part of the working age population should lead to better health, and thus an improved labour supply and therefore more goods and services. I hope that the Labour government will not fail to make those connections, but also will acknowledge that even a vast effort to ensure that everyone has adequate well-insulated housing and sufficient health and social care cannot compensate for the fact that working-age benefits are set too low. But at least we are past as a nation now the callous view that welfare benefits must be cut and the long-term sick and disabled forced to find paying work.
@ Simon R
“We don’t on the whole today have people standing idle and unemployed because of treasury bean counters”
We do have 1.44 million unemployed but that’s just a part of the problem. According to the BBC article below there are an additional 1.7 million people who aren’t employed who would like to have a job.
The article doesn’t mention the underemployed. Once we start adding in the lost hours of those working part-time or on zero hours contracts the total picture worsens considerably.
Lib Dems might want to take a look at what Economists call the NAIRU (Non-Accelerating Inflation Rate of Unemployment). I’d add an extra U for Underemployment. Is using unemployment /underemployment as a method of inflation control compatible with your principles?
https://www.bbc.co.uk/news/business-52660591
@Peter. I don’t believe there is a mass unemployment-but-available-for-work problem . On the article you link to, if you click on the ‘Wants a Job’ view of the ‘Reasons people are not in work’ graphic, you’ll see there are 505K + 595K + 267K so about 1.4 million people straight unemployed and wanting work. That’s not much more than the baseline level you’d typically expect just from people switching jobs etc. That’s confirmed by checking the numbers of long term unemployed (arguably the real measure of unused human resources): https://www.health.org.uk/evidence-hub/work/employment-and-underemployment/trends-in-unemployment-and-long-term-unemployment, which states that Long-term unemployment reached a record low in 2023 – 0.8% of economically active people had been unemployed for more than 12 months in 2023, a significant decrease compared to 2.8% in 2013. So it’s really a very small group who might theoretically be able to work if only more jobs were available – and it’s reasonable guess that some of those are for various reasons unemployable.
The BBC article shows that the vast majority of the remainder of people who want work are students, sick or caring. It might be possible to get them into work with some targetted intervention, but having the Government just spend money to stimulate the economy isn’t going to cut it.
If we want to get more people working, then the real issue to tackle is the vastly greater number of people of working age who are not working and for various reasons don’t want to work .
@ Simon R,
I’ll leave you to mull over the figures you’ve highlighted. The points you make are, at least to some extent valid, but there should be enough there to be a cause for concern to a party which proclaims that “no-one shall be enslaved by poverty”. The “don’t want to work” argument is probably one that Lib Dems should stay away from.
Having said this, the longer that young people are without work the easier it is for them to disillusioned with society, fall into anti-social or even criminal ways and so become very difficult for anyone to employ.
The fact remains that the threat of poverty is used as a disciplinary measure against all workers in society. That’s the basis of the NAIRU. We should all recognise that. I’m not sure that there is an easy alternative but it’s one that Lib Dems should be thinking about. One guaranteed job for young people who have been out of work for a period of time would be a step in the right direction.
The report I linked to above doesn’t mention underemployment – in which I’d include all forms of low quality employment. Both have fallen recently and probably due to the large fiscal stimulus applied to the economy during the Covid period. The trick is to do this without causing too much inflation though as I’ve always agreed it might.
https://www.health.org.uk/evidence-hub/work/employment-and-underemployment/trends-in-unemployment-and-underemployment
@ SimonR,
“but having the Government just spend money to stimulate the economy isn’t going to cut it.”
We know what will happen if (when?) Rachel Reeves crashes the economy by running an overzealous austerity inclined fiscal policy. The BoE will lower interest rates sharply to stimulate the economy ie encourage us all to borrow and spend more.
So will this “cut it”?
The political right seems to have a blind spot about this. Somehow the spending of privately created money isn’t considered be inflationary but spending public money is. The Tories should have learned that this isn’t true in the late eighties when Nigel Lawson ran a credit fuelled boom and pushed inflation back into double figures.
The trouble with credit booms is that they lead to busts as we saw a few years later.
So we need to get a better perspective on how to stimulate the economy when it needs stimulating. The only way to do that without building up private debt is for the Govt to play its part too.
When I last stood for parliament in 2010 in Leeds Central against Hilary Benn, I was both surprised and disappointed at the attitude of a large number of working class voters (almost always Labour not Tory) who held the very strong view that the unemployed were idle and shiftless and should get off their backsides and get a job. The voters I spoke to were very annoyed that they had to pay for those who for whatever reason were not working.
As a party we have a lot of work to do to change the ingrained attitudes of very many voters who do not share a compassionate view of welfare and who would, almost certainly, respond to a crack down on the so-called “work shy”. I support the idea of UBI, but we do have to think how we are going to sell it to electors like those in Leeds Central who were so anti non workers.
Having the right good ideas is great. Persuading the electorate to approve of them in the face of continuous arguments about the idle poor put about by the Tory press will not be easy.
@ Mick Taylor,
You’re right and I’ve said the same thing about working class attitudes myself. I do have a much more genuine working class background than some who like to big up their Labour credentials, like Keir Starmer BTW, and so I do have some direct experience of why some Lib Dems might find it difficult to constructively engage with the “lower orders”.
You might think it’s just a matter of working “to change the ingrained attitudes of very many voters who do not share a compassionate view of welfare”. That sounds rather paternalistic. It’s what they would term a we-educated-types-know-better-than-you POV. Maybe they think they should work a bit harder to change your opinions?
It’s not they lack compassion for those who need it. However, they don’t generally agree with just handing out money for nothing. An alternative approach to tackling the poverty issue is to concentrate on making sure that a living wage is payable to everyone who puts in a shift at work and that jobs are provided for everyone who needs them.
You won’t get much disagreement on those kinds of policies.
Neither Keynessian theories nor so called German type expansionary austerity theories have proved a reliable basis for explaining the path of the UK economy since 2008. Measured unemployment fell below 5% from 2016 and remained lower (around 4%) than the average of circa 5.5% achieved under the Blair/Brown government before 2008 without any significant fiscal stimulus during the 2010s.
Austerity in macroeconomics typically refers to fiscal contraction which may be just higher taxes as a proportion of spending rather than spending cuts. In the public mind it means spending cuts, which were heavily concentrated on welfare and social care, local authority and other areas of spending outside of protected areas like Health, education and overseas aid. Evethough health and education spending were maintained in real terms they were not maintained on a per capita basis for schools with a growing population or for an aging population with growing health needs (cont).
(cont) The idea that adequate levels of public spending can be restored or structural unemployment mitigated by increased deficit spending on a large scale in excess of current levels (without tax increases)is highly implausible. Debt and deficits do matter, both in terms of distibution/inequality and stability of the purchasing power of the currency.
When the goverrnment is running a deficit, it is exchanging currency for goods and services without taxing back that spending. That deficit is increasing net savings in the economy which the government will borrow back (and pay interest on to maintain the value of the currency) from the providers of goods and services i.e. the owners of capital in the economy both domestic and foreign. If deficits are financing investment that is taxed in future years or meeting temporary cash flow requirements in a downturn that is a rational policy. If it is spending the same currency on immediate consumption twice in a near full employment economy that is potentially undermining the stability of the currency or increasing the debt service costs required to maintain that stability.
You can have full employment and low inflation under a feudal system of serfdom or in subsistence economies (which seems to be is where we are heading), at least until we begin to address the reason why neither Keynesian (outide of recessions) nor expansionary austerity theories have been able to deliver improved living standards for the population as a whole i.e. widening wealth inequality.
Peter Martin,
The link you provided gives unemployment at 3.8% and underemployment at 6.4% for 2023. Since then unemployment has increased to 4.2% 1.44 million people and its likely underemployment has also increased. However, those ‘people who are receiving a benefit principally for the reason of being unemployed’ number 1.8 million – which I make 5.25% https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/employmentintheuk/august2024
Simon R and Joe Bourke,
In June 2022 unemployment was 3.6%. Therefore we should be able to agree there are spare resources in the economy. More than 0.6%. The UK economy is over £2,274 billion. This means the government could spend £6 billion stimulating the economy. A 2 pence cut in National Insurance cost over £8 billion done by the Conservative twice (2023 & 2024).
However, I do agree that the government should do things to make the long-term unemployed more unemployable and get those waiting for operations their operations so they can return to the labour market.
Mick Taylor,
It is our policy to have a Guaranteed Basic Income not a UBI and to increase the amount people not working receive to the deep poverty level. During Covid many people were shocked at how low the level of Universal Credit was, hence the £20 a week temporary uplift. Hopefully, the public still recognise that the level of benefits is too low.
When we had full employment I don’t think the working class believed that ‘the unemployed were idle and shiftless and should get off their backsides and get a job’, because there was little long term unemployment.
@ Joe,
“When the government is running a deficit, it is exchanging currency for goods and services without taxing back that spending.”
Sure. What’s wrong with that? As always it is inflation and the levels of economic activity as measured by unemployment and underemployment that matters.
You seem to think that it is only the Government which chooses whether or not to run a deficit. Everyone else has a choice too. If no-one wants to save there will be no deficit. If everyone else wants to save, ie run a surplus, the government will be pushed into deficit. The evidence is that this is what happened after the 2008 GFC. There was a natural desire on the part of everyone else to afterwards take a more more cautious line of borrowing and spending. This pushed up the Govt’s deficit to 11% or so of GDP.
The neoliberals panicked and did exactly the wrong thing by trying to fight the natural stabilisers and ended up throttling the recovery process.
Peter Martin,
saving is done by that part of the population that can afford to do so. The bottom half of the population with little to no savings does not choose to have no savings, they have no ability to accumulate savings and will rely on personal debt to supplement their basic needs, especially so during a recession.
Deficit spending disproportionally increases the net savings of those at the top end of the income distibution who have the ability to save a significant part of their income.
Restricting relief on pension savings to basic rate is estimated to raise £14.5 billion in tax. Scapping the two child limit on child benefit is estimated to cost £1.8 biillion and would immediately take 1/2 million children out of poverty Save the Children
What should be the priority for a UK government- subsidising the pension savings of higher rate tax payers and increasing the savings of the wealthiest in society with increased deficit spending and increased interest transfers to the holders of government debt or reducing tax and interest subsidies to the wealthiest in society to relieve child poverty?