What should be our overall party line on taxation and public spending? We have a new government that came into office promising not to raise any of the major revenue-raising taxes. It claims that it has now discovered far larger holes in public spending plans than it had expected. The reality is that the Conservatives and their media allies managed to focus attention in the run-up to the election entirely on the level of taxation, without addressing what that implied for public services and long-term investment.
So Labour are now stuck. They knew well before the election (as the Institute for Fiscal Studies (IFS) and even the business pages of the Times were telling them) that government spending projections were unreal, that maintaining Tory plans would necessitate cuts in core programmes, and that Jeremy Hunt’s reductions in national insurance were almost criminally irresponsible. But they didn’t dare to be honest with the voters, for fear of the Tories branding them as a ‘tax and spend’ party.
We have been here before. Tony Blair similarly promised before the 1997 election not to raise overall rates of tax. We Liberal Democrats were braver, promising ‘a penny on income tax’ to raise the quality of education. I was then chairing our manifesto group, and vividly recall a Labour adviser telling me that we were mad to do so; ‘voters will never support a party that talks about raising taxes.’ But voters don’t want to vote for cuts in schools, health services, police numbers, courts and prisons either. It turned out to be the most distinctive theme of our campaign.
The Institute for Economic Affairs and its right-wing allies like to argue that no market economy can operate with a tax take higher than 40% of GDP – ignoring the examples of Germany, France and the Nordic states, and that the current tax take of 37% still leaves some room for manoeuvre. Long-term trends impose upward pressures on public spending. No government would dare to cut pensions; but the rising percentage of older people (and the promises all parties have made to maintain their spending power) means that pensions and health spending will continue to rise. Cuts in local government spending have driven councils close to bankruptcy and will have to be reversed. Promises to ‘level up’ the wide gap between the South-East and the rest of the country are so far unfulfilled. Capital spending (on hospitals, transport, school buildings) has been held down for years.
The UK spends less on research and development than almost all its competitors. Climate change requires additional public investment in the transition to a sustainable economy. Our long-term skills shortage (which drives immigration) cannot be resolved without more money for schools, FE colleges and universities. And we now face a more dangerous international environment, and will have to raise spending on defence, diplomacy and development assistance.
No party has explained this to the British public. Rather than set out the hard choices to be made, Rachel Reeves is already talking about returning to PFI contracts for infrastructure projects and selling off capital assets to fund current spending. Putting VAT on independent school fees is a gimmick that will not raise enough to make a real difference to state schools while infuriating parents who pay (my name is down to speak in a debate on this in September, and my Email inbox has filled with protesting messages). The Conservatives are waiting to pounce on Labour for ‘profligacy’, and to denounce us (as a Conservative Home article has just done) as ‘seeking to outflank Labour to the left.’
When both the other main parties are ducking this central question, what should Liberal Democrats dare to say? Britain needs a cross-party debate on the hard choices facing the country and how to pay for them; but the hyper-partisan character of the Commons and the media militates against that. The IFS, the Resolution Foundation and other think tanks will set out the figures, but only the bravest politicians will take the debate on from there. The middle-income professionals in the seats we have just won will take a lot of persuading to pay more for better prisons, probation officers and children’s services, even if told that alienated teenagers turn into rioters, and criminals without rehabilitation reoffend. Those saving to send their children to private schools will be reluctant to pay more tax for the state sector. Getting comfortably-off taxpayers in the home counties to contribute to regeneration of the north will be very difficult.
The Labour government does not know how to answer these questions yet. But neither do we. Now that we are bidding to be as important a political voice as the Conservatives, we will need to develop some answers soon.
* William Wallace is Liberal Democrat spokesman on constitutional issues in the Lords.
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68 Comments
An excellent piece, as we come to expect, from Lord Wallace. I think the answer is two fold. First we need to consider forms of taxation which do not act as a disincentive to useful economic activity. Land Value Taxation is an obvious example. Secondly we need to think of bits of state spending we can cut to make way for more useful expenditure elsewhere. I am old enough to remember former Liberal MP Richard Wainwright making us all proud by his work on the Public Accounts Committee. Hopefully amongst our new MPs we can find some with the ability and drive to become relentless and astute members of that committee. As well as finding examples of where money has not been well spent we also need examples of where money should not be spent at all. In the past taxing my pension to give me a winter fuel allowance was just mindless churn and doubtless incurred administrative costs. There are doubtless other examples where we employ tax collectors to take money away from people just to give it back to them. But we also need some high level policy decisions about what programmes we can afford and what we can no longer afford. For example do we, the US and France all require so called “independent” nuclear deterrents? Taking an axe to those sort of programmes will require some hard choices but we should live up to the challenge Lord Wallace has set.
The most classic example of an outdated tax benefit that costs more to provide than the benefit it gives was the letter I received from the DWP on my 80th birthday, informing me that my state pension would now be increased by 25p (per month, I think) in view of my advanced age. Once upon a time, perhaps when my father reached 80, that might have been worth having….
” But they didn’t dare to be honest with the voters, for fear of the Tories branding them as a ‘tax and spend’ party….
…..Rather than set out the hard choices to be made”
Keir Starmer won the Labour leadership election on a platform of higher taxes for the top 5%. The choices aren’t that hard. Has anyone considered that it wasn’t because Starmers’ “changed” Labour Party was scared of what the Tories would say and the voters might do? The Labour Party in the previous two elections did promise to raise taxes and still received more votes than they did last month.
The evidence is they genuinely do not want to raise taxes and prefer to go down the disastrous road of PFIs and spending cuts.
King Charles seems to have taken a step in the right direction King Charles to divert profits from £1bn offshore wind farm deal for the ‘public good’ donating profits from a wind farm deal for the public good.
One of the first places to start is with one of the most regressive taxes i.e. council tax. The council tax on Buckigham palace is £1824 i.e. less than nearly 30,000 homes in Oldham Buckingham Palace: Nearly 30,000 Oldham homes pay more council tax.
The IFS undertook an analysis of the Libdem manifesto Liberal Democrat manifesto: a reaction but we all know that this level of spending will be inadequate for what is needed,
There is a detailed blueprint available for tax reform – the 2010 Mirrlees review that is a starting point for making the tax system more efficient.
Ultimately, it is only Land Value Tax that can deliver both the level of tax increases increased without incurring the deadweight losses associated with increased taxes on wages and producion.
Important as it is, it will not be sufficient to increase tax only on the wealthiest in society. We will need tax increaes on the top half of wealth and income deciles. The super-rich do not report taxable income and gains. The gains are accrued via offshore trusts in overseas tax havens under UK juridiction. Land Value Tax on UK property holdings and mortgage interest earned on UK property is the quickest and most effective way of capturing these gains.
Public borrowing for investment in income producing assets such as council housing built for rent can be segragated from the Public Sector Borrowing Requirement (PSBR) so that such investmets are excluded from fiscal rules on the direction of the PSBR.
Excellent article. What goes around, comes around. The Blair / Starmer recipe for power is revealed as:
1. Promise no (or not much) new taxes
2. Waste 5 years consequently not solving any of the problems the Tories left behind
3. Eventually get pushed into doing something more effective, by Gordon Brown (who is still honourably trying to do this!), and by the Lib Dems.
The push recipes have been:
1. Apply “stealth” taxes and/or look for useful financial loopholes (that one’s Gordon)
2. Use the inspired slogan “penny in the pound”. This conveys the idea “Enough to make a difference, but not so much that it frightens the horses and attracts Tory bullsh*it along the lines of “dangerous extreme lefties”…)
That one was the Lib Dem line. Why not use it again?!
Indeed David Allen. The 1p on income tax was a clear indication that the Lib Dems were the adults in the room and understood that we can’t just keep on spending massively more than we earn as a nation.
Like Remain, it resonated with the just under 50% of people (give or take a few percent) who understand we have to pay our way/work with nations like us in order to get real progress and the benefits of a growing economy for our country and everyone in it.
It doesn’t resonate with those people who only care for themselves or who like the simplicity of a quick slogan.
But those people don’t vote for us anyway!
I wonder who and why those things were dropped, but I bet Focus Groups were involved!
Might it be worth promoting these taxation facets:
1) Clarity so that all have a reasonable understanding of the tax system, including tax avoidance schemes which need to be made available to all or abolished.
2) Consistent horizontal taxation so that all in receipts of monies pay the same level of taxation. A practical example would be that none or all paid N. I.
3) Consistent vertical taxation so that all who benefited from greater wealth paid more in taxation
(Richard Murphy’s blog “ Funding the Future” is excellent on equitable and society developing taxation.)
P. S. We do not know how much the wealthy put into society, but we have some, if limited, knowledge of what they get out of society.
P. P. S. Might we promote a Mixed Economy so that we have comparison and competition between current Neoliberal/Austerity theory and practice and an updated, whole-society benefiting form of Keynesian theory and practice?
It is surely time for a serious reconsideration of the way public expenditure is financed and for an end to hysterical talk about black holes. For decades our party has gone along with pretending that the public finances are like a household budget writ large and that government borrowing is somehow a tax on future generations. Governments that issue their own currency have a much wider scope for action as long as they control inflation. In the UK government borrowing is largely an internal transfer at the Bank of England (wholly government owned) from the BoE to the government. In other words it is money that the government owes itself. Sure, you can’t just print money to pay the bills, but the government can largely decide what it wants to spend and finance it.
Also, for years, our party has gone along with the myth that tax is bad, always promising, impossibly, not to raise it. As JK Galbraith put it “tax is the price we pay for a civilised society”.
If we are serious as a party in wanting to improve public services, then taxes will have to rise and we should say so. Now the issue NOT being tackled is progressive taxation where those with deeper pockets pay more. Income tax has been reduced from 33% when I was young to 20% and top rates from over 90% to 45%. They were progressive. Most other taxes are not. Time for a radical change.
Well posted Mr.Taylor!
How realistic is it to consider public expenditure without:
1) Clear, strong reference to national infrastructures
2) Ditto an effective resource goods and services economy within a heathy society
3) The fact that as a country with a sovereign currency, HMG does not need to tax to pay for making our society kinder and so more efficient
4) Neoliberalism/austerity is used to transfer wealth to the well off from the not well off and to weaken equitable government
5) The avoidably expensive and inefficient disaster of P. F. I
6) Etc?
@William Wallace ‘ my state pension would now be increased by 25p (per month, I think) ‘
On the same theme, we receive a £10 Christmas present from the Prime Minister, Edward Heath, which started as more than a week’s pension. This sort of the thing, fixed for decades and now ridiculous, like the winter heating payment, started life as an admission that the old age pensions were inadequate. They should be made redundant by the Triple Lock
@ Mick Taylor,
Good to see that you’ve picked up on some “boring” macroeconomic theory. 🙂
You’re quite right to suggest that taxes will probably have to be rise. Many MMT advocates often don’t do themselves any good by appearing to suggest they never have to be. If demand led inflation is an issue then taxes will have to, or should have to, rise to reduce aggregate demand.
This is seen as a far more effective and equitable method than raising interest rates.
Economics is a more about resources than it is about money. Rachel Reeves is big on the latter but totally ignores the former.
@ Steve,
“HMG does not need to tax to pay for…..”
See comments above. HMG does need to tax to be able to support its spending. The correct wording in MMT terms. The theory is different from the mainstream but not as different as some make it out to be. It’s arguable that “to be able to support its spending”, is really that much different from “to pay for”.
What it does mean is that govt spending doesn’t have to equal taxation revenue if inflation is not an issue.
If government spending/putting money into society does not exceed taxation returns, where does the money for households, business etc. come from?
If inflation is an excess of money, might Neoliberalism/Austerity contribute to inflation by its transfer of money/wealth from those who have too little and those without a lot, to those who have amazing amounts of such?
With the overall level of tax take the highest for 70 years – and people on lower and middle incomes feeling this acutely – a message around raising taxes on income tax, or others that directly impact working people, would be as unpopular as it would be unfair. Rather the Liberal Democrats can have a clearly differentiated message on tax through shifting the burden of taxation. It is widely recognised that younger generations are shouldering too much of the burden whilst older generations are sitting on wealth. The Intergenerational Foundation have clearly demonstrated this in their outputs.
We should as @Richard argues look at taxes which disincentivise economic activity. It would be foolish to raise taxes in areas that drag economic activity and make everyone poorer as a consequence. It is argued that stamp duty is one of the most regressive taxes for this reason.
However we should be clear about how the burden of taxation should be shifted gradually and pragmatically away from income and towards wealth and the proceeds of wealth. The Land Value Tax proposal speaks to this shift in burden. If policies are advance that seek both to fund public services but also to minimise the effect on economic activity, this could help assuage fears of capital flight. Devices like a Cash Flow Tax – taxing businesses based on withdrawals from the company, rather than overall profits – or taxes on liquid instruments, might actually be seen to promote economic activity through incentivising re-investment.
@ Steve,
“If inflation is an excess of money…..”
It isn’t.
It’s an excess of spending relative to what’s available to be bought that causes it. If you were to get a £1000 from the Government you could choose to spend it or save it. If you chose to spend it the Government would probably collect tax on the transaction. Its deficit would fall but you’d be contributing to demand and possibly inflation. On the other hand if you chose to save it by buying Premium bonds the Government would be more in debt than before!
So things often work out to be the opposite way around to what many might pre-suppose.
First a « thank you » to Peter Martin for encouraging me to look more closely at inflation.
Below is what I found.
« The quantity of money theory argues that inflation is determined by the money supply. (1)
The demand-pull theory of money suggests that the cost of goods and services rises when demand is greater than the available supply. (2)
The cost push theory attributes inflation to rising cost of production amid a steady flow in demand. (3)
The structural theory of inflation says that inflation is caused by structural weakness in a country’s capacity to produce goods or maintain an adequate flow of supply. Poor infra-structures can contribute to this. Inflation that stems from structural issues may not easily be changed by monetary policy.” » (4) (All from Britannica Money)
Austerity/Neoliberalism seems to be based on theory 1 whereas our situation seems to fit best with 4. It also seems to make the causal problems of 4 even worse, besides making the disadvantaged suffer even more.
Might a mixture of Keynesian economics and much of Modern Monetary Theory serve all of us better?
The word inflation means inflation of the money supply. Money supply is increased by the creation of credit by banks.
When there are supply shocks that cause increases in the price of energy, food or other commodities that is not monetary inflation. Households typically have to reduce spending on non-essential goods and services to compensate for what is termed cost-push inflation in basic goods and overall spending in the economy does not incease as a consequence, Only increases in the money supply can generate overall increases in spending in the economy.
The main source of inflation is commercial bank lending and its impact is most dramatic in asset prices. The younger generation are paying 40 to 50% of their income in rents or mortgage payments and private equity firms are buying up the available scarece rental stock that the younger generation cannot afford to finance.
The more you allow the money supply to increase in excess of the growth of the economy and available housing stock the more asset price inflation will increase (as we have seen with near zero interest rates and QE) and the greater the wealth disparity wlll be between those with access to borrowing and those without access.
The answer lies with Land value Tax and the control of bank lending as the classical economists like John Stuart Mill and the old liberal party understood and many here have commented.
The issue is not economics, it is political and lies in clearly demonstrating that money illusion does not create wealth. Wealth comes from the production of goods and services and the equitable distribution of that production throughout society via the mechanism of taxation.
@JohnHill. If tax were at the highest level for 70 years we’d be able to pay for services, but it’s not. In fact, for the wealthy it’s much lower than it used to be. As I pointed out earlier income tax is now the lowest it’s ever been at 20% in my lifetime with much higher levels of personal allowance than when I started work, when the basic income tax rate was 33%. For the very wealthy income tax rates as high as 98% used to be levied (by Conservative as well as Labour governments) and now the top rate is 45%. Yes, other taxes now form a higher percentage of the tax take, because governments mistakenly think people won’t notice them as much as income tax. Governments since 1997 have been introducing such new ‘hidden’ taxes, again both parties have done this.
It would be more honest to have a higher rate of income taxation and less indirect or hidden taxation because this would mean the burden would fall more on those with the broadest shoulders. Indirect taxes like VAT fall much more heavily on the low paid.
I do not disagree with moving towards wealth taxes, but as William Wallace had pointed out, they are difficult to collect and easy to avoid. Much more detail required before they will be effective. An obligation on all UK citizens to submit a tax return, wherever you live as happens in the USA is something to get our teeth into
The IMF has been warning the last governmet against tax cuts for a couple of years including as late as May this year https://www.politico.eu/article/imf-warns-uks-jeremy-hunt-against-further-tax-cuts/
“The government should instead prioritize stabilizing debt in the long term, the IMF’s report said. To ease the debt burden, it said the Exchequer’s primary balance — the difference between revenue and spending — needs to be around 1 percentage point of GDP higher compared to next year’s baseline.
To do so, the IMF suggested boosting government revenue by hiking carbon and road-usage taxation, broadening VAT and inheritance tax bases, and reforming capital gains and property taxation. These are all measures the forecaster recommended in its 2023 annual report.
In more positive news, the IMF noted the U.K.’s “stronger than expected” exit from its technical recession in the second half of 2023, with real GDP growth now forecast at 0.7 percent in 2024 before rising to 1.5 percent in 2025.
However, it said longer-term growth prospects for the U.K. “remain subdued” due to weak labor productivity and higher-than-expected inactivity levels due to long term illness.”
The IMF has a highly neoliberal economic outlook. It’s “advice” is best ignored entirely. It was founded in the post war period to administer the Bretton Woods fixed exchange system of currencies.
We don’t have that any longer. That went in the early 70s and probably the IMF should have gone with it.
On the question of an increase in the money supply causing inflation: I’d like to know how the rest of us know that it’s there if nothing is being done with it? We only do know that if someone is trying to spend it on something we have.
Peter Martin,
whether inflation is defined in terms of the quantity theory of money or demand-pull inflation the same basic dynamics apply – “Too much money/credit chasing too few goods.”
The QE undertaken after financial crisis was primarily aimed at supporting financial markets. That injection of liquidity simply substituted Bank of England credit for commercial banks deleveraging of lending previously injected into private sector asset markets and recapitisation of distressed banks like RBS and Llloyds. Borrowing in the bond markets enabled the deficit financing of the government budget and helped offset a deflationary depression.
The QE undertaken in the Covid pandemic replaced longer term bonds that had been previously issued with short-term borrowings in the form of bank reserves. The new bond issues (coupled with state guarantees of Covid recovery loans) during the pandemic also enabled the defict financing of the government budget and prevented a deflationary depression. During Covid a significant element of the government deficit spending was accumulated as money savings and as this began to be spent after lockdown inflation gradually began to take hold.
When energy prices began to rise consumption of energy began to fall as would be expected. Winter demand falls as fuel bills rise: understanding the energy impacts of the cost-of-living crisis on British households and eventually returned to pre-pandemic levels as the crisis subsided. That is transient inflation arising from a one-off supply shock.
No government wants to see above target inflation take hold in the economy and has a combination of fiscal tools in the form of tax and monetary tools in the form of interest to exert downward pressure on future demand. Both have been utilised over the past couple of years in an effort to avoid a wage-price spiral embedding.
@ Joe,
“No government wants to see above target inflation take hold in the economy”
Perhaps not. However, when I was a young person I have to say I liked inflation. It effectively reduced my mortgage payments! The higher the better as far as I was concerned. I was always reasonably confident that I could keep my own income in line with the going rate.
Debt in the economy is a fiscal drag. Inflation is a good way of reducing it!
I agree, we need a more informed electorate and this would involve the education sector and media along with others. An infomed electorate would be a more caring electorate. Many would understand the advantages to them of improving public services if it was clearly explained to them. Now would be an excellent time to start this programme with the recent violence on our streets, looting and the homeless squatting our our roads being constant reminders.
They say politics is all about choices, and politicians are pulled one way by what they think is the right thing to best progress their values, but the other way by what will get them votes. In the UK that means what will appeal to enough swing voters in enough swing seats? Which means terrible choices are made by people who know better. We’ll never make serious progress without electoral reform.
My ideal tax reform would require considering what goods, services and behaviours contribute to society and what creates burdens. What is an essential, what’s life enhancing and what is a luxury? Salaries/benefits including pensions should be enough for people to afford a few luxuries of their choice, including cakes – which should be subject to VAT.
IMO, private schools do not contribute to society, and their existence is harmful and it’s right they are taxed, but that doesn’t mean there aren’t consequences for local education authorities. I’d have phased it in, and given school fees a tax free allowance that’s equivalent to whatever is spent on state education for that age group. That would focus minds on funding of state education, as well as ensuring the more expensive schools would pay proportionately more. Of course they’ll find loop-holes to reduce what counts as school fees, but some of them can be closed over time.
The tax breaks for aviation should be ended, and efforts to introduce fair taxes on international flights prioritised.
In line with my desire to have taxes, especially VAT style taxes, reconsidered to incorporate the value goods and services add or detract from society, I’m pleased to see we are this morning calling for VAT to be removed from high factor sun screen. A perfect example of something that we should not be making harder to buy and use.
@PeterMartin. As someone with a PhD in economics, I might just have picked up an idea or two along the way…
@ Mick Taylor,
It’s interesting to see you have a PhD in Economics. Some of the phrases you use: such as “Governments that issue their own currency have a much wider scope for action …” and “……an end to hysterical talk about black holes” are the kind of phrases I use myself but I never see them used by the economics mainstream. I can’t imagine any Chancellor of the Exchequer ever using them
I’ve often been told that I should leave Economic commentary to those who have been formally educated in the subject. 🙂
I remember chatting to Prof Bill Mitchell. he’s Australian, quite a few years ago now, about the possibility of doing some formal study over here, and just for my own interest, but he advised against it. He seemed to think that most courses were designed to deliberately mislead the students into mainstream thinking and would be a waste of time.
He’s since taken steps to try to offer something better in his own University, in Newcastle, New South Wales.
I can’t remember if used the word ‘brainwashing’ but this is what he was getting at. What do you make of his view?
Mick Taylor,
you write above”Governments that issue their own currency have a much wider scope for action as long as they control inflation. In the UK government borrowing is largely an internal transfer at the Bank of England (wholly government owned) from the BoE to the government. In other words it is money that the government owes itself”
The whole reason governments control their deficit spending is to avoid the exacerbation of inflation. It is not a caveat, it is a principal reason why governments try to keep deficits in low single digits.
Government borrowing is and always has been borrowing of public savings either directly or via commercial banks. The initial capital subscribed to the Bank of England was just that. The post-war nationalisation of the central bank or the use of QE does not change that. Personal savings represent a claim on future production by those who hold such claoims.
This chart takes a look at what makes up UK public debt and who it is owed to UK Public debt
“HM Treasury owes £2.1trn to holders of British government securities, of which approximately £745bn is owed to the Bank of England” The Bank of England, which owes around £1,060bn to its depositors. This mostly comprises deposits created under its quantitative easing programme to support the economy, in the order of £850bn to finance fixed-interest gilt purchases, £20bn to finance corporate bond purchases and around £190bn to finance Term Funding Scheme loans.”
The most importat takeaway from this chart is who is owed government dent and henvce has a claim of future production.
@ Joe,
If I buy some Premium Bonds and the Government spends the money it receives, its deficit will rise.
So why is that more inflationary than if I’d spent the money myself? When of course its deficit wouldn’t have risen at all.
@Joe Bourke. When I was starting out learning economics, the government had many ways of tackling inflation. Money Market operations, interest rates (including controlling Hire Purchase), special deposits, taxes and more. Then along came monetarists, inc. M Thatcher, and we are reduced to controlling interest rates and the money supply.
MME gives a new insight into the issue and control of money and it is up to politicians, including Liberal Democrats, to understand the new insights and make use of that knowledge. However, as Stephanie Kalton herself says, recognising that in a very real sense there is a magic money tree is something politicians just can’t bring themselves to accept or promulgate. Instead we go on spreading doom about black holes in finance, and burdening future generations with debt.
I accept that it’s difficult to push policies that are at variance with the accepted economic dogma, but surely we owe it to the people of the UK to try.
Peter Martin,
if you buy premiun bonds the governmet can borrow less elsewhere e.g. in bonds. It neither increases deficits or increases debt,
It is investment that creates savings i.e. national output that is not consumed in any given perod. Higher levels of investment (public or private) correlate with higher levels of saving.
Inflation is always geneated by excess money creation via either commercial bank lending or large enough government deficits when the economy is operating near capacity. To control inflation commercial bank lending has to be reigned in (usually via interest rates or directly via quota’s) and deficits kept in line with economic growth including both consumption and Investment.
To increase consumption, productivity has to be increased. To increase productivity, investment (both public and private) has to increase in the UK.
You write above “Debt in the economy is a fiscal drag. Inflation is a good way of reducing it!” That is true if inflation is a moderate 2% a year but certainly not in double digits.
The biggest problem with the UK economy is extreme regional and individual inequality. There has been a longstanding need for direction of large public investment to the North and Midlands. This has been done before with East Germany. Helmut Kohl was able to engineer a political consensus around development of East Germany and introduced a solidarity surcharge for wealthier tax payers and companies German solidarity tested after 30 years of paying to rebuild eastEast German productivity was about 20% of W. Germany in 1990. 30 years on, it is around 85%. That is how it is done,
Mick,
credit restrictions on hire purchase and bank credit creation were used to control inflation under the Bretton Woods system, but that all got blown out of the water in the Barber boom and the 1970s when commercial banks were allowed to expand lending into the mortgage market and credit cards became ubiquitous.
Keynesian stimulus is an effective policy in conditions of depressed demand relative to the supply capacity of the economy, but is not an alternative to intelligent industrial policy. There has rarely been a time in the post-war period when Keynes advice that “the Boom not the slump is the time for austerity” was actually implemented.
Increased taxes can be used to reduce household spending in the economy, but it takes time to implement and creates the kind of stop/go economy experienced in the post-war period.
Significant reduced spending typically induces recessionary conditions, that in turn reduce the overall tax take. To prevent that happening, the state must increase its level of spending to maintain demand that will in turn restore its tax take at higher levels and result in a reallocation of resources from private to public sevtor activities. We know that can work, if carefully timed and calibrated, from prior experience. The only case study we have for MMT is Japan which has been experiencing deflationary stagnation for three decades.
Banks can operate as long as their creditors (depositors) believe they can be trusted to make good on their liabilities on demand. Trust in the value of Sterling as a medium of exchange for imports is based on the belief that the British pound represents a good store of value relative to other tradeable currencies. When that trust falters then inflation will normally resurface and what Keynes referred to as ‘Money Illusion’ begins to erode real wages.
@ Joe,
So you’re saying that if I buy Premium Bonds ” the government can borrow less elsewhere e.g. in bonds” and so this wouldn’t count as borrowing.
The mainstream view is that the Government borrows by selling bonds. I did think I understood this much. So what if I just buy ordinary bonds to start with? You’re saying this would contribute to the Government borrowing but it wouldn’t contribute to borrowing if they were Premium bonds?
Some people think MMT is hard to understand but getting your head around the mainstream take on it all is much tougher!
Peter Martin,
the debt management office forecasts government borrowing requirements weekly. If you buy a premium bond it might change the composition of its borrowing but not the total amount of borrowing it needs . If you want to invest in newly issued bonds instead you can only buy what the government decides to issue based on its forecasts which includes its forecast receipts from premium bonds.
New credit money is created by a bank purchasing a security (a prommisory note that is evidenced by a loan contract) and crediting your bank account with the loan proceeds. In the case of an overdraft faclity your account is credited only as you spend. The amount you can borrow is based on your ability to service a loan from your income.
The Treasury and debt management office can borrow whatever Parliament authorises. It does so by borrowing deposits from the public that have been created by and are held with the commercial banks and issuing securities for those borrowings (See chart above at 1.34pm)
The amount the government is prepared to borrow in this way is largely based on their judgement of the ability of taxpayers to service the loans without devaluing the currency. In practice, this is driven by the amount of interest that is expected to be paid from future annual government budgets to maintain the puchasing power of the currency and the associated tax burden.
If interest rates are not comparable to that available from lending to similar developed economy currencies around the world (the US dollar in particular), then the government has to be prepared to accept the possibility of a currency devaluation (and the increased costs associated with the import of energy, food and raw materials) as Japan has been prepared to do over the past two years.
@ Joe,
You’re not putting it very clearly. The MMT view is much simpler to follow. Government borrowing is a misnomer. Govt debts and deficits arise as a process of money creation. Money is a both an asset to the holder and a liability to the issuer. So once that money is spent into the economy the government is left with the liability (or debt) whereas the recipients of the spending are in possession of the assets or net credits.
Until they are collected back as taxes that is.
So what you, and the mainstream, would call ‘borrowing’ is simply a swap of one type of government IOU for another. Money for bonds (gilts). It really doesn’t matter whatever type of bonds or other securities they are. They can just as well be Premium Bonds.
The government doesn’t sell bonds because it needs the money. It does it to set a market in long term borrowing. It’s not a free market as such. The BoE can intervene as as a buyer or seller as required.
Peter Martin,
According to the Bank of England the reality of how money is created today differs from the description found in some economics textbooks:
“Rather than banks receiving deposits when households save and then lending them out, all bank lending creates deposits.”
“In normal times, the central bank does not fix the amount of money in circulation, nor is the central bank money ‘multiplied up’ into more loans and deposits …
Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base money or broad money.” Source McLeay, M. et al, Money creation in the modern economy; Bank of England, Quart. Bull. 2014 Q1 (pp 14-27).
The Bank of England avoids monetising debt by creating non-interest bearing reserves and does not itself normally lend to the government. It does lend to commercial banks against their assets (including government bonds held by commercial banks) when required.
There are arguments for and against direct monetary financing by Central banks in exceptional circumstances as this IMF blog discusses Should Monetary Finance Remain Taboo?
“..we see merit in further exploring the conditions under which monetary finance may or may not be appropriate in exceptional circumstances. However, possible experimentation with this tool should be modest and limited to countries with credible monetary frameworks, low inflation, and sustainable fiscal positions.”
@ Joe,
Yes the conversion of the BoE as to how the economy works has started with an acceptance of how commercial banks create money. However, I sometimes think this small movement in the right direction causes more problems than it solves. It leads people to think that it’s the banks rather than the central government, of which the BoE is a part, which are the currency issuers.
They aren’t.
It’s only central government which can issue net credits into the economy. In other words commercial bank created money, which is created by lending, is different to central bank money which is largely created by spending.
@ Mick,
I mentioned the word “brainwashing” in connection with university economics teaching last time. Here is a link showing Bill Mitchell using the term on his blog.
You seem to be at least partially immune! So would appreciate your take also.
https://billmitchell.org/blog/?p=41542
Peter Martin,
currency issue is notes and coins. That is what the government issues – debt free or equity money if you like. Approximately 97% of money used in the economy is interest bearing commercial bank credit.
You can make an argument for monetary reform that would see the government via its central bank issue bank credit into the economy (as the Bank of China does in effect How Does China Manage Its Money Supply?, but that is not a description of the financial system in the UK or across most of the world and has not prevented real estate bubbles in China.
Throughout much of the 19th century from the time of Smith, Ricardo, Marx and John Stuart Mill the major economic struggle was between a rentier landlord class and the working population for an equtable distribution of the fruits of production.
Today it is a financial rentier class that extracts the fruits of production through rents, mortage lending, monopoly rents, commodities etc.
Lord Wallace asks how do we increase public spending. In my opinion the answer is what it has always been. The recovery of economic rents generated by financialisation of economy activity for the public benefit through taxation and regulation of the financial sector to redirect bank credit creation to productive activities.
Without these kind of tax and monetary reforms the ultimate destination is a debt deflation as described by Irving Fischer in the 1920s and a decline in living standards to a precarious subsistence level for the majority of the population Inflation Induced Debt Destruction: How it Works, Consequences
“currency issue is notes and coins. That is what the government issues – debt free or equity money if you like.”
Whether or not I like it is neither here nor there.
First of all coins and notes aren’t debt free. They are government issued IOUs. So you need to add all government IOUs including bonds/gilts to get an idea of what government issued currency means.
If you don’t include notes and coinage you end up with this kind of absurdity. We just create two or three trillion pound coins, or maybe notes, and hey presto! No more National debt!
Nothing really changes- of course!
https://en.wikipedia.org/wiki/Trillion-dollar_coin
William Wallace,
Until recently we had a policy of putting a penny on income tax to fund extra spending on the NHS and social care but it has disappeared. We didn’t actually vote at a Conference to get rid of it. It was just announced at our autumn conference in Bournemouth last year. As far as I can tell there is no way of holding anyone or any group to account for this. It has been suggested that as the policy paper and motion ‘A More Caring Society’ on social care, which we passed at York in 2023, had no mention of the policy of putting a penny on income tax Conference had agreed to its removal.
Joe Bourke,
Thank you for pointing out that the IFS stated that the extra spending of nearly £27 billion a year as set out in our costing document for this year’s manifesto will be inadequate for what is needed.
In our recent manifesto we are no longer separating government investment from the requirement to have government debt falling as a percentage of GDP.
David Allen,
Looking at our 2024 manifesto does not provide me with any confident that we will be pushing the Labour Party hard enough to solve all the problems left by the Tories.
Steve Trevethan,
From the changes to our fiscal rules from the pre-manifesto to the manifesto it seems we have signed up to the current ‘Neoliberal/Austerity theory’.
Peter Martin,
currency only really becomes public debt when it has been transferred to commercial banks to be spent into the economy and the currency is held by the private sector as legal tender. In the Chart of what makes up UK public sector debt you will see on the asset side £2.7bn and on the liability side £.2.4bn. The difference between assets and liabilities is the equity i.e. £300bn of cash and liquid assets that have been created and held in reserve. Although equity appears on the liability side of a balance sheet and represents a claim on the assets of an entity, it is not charaterised as debt in accounting terms in the same way as borrowed funds.
Public and private sector investment spending create savings. When taxes cover day to day spending then investment is equal to savings and you have the prospect of a balanced economy as long as borrowing is directed towards productive investments. The purpose of investment spending should be to grow the supply capacity of the economy. As supply capacity grows so too does the demand for money growth and the capacity for extra spending in the economy driving economic growth and further investment in productive assets i.e. a virtuous circle of growing investment and demand.
@ Joe,
So we have established that currency is issued “debt free” but it later “becomes public debt” but even so ” it is not characterised as debt in accounting terms in the same way as borrowed funds.”
I see. Or maybe not!
Let’s move on to what the word “investment” means. It all sounds very nice that we are going to prioritise investment over wasteful day to day spending! But we need to be clear about what this means. Can we do any better with this? We all know what it means for us personally; but, what what do politicians and Economists mean?
Can you give us some examples of what is and what is not investment spending? For example if the Govt spends £20 million on a hospital building does this count as investment? What if they spend the same on staffing it? What if the private sector does the same?
@ Joe,
So far we have established that currency is issued “debt free” but it later “becomes public debt” but even so ” it is not characterised as debt in accounting terms in the same way as borrowed funds.”
I see. Or maybe not!
Let’s move on to what the word “investment” means. It all sounds very nice that we are going to prioritise investment over wasteful day to day spending! But we need to be clear about what this means. We all know what it means for us personally; but, what what do politicians and Economists mean? Can we do any better with this?
Can you give us some examples of what is and what is not investment spending? For example if the Govt spends £20 million on a hospital building does this count as investment? What if they spend the same on staffing it? What if the private sector does the same?
@PeterMartin Whoever said I was an orthodox economist? I am a heterodox economist, which in broad terms means that I am open to alternative solutions to economic problems, quite possibly many.
The problem the UK has at the moment is that Rachel Reeves is an ultra orthodox economist, trained at the Bank of England and she believes implicitly in financial black holes and not, alas, in a flexible approach to spending.
@ Mick
No I wasn’t meaning you were an orthodox economist. However you’ve been through the system so I was just wondering if you agree with Bill Mitchell on attempted brainwashing.
I suppose he, himself, shows it isn’t always successful.
Fully agree with you on Rachel Reeves. It looks like she may have been less resilient!
Peter Martin,
Investments relate to spending on assets, the benefits of which are consumed over more than one fiscal period. The costs of asset depreciation and debt service are financed by taxation(or earnings generated by assets in the case of private business investment) as assets are consumed.
Day to day spending is recurring expenditure the benefits of which are consumed within a current fiscal period.
There are in the UK an infinite number of public investmet projects that can grow the supply capacity/productivity of the economy and be justified with public borrowing including council housing , renewable energy, schools, hospitals, road, rail, bridges, ports, digital infrastructure and more.. All such projects can add to the social capital of the UK and generate benefits for years to come. That is what real public savings are. As you note above money is debt. Debt, like equity is a claim on real assets that generate future production. Money savings are part of those claims.
@ Joe,
“Investments relate to spending on assets….”
Yes we know that but how do you define ‘assets’? Most sensible people would think that investing in our young people’s education was spending on an asset. Or that spending on treating a young person who was sick and back to health was the same.
So, does spending on employing teachers and doctors count as “investment spending”
Yes/ No ?
So
No, it is recurring spending that has to be financed by taxation year after year. The fundamental underpinnings of any economy that is capable of delivering good quality public services is political and economic stability. That stability is reliant on prudent management of the public finances according to the prevailing domestic and global conditions.
In the 1980s people bought into the idea that taxes were too high and a drag on economic growth. As a conseqence we got the Laffer curve, trickle down economics and rising inequality. Trump in the US and Liz Truss are still pedalling the same flawed narratives.
Now the idea that money printing or ever increasing levels of borrowing as a % of GDP can deliver the level of public services needed without having to raise taxes is doing the rounds, even absent the real human and capital resources to do so (albeit not actual MMT economists), and inspite of the exponential increse in wealth inequality that zero interest rates have delivered over the past 15 years.
Look around the world. Successful economies that maintain a robust social security safety net and low unemployment, while delivering high quality education and healthcare services typically maintain a high level of both investment and taxation as a % of GDP than the UK.
Joe Bourke,
‘Inflation is always generated by excess money creation’ 20th Aug 3.09
This is not true and you have posted that it isn’t true.
‘When there are supply shocks that cause increases in the price of energy, food or other commodities that is not monetary inflation.’ 15th Aug 1.12pm
‘It is investment that creates savings’ 20th Aug 3.09pm
‘Public and private sector investment spending create savings.’ 22nd Aug 2.52am
If this was true then the amount of savings would equal the amount of investment, but it doesn’t as you know well. Private Investment plus Government Spending plus Exports should when the economic is in equilibrium equal Savings plus Government Revenue plus Imports.
@ Joe,
The mainstream needs to get its act together, otherwise we do run a risk of having GFC part two.
It starts at the beginning with what money is. Is it a liability to the issuer or isn’t it. An answer starting with “Yes , but,….” isn’t good enough. Just remove the “but”! If you can’t get the basics right you’ve not much chance with anything else.
If you don’t think spending on children’s education is “investment” then you aren’t using the same language of everyone else. Everyone else is much more sensible than most Economists. They know that the only reason for building schools and hospitals is to run the buildings as, er, schools and hospitals. What an accountant might put down on the balance sheet as their capital worth is neither here nor there unless there is any intention to sell them.
There is an educational aspect with the public though. The difference between a household and a currency issuer needs to be properly explained. You can only do that, though, if you get your own story straight. The “trillion dollar coin” contradiction clearly shows up a major flaw in conventional thinking.
Peter Martin,
public education is a necessity, as is healthcare that is why we have tax. Money is an medium of exchange and debt is an accounting record. It is not real resources. Schools and teachers are. They are all paid for by tax. Schools by tax smoothing via borrowing and teachers wages by tax colections as they are paid with short-term borrowing to smmoth out cash flows.
When the government spends money iinto the economy it creates debt. That debt ultimartely ends up as financial assets (share, bonds, mortgage lending etc) in the hands of the wealthiest in society and remains as a debt liability on taxpayers across the board. An extra £700 billion of it during Covid alone. That needs to be taxed back from where the assets have accumulated i.e. in the hands of the wealthiest who are the creditors holding the public debt and private mortgages and consumer debt owed by the public at large Why UK taxes should be higher
The trillion dollar story changes nothing. It just exchanges one form of debt for another.
GFC part 2 will come from allowing inequality to continue to widen as it has done over the past 15 years and that accelarated during Covid.
The big flaw with saying government debt is all our savings is – it is not all of us and certainly not those with no savings only private debt. It is largely the savings of a small percentage of society that hold significant financial assets that have not been taxed back and continue to grow through the effect pf compound interest that is paid by taxpayers and squeezes out spending needed for vital public srvices
People do not need economy theory to know that they are getting poorer each year while a small group are getting ever wealthier despite the government running ever greater deficits compounded by £120 billion plus of annual interest payments with no schools, hospitals or other infrastructure to show for it
@ Joe,
“Schools (are paid for) by tax smoothing via borrowing and teachers wages by tax collections as they are paid with short-term borrowing to smooth out cash flows.”
This is simply not true. With or without the smoothing!
There is nothing in the accounting identities of the sectoral balances to suggest that the Government’s deficit or surplus is in any way linked to what arbitrarily defined as investment.
(G-T) = (M-X) + (S-I) (i’m you know what these mean)
This is not to say that there is no relationship between the govt’s deficit and what might be termed investment but it’s nowhere near what you are suggesting. You’ve totally ignored the factors of imports, exports and the level of private sector savings.
Peter Martin,
the sectoral balance simply records flows of money from the government to private parties. Those parties are ordinary households, wealthy investors both domestic and foreign, corporations,financial instutions domestic and foreign. The parties that are indebting themselves are the government and ultimately the 90% of working households that have to borrow beyond their means to meet their basic needs for housing and other essentials. The parties that are accumulating ever more UK based assets are a small proportion of the population (10%) with significant assets and wealthy overseas investors.
50 years ago the government had a large stock of assets in the form of infrastructure, council housing, utility companies and so. Much of those assets have been sold off or leveraged and are now in private hands increasingly overseas.
Ordinary families are taking on mortgages or paying rents that absorb 40% to 50% of their incomes. Increasingly, home ownership is no longer a prospect for many and they will have to rent from the Amercican private equity firms that are buying up great swathes of former council housing and care homes as they have done in California and elsewhere Private equity giants worsen California’s housing crisis. Why are we giving them public dollars?
Where do you think the £800 billion or so of cash that the UK government pumped into the economy during covid has ended up. The debt is still there. Ordinary families have spent the cash on rents, mortgages, utilies etc. The cash pumped in by governments around the world has ended up as financial assets of the wealthiest Wealth of world’s 10 richest men doubled in pandemic, Oxfam says
Government deficit spending needs to be taxed back from the economic rents these accumulated assets are extracting from the public wealth. We need to introduce a land value tax and An Excess Profits Taxto address this extreme inequality before these billionaires reduce the current generation to Victorian era penury.
Joe,
I agree that we need to introduce a LVT, albeit I’d widen the scope to make it a wealth tax, to claw back some of the £800 bn you mention, but this is quite separate from the introduction of arbitrary fiscal rules to control public spending.
Rachel Reeves will no doubt agree with you on these fiscal rules but she won’t agree with you on a LVT.
So, we’ll end up with no LVT, no wealth tax, and a very depressed economy with little or no growth caused by the introduction of nonsensical fiscal rules.
Peter Martin,
according to the Sunday Telegraph Rachel Reeves faces pressure from Left and Right to introduce radical Land Tax
Charles Goodhart, the former bank of England economist, argued that Reeves has “the bet chance since Lloyd George of introducing a land tax. Labour has a massive majority and the House of Lords is no longer as dominated by Tory Peers as it was back in 1909.
If she wants to get really radical and be the new Lloyd George, a capital levy of £750 billion could be levied on the top 10% in proportion to financial asset wealth. This money would just be burned by cancelling the £750 billion of Gilts still held by the BofE. That would free up interest being paid on the QE reserves created to buy these bonds and give her another £35 to £40 billion of budget room.
@ Joe,
its hard to imagine Rachel Reeves doing anything which could in the least part be described as “radical”. We’ll see, but I wouldn’t hold my breath about a LVT.
On the question on the £750 bn or so of Gilts owned by the BoE we are really talking about one dept of government paying another dept of government. So it can tear up its own IOUs if it likes and it doesn’t make any difference to the wider economy. It won’t free up £40bn of budget room. Doesn’t the BoE hand back any interest paid by the Treasury on it’s owned bonds in any case?
The BofE is paying interest to commercial banks on the reserve deposits created to buy back the bonds. A capital levy that extingushes those QE reserve deposits held by commercial banks with the BofE saves the interest at base rate being paid on them.
That is £35 to £40 billion being paid out every year to the holders of financial assets who have seen their share and property portfolios dramatically increased during Covid as a consequence of monetary and fiscal policy, while living standards for lower and middles income households have been rapidly eroded by inflation.
It is the distributional consequence between those that have net financial assets and those that have no financial assets that is key to the wider econimc impact not macroeconomic aggregates.
@Peter Martin. I very much agree with Bill Mitchel. There are some universities where heterodox economists have a place and there is an Association of Heterodox Economists who hold regular conferences and I have attended a number of them. There is a strong push by orthodox economists to ban anything other than mainstream economics from places of further and higher education. Not very Liberal, I’m sure you would agree. [I naively thought universities were places where one learned to think and question, silly me]
In fact some orthodox economists virtually foam at the mouth whenever anyone suggests there may be alternative theories and explanations of economic phenomena.
The Liberal Democrats have long ago abandoned any pretence of new economic ideas and have swallowed orthodox economics hook, line and sinker. I note that the SLF has organised a fringe meeting at conference where these ideas may be questioned. I’m not holding my breath. It takes a brave shadow chancellor to say that he/she isn’t going to follow orthodox economics for fear of being accused of being cavalier with the economy.
@ Joe,
There are the payments that Treasury makes to the BoE on the gilts they own. I agree they can be waived.
I’m not clear what you are suggesting we do with the £700 bn or so held by commercial banks at the BoE. This is money the banks consider to be their own because they sold bonds which they previously owned to the BoE as part of the QE process. Therefore they will consider they should be able to do what they like with it. The purpose of the 5% base rate is to set a floor on the ‘price of money’.
Many of us don’t agree that this form of monetarism is best way to regulate the economy but,nevertheless, this is official policy. So the monetarists can’t have it both ways. If Govt doesn’t want to shell out 5% then it needs to lower interest rates. It should take back control from the BoE if this is the case.
@ Mick,
Interesting comment. I think it was Max Planck who said that progress in Physics happened one funeral at a time. We need a few more funerals yet!
Mind you, the move away from Keynesianism in the 70s seemed to be a relatively rapid process. So maybe we should be pressing for more early retirements!
Peter Martin,
the point is the Capital levy does not itself give the government funds to spend on new programs, but does free up £35bn to £40bn of interest costs from the budget covering such things as black holes/unfunded spending committments etc.
The capital tax levy is credited to the Treaury account at the BofE and used to retire the £700bilion of bonds owed to the BofE by the Treasury. The reserve deposits owed to the commercial banks are simultaneously reduced by the £700bn payment made by depositors that are subject to the capital levy. Redeeming the bonds held by the BofE avoids the realisation of losses being incurred on the sale of those bonds back into the market as part of Quantitative tightening monetary operations that the Treasury would otherwise need to cover.
The government cannot effectively lower interest rates while global rates are circa 5% without seeing the exchange rate depreciate. If the government were to instruct the Bank of England to reduce rates to zero, we would see the same results as Japan has experienced since last year i.e a halving of the value of the currency against the dollar, Euro and other tradeable currencies.
That is an option, but one that would see the cost of importing energy, food, commodities and manufatured goods rise dramatically without any significant offsetiing increase in the volume of exports and an immediate decline in general living standards, albeit somewhat mitigated by lower mortgage interest payments.
Maybe I’m being a bit slow on the uptake. Maybe you can give an example of a commercial bank which has a £1bn deposit in its reserve account at the Bank of England. At the moment it will pick up £50 million pa in interest. So you apply a capital levy of £50 million pa.?
So what’s to stop the bank moving its money somewhere else? Just as it might if its interest payments were substantially reduced. In both cases the effect on the pound would be the same.
Peter Martin,
capital levies are a one off windfall tax on wealthy families. According to ONS statistics for 2018-20 “The wealthiest 10% of households held 43% of all the wealth in Great Britain in the latest period; in comparison the bottom 50% held only 9%.” That % of wealth held by the top 10% has likely increased significantly during the pandemic.
Household total wealth in Great Britain: April 2018 to March 2020
The commercial bank deposits with the BofE are not the banks money, it is that of its depositors including the families that would pay a one off capital levy on their wealth.
@ Joe
I see. I did wonder if that’s what you meant but it’s such a radical policy that I thought you couldn’t be!
I’d be in favour of a wealth tax but it would have consequences. I accept that. So would this. Probably even more. You’d have to do it overnight without any warning. If a left government tried it would be considered an act of revolution.
Can’t see Rachel going for it!
Joe, “one-off capital tax on wealthy families”. Yes, let’s ask our Conference to agree it, and let’s ask our Parliamentarians to demand it of Rachel Reeves. She is not going to
spend on the needs of the country as we want unless we show where she can get the extra billions from.
Katharine,
If Libdem Parliamentarians are going to argue for a wealth tax it would probably have to be along the lines of an unrealised capital gains tax. This is what the Biden administration is proposing in the Fiscal Year 2025 Budget of the United States Government Unrealized Gain Tax—A Coming Sea Change in FY2025 Budget Proposal?
“…a simple example: a billionaire holds shares in a given electric car manufacturing company. Since acquiring, either through purchase or as compensation, the given shares, they have appreciated in value significantly—let’s say from $1 per share to $1000 per share.”
“…consider the fact that the aforementioned billionaire could borrow money using the appreciated stock as collateral—perhaps, say, to purchase a social media company— absent some mechanism by which the billionaire can be taxed, they can at least in theory defer ever realizing their gains by continually borrowing against their stock rather than selling any of it.”
This is what does actually happen. The very wealthy use their excess passive income and borrow against appreciated assets to acquire yet more assets inflating house prices, rents, energy, food prices and governent deficits etc along the way. Best to have them use their excess passive income and/or borrow to pay taxes rather than buying up all the real resources in the country leaving nothing for ordinary famiiies to be able to own or live on.
Peter Martin,
lump sum tax is the most efficieny way of taxing without distorting any economic behaviour or creating a deadweight on economic activity Lump Sum Tax especially if, as you say, you do it overnight without any warning. This is not Russia where the oligarchs have their own private armies. If there is going to be a revolution it will come from the people that don’t have the money to buy or even rent a home, pay for heating or put food on the table.
Rachel Reeves says she wants to get public debt falling as a % of GDP. A one off capital levy of this size would reduce debt to GDP by 26% at a stroke.
@ Joe
How would that work exactly? The tax would have to be large enough to make a difference but couldn’t be exactly lump sum because some people wouldn’t be able to pay it.
Peter Martin,
See Warwick University report A wealth tax for the UK
One off wealth tax
“The defining feature of a one-off wealth tax is that it would be a one-off exceptional response to a particular crisis. Individuals would only be taxed once based on the wealth they owned valued at a particular date. They would still be allowed to pay the tax in instalments over a number of subsequent years, to reduce the cost in any single year, but the amount of tax would be based on their wealth on the initial assessment date.
Achieving objectives
A one-off wealth tax can raise substantial revenue. After accounting for non-compliance and administration costs, a one-off wealth tax payable on all individual wealth above £500,000 and charged at 1% a year for five years would raise £260 billion; at a threshold of £2 million it would raise £80 billion. This would be paid by individuals whose total wealth after mortgages and other debts, and after splitting the value of shared assets such as a jointly-owned family home, exceeded the tax threshold, and only on the value of wealth above that threshold. To be clear, a wealth tax levied at 1% above £500,000 would require a couple to have net wealth of more than £1 million before any wealth tax would be payable.”
Households with wealth in excess of £1m are likely to sell financial assets or borrow against their portfolio of finacial assets to meet tax liabilities.
In the 20th century we had 3 landmark governments; the Liberal government of 1906 that introduced the People Budget and the welfare state, the 1945 Labour government that introduced the NHS and improved the welfare state thanks to the great Liberal William Beveridge, and the 1979 Tory government under Margaret Thatcher, of which the less said the better.
We have not had such a government in the 21st century, not even the Coalition government of 2010.
It is worth recalling that in the years of economic depression in the 1930s, this country could have decided to go the way of communism or fascism. It was the economic policies of JM Keynes that rescued capitalism and liberal democracy saved us from such a fete. Capitalism of course comes in many different forms.
It feels like the time is ripe for a sgnificant left of centre government to rescue capitalism once again, and save us from the populist tide that is sweeping Europe, the US and most of the democratic world. If this government fails to achieve that than the risk is that Reform will be the main beneficiary.
But we all seem to be stuck. To coin a phrase, there is no money left.
I am by nature a tax and spender. But during a cost of living crises, taxes should only come from those who can afford to pay them, ie the rich. How much revenue can be raised from them? How much can we borrow when interest rate are high? It all seems to have got harder these days.