William Wallace writes…We need to challenge Conservatives on Tax cuts

Right-wing Conservatives like Boris Johnson and Priti Patel are calling again for tax cuts to ‘free’ the economy.  It’s always popular to call for tax cuts, so long as you don’t link them to spending cuts; so it’s a priority for Liberal Democrats to link the two, and point out that the Brexiteers’ agenda is also one that shrinks the state further, and enforces continuing cuts in the NHS, social care, children’s services – the entire welfare state – education, bus services, even police and prisons.

And the Brexiteers have a problem.  They promised, of course, that they could spend £350m a week more on the NHS – a promise given by a campaign master-minded by Matthew Elliott, founder and first director of the Taxpayers Alliance, a lobby/think-tank dedicated to cutting state tax and spending.  He had used the same cynical ploy in leading the campaign against the Alternative Vote, arguing that the cost of the referendum and the new system could better have been spent on the NHS: knowing that this would appeal to hesitant voters, but not intending that any more money should be spent.  

Their problem is that the narrow majority that voted for Brexit were, and remain, deeply divided on public spending.  One of Lord Ashcroft’s latest polls, intended to inform the Conservative Party conference, warns that roughly half of those who still support Brexit support further cuts in spending and tax, while half – the less well-off, the ‘left behind’ and the ‘just about managing’ – want an end to austerity.  Pushing through Brexit, with a resulting fall in tax revenue on top of the corporate tax reductions right-wing think tanks are calling for, would force yet another squeeze on public services of all types – and would lose the Conservatives the working class support they think they have won.

Boris Johnson’s Conservative conference speech relied on the ‘Laffer Curve’ to square the circle: the assertion that cutting corporate taxes will increase revenue, as companies and their owners are freed to increase investment, create more jobs, and spur faster economic growth.  The record of successive Republican Administrations in the USA has shown that this does not work.  The second Bush Administration cut taxes without managing parallel cuts in spending, leaving the Clinton Administration to struggle with the accumulated deficit it inherited.

Behind this commitment to continuing cuts lies a deep antagonism to the public sector and to those who work in it, and an insistence that private provision always works better than public.  Teachers, they argue, are overpaid and underworked, civil self-interested and intrinsically inefficient bureaucrats.  But never a word from the libertarian lobby about rent-seeking executives in the private sector, or examples of corporate failure or corruption in the provision of services.  And it’s corporate taxes they want to cut deeply, more than personal taxation.

The cuts have deepened since the Conservatives escaped from coalition in 2015.  Support for local authorities has reduced by over 40% since 2010, and is planned to shrink a lot further; Conservative local authority leaders are protesting bitterly, although the squeeze is much more severe for authorities in the north and Midlands than in the comfortable (and safely-Conservative) South-East.  The consequences of cuts of over a third in the prison budget are now becoming clear in riots and prison disorder.  Cuts in police budgets are continuing year by year, with unsolved crime rising as a result.  Philip Hammond has been trying to ease the pace of austerity, but attacks from the hard-line ideologues within his own party oppose his efforts.  

Yes, I know that many commentators to Lib Dem Voice will now pile in to say that we collaborated in government to impose austerity, so have no right to protest now: but there was and is a difference between a squeeze for a limited period to get a widening deficit under control, and a permanent drive to shrink the state.  One of our major mistakes of the coalition was not to insist on a more generous ratio between tax increases and spending cuts in budgetary planning than the Conservatives pushed for.  But it’s time to stop beating ourselves up on the coalition, and to focus on the sharp cuts the Conservatives are pursuing now that they no longer have the constraints of a coalition partner.

Public opinion is changing; recent polls show majorities support higher taxation, to support better services.  We should be challenging Conservatives every time they talk of tax cuts on what spending they will cut next.  The deficit has been successfully contained: further cuts will damage the poor, the sick, the elderly and the young.

* Lord Wallace of Saltaire is a Liberal Democrat member of the House of Lords.

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25 Comments

  • Peter Martin 2nd Oct '18 - 8:05pm

    The second Bush Administration cut taxes without managing parallel cuts in spending, leaving the Clinton Administration to struggle with the accumulated deficit it inherited.

    Clinton merely shifted the borrowing ‘burden’, if that’s the right word as far as Govt is concerned, to the private sector. He overdid it when he actually managed to produce a Government surplus just as he was leaving offcice. So we had the Govt net removing money from the US economy and the overseas sector removing money too because of the trading imbalance. The US economy could only keep moving if the US private sector carried on borrowing.

    It can’t do that indefinitely as the crash of 2008 showed. Private debt is a much bigger danger that Govt debt, but the neoliberals tend not to understand this.

  • OnceALibDem 2nd Oct '18 - 8:29pm

    “It’s always popular to call for tax cuts, so long as you don’t link them to spending cuts; ”

    Didn’t work out that well for the tax cutting LIb Dem agenda 2010-15

  • John Marriott 2nd Oct '18 - 10:30pm

    Not only do the Tories need challenging over tax cuts but Labour also needs challenging over tax rises. It ought to be obvious that all but the lowest wage earners need to pay more and it would seem that most people would be prepared to pay more for services. And yet Labour still thinks that soaking the rich is all that is needed.

    And the Coalition? Back in 2010 we could have taken the Keynesian route, borrowed more and undertaken a ‘New Deal’ public works strategy. Instead we went for austerity. I make no apologies for the Coalition Government. I supported it at the time. It made mistakes but it got some things right. Many reckoned it wouldn’t last a year let alone five.

    We’ve got enough on our plate if Brexit goes as badly as some predict. Do we really want to continue to beat ourselves up about what happened between 2010 and 2015? It’s easy to be wise after the event.

  • Malcolm Todd 3rd Oct '18 - 12:58am

    It’s funny how people who cite the “Laffer Curve” only ever seem to use it as an argument for cutting taxes. A curve has two downslopes…

  • John Marriott,

    I welcome the clarity that comes with the move back to traditional ground for the Conservative and Labour Parties. It enables a contest of ideas based on the three major economic philosophies of our times. Adam Smith’s Laissez Faire; Karl Mark’s dictatorship of the proletariat and John Maynard Keynes attempt to save capitalism from destroying itself.

    The financialisation of the real economy and the inequality it generates is at the heart of a general malaise. Although Keynes recognised the issues, he did not address it head-on. It was only really Karl Marx who made a serious effort to address the economics of inequality.

    Recent years have seen extraordinary upheavals in the political arena. I have an uneasy feeling that this period may be just the calm before the storm.

  • Bill le Breton 3rd Oct '18 - 7:13am

    Somehow these calls for tax cuts remind me of 2008 and another conference season speech:

    “It is time for government to tighten its belt too.

    Labour has doubled government spending from £300bn a year to £600bn a year.

    That’s 18,000 pounds a second.

    They’ve taken, give or take a few, 16 million pounds of your money since I started speaking.

    It’ll be 38 million by the time I’ve finished.

    Does anyone in this room believe every single pound is spent well?

    I don’t.

    And I think it’s liberal to be sceptical.

    Sceptical that central, controlling government gets things right.

    It’s the Labour party that believes every pound spent by government is better than a pound spent by you or me.

    We don’t.”

  • I usually agree with you, John, except that on this occasion in terms of your conclusion I’m reminded of the old cautionary tale that the best predictor of future behaviour is past behaviour.

  • John Marriott 3rd Oct '18 - 9:26am

    @David Raw
    There’s always a first time, mate! Seriously though, you/we have got to move on from dining out on the Coalition. What we surely need now is a Coalition, formal or informal, of ideas about where to go with Brexit. Listening to Johnson’s ramblings yesterday and the response he got makes me wonder whether that nightmare scenario I predicted a couple of years ago might yet come true (the one where President Trump descends from Airforce One at Heathrow to be greeted by Prime Minister Johnson and his Deputy Farage). Then the world really will have gone mad!

  • Peter Martin 3rd Oct '18 - 10:01am

    The deficit has been successfully contained: further cuts will damage the poor, the sick, the elderly and the young.

    The part after the colon in this sentence is right, but first part gives the impression that the deficit (presumably LWW means the Govt deficit?) has been reduced by the imposition of cuts and tax rises. This is not true. Every £ spent into the economy by Govt inevitably comes back as a revenue or someone saves it in piggy bank somewhere (or the digital equivalent like buying bonds etc). Where else can it go?

    Given that the UK is a net importer and money is always net leaving to pay for these imports, then someone in the UK has to do some borrowing to settle the bill. If govt wants to do less borrowing, then the UK Private sector has to do more. That’s why interest rates were lowered to encourage us all to do just that. That’s why there’s a bubble in house prices. So in other words “contained” means that the burden of borrowing has been simply shifted on to us and away from Govt. Just like Bill Clintion started to do in the 90’s in the USA.

    Is that a good thing? Probably not. I’d say it was a stupid thing to have done. We’ll see just how bad things get when the house price bubble deflates as it has already started to do in London. That can all conveniently be blamed on Brexit!

    @ Joe and Malcolm,

    The Laffer effect is OK as far as it goes. If Govt wants to maximise revenue from tobacco then it will set an optimum level of taxation. But that will probably cause revenue from alcohol sales to fall and/or revenue from VAT etc . If I buy a packet of cigarettes ( I don’t smoke -incidentally 😉 ) then I have less money to spend on something else. So it doesn’t mean revenues will rise generally.

    Similarly with the higher rates of income tax, capital gains, corporation tax etc. Especially when clever accountants work out ways of shifting income to be most ‘tax efficient’. So you can’t just do a back of envelope calculation and say that a 1p in the pound on income tax will raise £6 billion (or whatever) for the NHS. It almost certainly won’t.

  • William Wallace 3rd Oct '18 - 10:36am

    Thanks for comments. There’s an element in the libertarian argument about how cutting tax increases revenue which reflects the ability of companies and rich people to avoid tax: cut tax enough, and they may volunteer to pay more… We need to engage in the positive argument that taxation/public spending helps to hold society together. And to focus on tax reform. It’s good to see that Vince Cable is chair of an all-party group on taxing land values, for instance.

  • William,

    judging by the recent conferences the Conservative party will go the Libertarian route of cutting taxes, on the premise that a recharged business sector will deliver the economic growth needed to increase resources available for public sector provision and higher wages.
    The Labour party have correctly identified that power has drained from Labour towards capital in recent years and offers the solution of much greater state control of the economy. Workers would make up 1/3rd of company boards, while pay would be determined by collective bargaining. Ten percent of companies equity would be expropriated and put in funds managed by workers representatives, that would become the largest shareholders in many of the biggest firms. There is also talk of reintroducing capital controls. Income taxes will be increased on companies and higher earners.
    Liberal Democrats need to putting forward economic plans that retain the primacy of individuals and communities. Vince Cable as chair of an all-party group on taxing land values is overseeing work that would do just this. Addressing the inequalities that finacialisation and globalisation have delivered with a focus of redressing the increasing imbalances between those that own land and those that do not and shifting the burden of taxation from productive labour and capital towards rent-seeking activities that extract enormous value without contributing to economic output.

  • Geoffrey Payne 3rd Oct '18 - 1:00pm

    The man who influenced Nick Clegg the most on economic policy was David Laws, who recently admitted that he was an admirer of the libertarian economist Milton Friedman. It is important to know this because normally the Liberal Democrats can be expected to be a Keynsian political party, and his insight was to point out the “paradox of thrift” – that a policy of austerity to reduce the budget deficit is the worst way of doing it. Laws himself claimed that his objective was to reduce the size of the state to 35% GDP.
    This was the ideological shift that the Orange Bookers brought to the party – a belief in austerity to reduce the budget deficit – and it was disastrous for the Liberal Democrats even to this day. And there were only a small number of MPs in the Parliamentary party who were true believers; Clegg, Laws, Alexander and Browne spring to mind.
    So the question I have is why did everyone else in the Parliamentary party let them get away with it?

  • Peter Martin 3rd Oct '18 - 1:25pm

    @ Geoffrey Paine,

    ” ……….and his insight was to point out the “paradox of thrift” – that a policy of austerity to reduce the budget deficit is the worst way of doing it.”

    Exactly right. It is a good way of depressing demand and deflating the economy though! This creates the conditions where more people are more dependent on social programs than they would otherwise be. So, it’s not even a viable way of reducing the size of the state. Maybe we should be thankful that the neolibs are as incompetent as they are?

    “why did everyone else in the Parliamentary party let them get away with it?”

    Thanks a good question. Maybe LWW can answer it?

  • Lorenzo Cherin 3rd Oct '18 - 3:41pm

    I am very in keeping with some of the contributions herein, the article, John and David and colleagues too.

    We need to do what John says, those of us who agree with him on the better route, David, others, or at least realise that the Keynesian or FDR way was preferable and yet is and shall ever beat alternatives if managed with a sense of caution and responsibility, need though to not look back to these recent experiences.

    David is wrong, past is not indicator of present or future in politics often.

    Nobody familiar with Old, New Labour could imagine the Corbyn left direction.

    Things change. We were in coalition with another party not on our own.

    We have talent and ideas and a lot of moral outrage as well as common sense.

    Or some of us have. Let us have more of that and get on with it.

  • Peter Hirst 3rd Oct '18 - 6:54pm

    As much as our tax system is progressive, raising them is the same and vice versa. Taxes as well as raising funds for public services also alter the inequality in our society. By altering different ones can we raise money and be progressive and so tackle inequality?

  • William Wallace 3rd Oct '18 - 8:36pm

    I recall Nick Clegg saying at one point during the coalition that we were taking around 40% of GDP in public spending, and that seemed to him a reasonable amount. Yes, our macro-economic thinking was not as firmly rooted as it should have been; there are lots of people, inside the party and out, who we could blame for that. OK, and Blair’s Labour raised spending in a period of prolonged growth without daring to raise taxes to pay for it – which was party of the legacy that the coalition inherited. Now let’s get on and concentrate on the arguments about tax and spend, as the economy sinks under Brexit and the demands rise: as our population ages, the number of secondary schoolchildren is temporarily surging, the number of new apprenticeships is falling, etc..

  • Peter Martin 4th Oct '18 - 9:38am

    “…..none of which address the underlying structural issues he highlights – Brexit, demographic pressures and job-based skills development and retraining.”

    A suitably targetted stimulus in the more depressed regions could do and should do. At present employers know that they can probably find enough suitably trained people without having to bother with doing the skills development and retraining themselves. So why would they?

    Also skills development is something that happens naturally when we are at work. We don’t just learn when we are on courses. Every job we do is a lesson in itself. So to prevent the problem of an unskiiled pool of unemployed labour developing into an even worse problem, don’t allow the unemployment in the first place. The concept of a NAIRU is a fiction.

  • Peter Martin – I want to add another issue:

    https://www.spectator.co.uk/2018/08/if-the-uk-economy-is-a-wreck-why-are-jobs-and-exports-booming/
    This article is quite pro-Brexit, but there is one point that is true: “Britain is one of the least mechanised countries in the developed world”. Libdem should champion policies that boost the level of automation and mechanization for manufacturing industry.

  • To quote JoeB: “Fiscal policy needs to based not on “fine-tuning” the business cycle but by maintaining a steady stream of public investment in housing and infrastructure amounting to at least 20% of total UK investment, to offset the inherent volatility of the private economy”.

    I think our approach towards public spending should be like above, I mean, should be more strategic. 20% of GDP is still below OECD average, but is far better than currently.

    http://www.ekklesia.co.uk/node/26769u
    UK ranks close to the bottom of OECD countries for economic investment, both public and private. This means, our economic policies for the next election must aim to boost both public and private investment in our economy.

  • Some corrections to my previous post:
    For the economy, we can begin with this:
    https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/aninternationalcomparisonofgrossfixedcapitalformation/2017-11-02

    https://www.tuc.org.uk/news/uk-near-bottom-oecd-rankings-national-investment

    UK ranks close to the bottom of OECD countries for economic investment/GFCF, both in public and private investments. This means, our economic policies for the next election must involve boosting both public and private investment in our economy. Talking about policies with specific numerical targets will make us more credible. In this case, our target should be raising share in GFCF in GDP to at least 20-22%.

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