A report published today from Andrew Baker of the Sheffield Political Economy Research Institute, Gerald Epstein, University of Massachusetts, and Juan Montecino, Columbia University, NY, suggests that the cost to the UK economy in terms of lost growth potential arising from hosting an oversized financial services industry was in the region of £4,500 billion between 1995 and 2015. In other words, had the City of London been smaller and focused on more useful functions, Britain might have enjoyed a cumulative boost to GDP over this period worth £4.5 trillion. That is equivalent to around £67,500 for every woman, man and child in the UK. With another recession in the pipeline, the spectre of the Finance Curse looms darkly over the UK economy.

In the fallout from the 2007-8 global banking crisis the financial sector lost some of its aura of invincibility. Once the bailouts had been paid, what had previously seemed like rewards for hard work and quick wits began to look like the proceeds of incompetence and criminality on such a scale that it daunted the public authorities. But even if the criminality and self-dealing could be checked by regulation, is London’s massive finance sector nonetheless a drag on the rest of the economy?

This was one of the questions thrown up by my work as economic adviser to the government of Jersey (a secrecy jurisdiction in the British Channel Islands) in the 1990s. Responsible for advising on how to maintain a ‘balanced and diversified economy’, I found myself trying to reverse an incoming tide as the booming offshore banking and trust administration sectors crowded out other industries. With the island’s economy becoming ever more dependent on financial services, political power skewed in favour of the banks and accounting firms, and the government became increasingly captive to those players.

I gave this phenomenon a name – the Jersey Disease – as a nod in the direction of the well-known Dutch Disease which afflicts mineral and oil exporting nations. For all the billions flowing through the island, a significant proportion of the population were (and are) struggling to pay their rents and make ends meet. I published several papers with a focus on Jersey with my research colleague Mark Hampton (see here, here, and here for example).

My interest in the Jersey Disease put me in contact with author and journalist Nicholas Shaxson, who was reporting for the Financial Times on how West African oil exporting countries were succumbing to the widely recognised Resource Curse. Also known as the paradox of plenty, the Resource Curse arises from the paradox that countries and regions which export minerals and oil and gas tend to have lower economic growth and worse development outcomes than countries with fewer natural resources.

In 2007 Nick joined me at the Tax Justice Network, leading to the publication of his best-selling book Treasure Islands, which explored how tax havens have devastated the global economy. We also discussed the overlaps between the Jersey Disease and the Resource Curse, leading to the publication in 2013 of a short monograph titled The Finance Curse: how oversized financial centres attack democracy and corrupt economies in which we explored how the curse appeared to impact larger economies, including the UK. This work formed the starting point for Nick’s latest book (published today) titled The Finance Curse: How Global Finance is Making Us All Poorer.

Our work on the Finance Curse attracted the attention of other researchers. Andrew Baker, for example, wrote on the SPERI blog that the Finance Curse framing provides an effective grand narrative that can help explain apparently disparate forces, including global economic imbalances, regulatory failures, state capture, and more. Duncan Wigan from Copenhagen Business School also discussed these ideas with us, leading to a joint paper in which we concluded:

The Finance Curse hypothesis overturns an entrenched orthodoxy that what is good for the City must be good for Britain. Claims about the financial sector’s gross contribution are overblown, and an oversized financial sector imposes a wide range of costs on the economy, the polity and society, to result in a net negative for the country.”

Alongside our work on the Finance Curse, since the 2008/9 banking crisis researchers at the International Monetary Fund, the Bank for International Settlements and elsewhere, have posited the idea that once household and corporate debt rises above a certain ratio to national income the debt retards growth and productivity improvements. This line of research, known as the too-much-finance question, rests on econometric analysis which suggests that once the level of debt in an economy rises above a tipping point of between 90 to 100 percent of GDP a number of potential harms to economic performance and overall growth are triggered.

These harms might arise from a variety of causes, including misallocation of investment into real estate and wealth extracting mergers and acquisitions; misallocation of skilled labour to financial services (the BIS researchers refer to finance literally bidding rocket scientists away from the satellite industry); and insufficient funding being allocated to research and develop new products and services.

With interest in both the Finance Curse and the too-much-finance hypothesis increasing, in November 2017 we co-organised with Andrew Baker a research workshop at SPERI, and invited Gerald Epstein to provide a keynote address about his ground-breaking analysis of how Wall Street overcharges Main Street USA. The research findings published today stem from this workshop at SPERI in Autumn 2017.

The City likes to argue that it is the engine of the British economy, generating jobs and taxes to boost our prosperity. This research, which is the first of its kind, shows that these benefits are outweighed by the much larger costs imposed on the rest of the economy by hosting an oversized financial industry. The real cost of hosting the City of London and its satellites at Canary Wharf and elsewhere is £4.5 trillion. This net loss stems from misallocation of resources, which is estimated to have cost the UK economy £2,700 billion during this period, and costs arising from the 2008 banking crisis, which are put at £1,800 billion. £4.5 trillion is approximately 2.5 years of average gross domestic product across the period 1995 to 2015.

The research identifies further potential losses amounting to £680 billion arising from rents extracted by the City of London in the form of excess compensation and excess profits. Since at least part of this rent extraction stems from services provided to offshore clients, we do not include these sums in our estimate of the net cost to the UK economy. Other countries are also being impacted by London’s wealth extraction and overcharging.

When compared with analysis of the costs imposed by hosting an oversized financial sector in the USA, this data suggests that the negative impacts on the UK might be two to three times greater than those imposed on the USA. Hosting the City of London causes more harm to the UK economy relative to the harm inflicted by Wall Street on Main Street USA.

Our hope is that this research, and the broader narrative frame provided by the Finance Curse will stimulate a fresh conversation among academics, activists and a wider public about the many pitfalls of hosting an oversized financial industry. Much more research is needed to test our analysis and explore these ideas, but the initial findings support the view that London, a global financial centre, extracts wealth from the rest of the UK economy as well as from the rest of the world. It is not the golden goose claimed by its vast public relations team: from our vantage point it looks much more like a cuckoo in the nest.

Read the new report here

Read Nick Shaxson’s Guardian Long Read on the Finance Curse

Watch this short video explainer on the Finance Curse

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Ten years ago I spent the summer after graduating waitressing in Cafe Uno in Cambridge. The most political campaign for me that summer was the fact that I was getting paid below minimum wage because they could top up my salary with tips. At the same time, the western world was on the verge of financial collapse that would not only change the course of my future work, but also deliver such a shock to the world order that nothing would ever be the same again.

So what has changed in ten years? I’m guilty of banging the angry drum that nothing has changed, and saying that finance is still totally self-serving. In absolute terms, this is true. The vast majority of new loans continue to pour into financial and property markets, and this hasn’t really changed since the crash. Lending to the productive economy, including SMEs, has not grown. It was the failure to reform the financial sector, and the vacuum of conversation about what must be done, that allowed the conversation to morph into the need for austerity, which was of course completely untrue.

But looking under the bonnet of the headline figures about our stagnating economy, rising food bank use and record high stock prices, there is some good news. We are building an army of voices who didn’t exist ten years ago. The public know that things are not fixed. Today we at Positive Money have released a poll showing 66% don’t think banks work in their interests, and 63% are worried about another crash. The conversation is changing.

Here are ten things that have changed over the past ten years, including some huge achievements, that should be cause for hope and celebration.

1. Occupy captured the public’s imagination

The Occupy movement struck a chord with many of us. It said that the system is unfair and broken, and we need something new. People camped outside St Paul’s, and there were book groups, workshops and lots of other activity that encouraged people to wake up and realise that we need something new. Importantly, it repeatedly made the news, and memes like ‘the 99%’ stuck and exploded across the world. The challenge of Occupy was always going to be ‘how do we take its passion, voice, energy, and impact and channel it into a self-sustaining movement?’. And now, in the years after Occupy, do we avoid saying the inevitable ‘we need another occupy’ whenever a meeting full of activists and campaigners get together?

2. A civil society movement exists

We now have an ecosystem of institutions, campaigners, organisers, thought leaders, and economists focused on reforming the banking and finance sector, and its growth is accelerating. Organisations that were set up before the crash, like Robin Hood Tax and Share Action, have grown in size, profile and impact. New organisations like my own, Positive Money, as well as the Finance Innovation Lab and Finance Watch have established themselves as key NGOs with expertise. Larger NGOs like Oxfam, Friends of the Earth, and WWF have allocated resources towards recruiting people dedicated to looking at the finance sector. Think tanks started work on finance and banking. The New Economics Foundation set up a banking and finance team and have done an awesome amount of research on issues ranging from financial system system resilience to stakeholder banks. IPPR, Demos, and Respublica have all looked at alternative banking models. Work focusing on how people at the sharp end of the finance sector are affected, such as from Responsible Finance and Toynbee Hall, continues to grow. Unions are finding their voice in criticising the financial sector. A coalition of organisations are organising a large event to mark ten years after the crash, which will be taking place on 15th September.

3. Women are leading the movement

Anna Laycock heads up Finance Innovation Lab, Catherine Howarth leads Share Action, Maeve Cohen is the Director of Rethinking Economics, Miatta Fianbullah leads the New Economics Foundation, Faiza Shaheen is the Director of CLASS, Sarah-Jayne Clifton heads up Jubilee Campaign, Jennifer Tankard is the Chief Executive of Responsible Finance, Sian Williams is the Director of Policy at Toynbee Hall, Grace Blakeley at IPPR has been doing some fantastic work on Financialisation and Tax, and the brilliant Christine Berry has been doing excellent work across the movement. This is a fantastic development, which is not totally unconnected to the next point.

4. There is a culture of collaboration and systems thinking

Civil society has always been victim to a human characteristic prevalent in modern society – competition. Starting essentially a new sector and movement, we knew we had to do things differently. Finance and civil society is clearly a David and Goliath situation. If we spend time competing with each other, we won’t be able to move fast enough. That’s why when I joined Positive Money at the end of 2012 I wanted to work with the movement and create a culture of support. So I partnered with Charlotte Millar and Chris Hewett, both then at the Finance Lab (which was set up by three amazing women and a great man) to set up the transforming finance network. An important aspect of creating this collaborative culture was that we have several ‘systems thinkers’ amongst us. Systems thinkers are able to hold uncertainty, hold tensions, have humility, and can adapt, innovate, and most importantly evolve. Donella Meadows’ paper ‘leverage points’ was a key text for us. Systems change attitudes results in less ‘my policy is bigger or better than yours’, and more ‘how can we work together to move our common agenda forward?’

5. The rethinking economics movement is growing strongly too

The crash also triggered a shaking up of the economics establishment. A close relative of the financial reform movement is the rethinking economics movement. As well as fantastic student and university focused organisations like Rethinking Economics, there is a growing number of thinkers writing about how we need to ditch neoclassical economics and be more pluralist in our approach. Even new institutes are being set up such as Mariana Mazzucato’s Institute for Innovation and Public Purpose at UCL.

6. The tax justice movement seized the opportunity to make gains

The shock of the crash, followed by hijacking of the narrative by austerity, presented an opportunity for the tax justice movement. In the UK we saw the flourishing of direct action groups like UKUncut and tax experts like John Christensen and Richard Murphy. Large NGOs also got on board, which allowed it to cut through the public consciousness. This hard work meant that even David Cameron picked up the baton to ensure tax avoidance was clamped down on. A key reason for the success of the tax justice movement was having some key bits of infrastructure in place before the crash, including experts, grassroots activists and large NGOs working on it.

7. More must be done to reform regulation 

It would be remiss to write about the last ten years without saying something about what has happened in the world of regulation. Whenever I go on panels to talk about regulation I generally complain about how regulation is a mess. It’s a tricky point of view, because obviously as civil society we all want banks to have greater regulation, but is more regulation good if the premise on which its developed is based on problematic first principles? For example, ring fencing will be in place by January 2019, but it has always been about a false logic that retail banking is safe, while investment banking is the risky side. But the 2007/8 crisis emanated from the retail arm in the first place, so ring fencing wouldn’t stop another crash. Basel III looks at risk-weighting of assets which categorises lending into the productive (or real) economy as high-risk, whilst mortgages are low risk, even though it was mortgage lending that was a key factor in causing the crash

8. The Bank of England is now a risk manager

After the crash the Treasury took positive steps to add financial stability to the Bank of England’s mandate. The Bank now understands that to predict a crash it must look at the system as a whole, rather than just individual banks balance sheets. Its regulatory approach since the crash has been focused on how to ensure a bank can fail without bringing down the whole system, and as such they have been looking at bank bail-in regimes. While it is an important step forward, it doesn’t go far enough to meet the Bank’s mission which is ‘to serve the good of the people of the UK’. If it was to take its mission seriously, it would look at how banking is failing to serve our domestic economy, and how monetary policy has nothing to offer in the event of another crash. Similar to regulation, this approach can be thought of like a ship sailing off a cliff and crashing, and then continuing in the same direction to sail off another cliff, but along the way making sure there is less mess this time. We might be calculating the risk of sailing off the next cliff in a more complex and rigorous way, but we are not thinking about changing direction.

9. Building the new

Buckminster Fuller famously said that ‘to change something, build a new model that makes the existing model obsolete.’ Several leaders from civil society’s financial reform movement are now also building the new. Tony Greenham, formerly Director of Banking and Finance at NEF, co-author of ‘Where Does Money Come From?’ and more recently Director of Economics at RSA, is now working full time on developing new co-operative banks in the South-West and London. The Finance Innovation Lab runs a Fellowship developing the leadership capacity and business skills of innovators building a new financial system – one that works for people and planet. Alongside Finance Watch, the Finance Innovation Lab is also sounding the alarm about fintech – which is not all cute and cuddly. We’ve also seen more interest in credit unions, as well as complementary currencies popping up, such as the Bristol Pound.

10. Changing the old

The story of RBS is probably the best example of the challenges associated with changing the old, and of the strong inertia inside the government and regulators. As a result of the emergency bail-out package in October 2008, the British public acquired a majority shareholding in RBS (almost 80%) at a total cost of £45.5 billion. Among the many examples of how RBS fails to serve the UK economy, including consumers and businesses alike, probably the worst is the Global Restructuring Group (GRG). It was found to be deliberately pushing SMEs towards insolvency in order to shore up RBS’ own capital position, in some cases then buying up their assets cheaply. Despite economists, campaigners, and researchers continuing to call on the government to think of alternatives for RBS, namely turning it into a network of regional banks, the government is fixed on selling it back to the private sector at a loss to the public.

Where do we go next?

We must continue to work together by forming alliances and coalitions, increasing our expertise and skills, and building new infrastructure for the movement. We must appreciate our different tactics and theories of change, and tackle different parts of the system at the same time. We must bring down the old, while also building the new. We must challenge the neoclassical thinking that underpins the status quo, while also developing new policy prescriptions that can be implemented now. To do all this successfully at the same time, we need more people.

Brexit means finance is at a crossroads

The government, the City, Mark Carney and the Bank of England all want our financial services sector to be our ‘engine of growth’. Carney said he wants to see it double in size over the next ten years. We know that the bigger our finance sector is, the more detached it is from our domestic economy, and the more detached it is from real people, jobs, work and investment. What 2008 should have shown is that we can’t have it both ways. We can’t have a bloated financial sector in the City of London serving itself and global financial markets, because it will always undermine the kind of economy we are trying to build for most people here in the UK. As Michael Hudson’s book aptly puts it, the finance sector is ‘killing the host’.

The stakes are high, but if the last ten years have taught us anything, it is that if we aren’t in the game, we definitely can’t change things. So let’s get stuck in.

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“We are all in this together” was the familiar refrain used by former Chancellor George Osborne. If we want to pay down the public debt, we must all bear some of the burden for tax rises and spending cuts. After it was announced this week that the target for reducing the deficit had been reached, Mr Osborne announced triumphantly that “we got there in the end”.

It is, however, not at all clear who Osborne is referring to when he says “we”.

The enlarged deficit in 2009-10 was created by the slump in output that followed the global financial crisis, and the spending required to get us out of it. It was the decision to bail out the banks which added £1.5 trillion to the national debt — not overgenerous public spending by the previous Labour Government.

And yet, those people who rely most heavily on our public services have been the ones to bear most of the cost. Our schools have seen almost £3 billion worth of cuts since 2015. Local councils will see their funding fall by 77 per cent by 2020 versus 2015. The NHS funding gap stands to reach a staggering £30 billion by 2020.

Meanwhile, successive Conservative governments have reduced the rate of corporation tax from 30% in 2005/06 to just 19% today. This is the lowest rate in the G7, and one of the lowest rates among the 35 countries of the OECD. Astonishingly, a further reduction to 17% is still planned before the end of this Parliament.

These changes have seen revenues from corporation tax fall from 3.5% GDP in 2005/06, to just 2.6% today. At the same time, it has become increasingly easy for multinational companies to shift their profits to low-tax jurisdictions in order to avoid paying tax in the UK altogether.

Today, nearly half of all children in London, Birmingham, and Manchester live in poverty, whilst UK-based corporations enjoy some of the lowest tax rates in the developed world. So much for “we’re all in it together”.

It is in this context that the IPPR has released a new report calling for a fundamental rethink of the system of corporate taxation in the UK.

First, we are proposing an increase in corporation tax from 19% to 24%. We argue that the revenues from this should be used to reduce taxes on workers by reducing employers’ national insurance contributions from 13.8% to 11.8%.

Taxes on profits are more likely to be borne by the people who own a company, whilst taxes on payrolls are more likely to be borne by workers themselves. So reductions in corporation tax have benefited shareholders at the expense of workers, who have yet to see their wages recover to pre-crisis levels. This imbalance has also had important distributive effects between companies, raising the tax burden of less profitable, higher-employment companies, and reducing that of more profitable ones.

Second, we propose the introduction of a new tax designed to prevent multinational tax avoidance. Our ‘Alternative Minimum Corporation Tax’ (AMCT) would link a company’s tax liability to its sales or turnover in the UK, to ensure that firms were not able to avoid taxes by shifting their profits to low-tax jurisdictions.

While we do not currently have any reliable data on the extent of multinational profit shifting, the exchequer is estimated to lose somewhere between £3 billion and £12 billion each year as a result of these practices. Our AMCT would capture a significant portion of these lost revenues, which would go some way to closing the gap in the NHS budget.

After eight years of austerity borne primarily by the most vulnerable in our society, it’s time that all businesses started paying their fair share.

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Yesterday the Chancellor announced a ‘crackdown’ on companies that don’t pay tax in the UK. From April 2019, companies will have to pay a withholding tax on royalty payments they make to their subsidiaries in low tax jurisdictions. The companies will have to make these payments ‘even if the group has no taxable UK presence under current rules’.

This is less a crackdown and more a tentative step in the right direction. It will bring in just £800m by March 2023 – to put this in perspective current estimates put the UK tax gap at between £34bn and £119bn – and in the absence of any real effort to tackle tax avoidance and evasion many companies will continue to slip through the net.

Yet in many ways this announcement is an important victory for tax justice campaigners in the UK. Not because we know something Hammond doesn’t about the policy itself, but because in implementing it the Chancellor has acknowledged something that no recent government has: that as long as a company has a physical presence on UK soil, sells to UK customers, or channels its profits through UK banks, it can be taxed by the UK Government.

Tax us if you can

It may seem obvious to anyone that has ever come into contact with HMRC that you can’t negotiate over your tax bill. But in recent years some of the world’s largest companies have managed to do just that.

One of the main ways in which large companies are successfully (and legally) able to avoid tax is through profit shifting. Multinational corporate groups have subsidiaries all over the world and each of the subsidiaries is taxed at the corporate tax rate of the country in which it is based. So a subsidiary of a company that makes £100m profit in the United States would pay £30m in corporate income tax, whilst another subsidiary that made the same profit in Ireland would pay just £12.5m.

Companies have lobbied for international tax law to treat their subsidiaries as legally separate entities because, they argue, it protects them from ‘double taxation’. In the above example, if the company was taxed on its global profits in both the USA and Ireland (and all the other countries in which it operates), that same profit would be being taxed over and over by different jurisdictions. So far, so fair.

The issue is that companies have abused this privilege by shifting their profits from high tax to low tax jurisdictions to reduce their overall tax liability. If the subsidiary in the US doesn’t want to pay 30% tax on the profits it has made there, it can use clever accounting techniques – from fake loans to transfer pricing – to shift those profits to Ireland where it can pay 12.5% instead, or to Bermuda where it can pay nothing.

In recent years, these practices have become more and more common. Today, the OECD estimates that profit shifting by multinational corporations is costing governments around the world between $100bn and $240bn per year in lost revenues. The UK is not an exception, despite the Government’s attempts to woo international capital by cutting corporation tax rates; in 2014 a fifth of our largest 800 companies paid no UK tax at all. Not only is this unfair on the public, it is also unfair on the vast majority of companies of all sizes that pay the taxes they owe.

A step in the right direction

In a striking departure from the attitude it takes towards benefits claimants, the Government has been arguing that it has to use a carrot rather than a stick to tackle the issue of corporate tax evasion. If a company claims to have made zero profits in the UK and billions of pounds in Ireland, there is very little the UK Government can do to challenge that.

But by stating that royalty payments made to subsidiaries in low-tax jurisdictions will be taxed as corporate income in the UK, Phillip Hammond has conceded that the UK Government does have the power to tax the profits of multinational corporations, regardless of where they are reported. After years of corporation tax cuts that have triggered a ‘new race to the bottom’ around the world, this represents a belated concession that the UK does not have to cut its corporation tax rates to tempt multinational corporations into paying their taxes.

The immediate question that arises now is if the Government can tax royalties offshored to tax havens, why can’t they do the same to profits? If multinationals continue to shift their profits to low-tax jurisdictions, why not just base their tax bill on their UK turnover, or sales to UK consumers?

The Government is more than capable of coming up with a fair way of taxing multinational corporations on their UK activities. It just has to put its mind to it.

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UK Chancellor Philip Hammond is likely to use his Budget speech on Wednesday to declare that the UK has turned the corner on public debt. Recent tax receipts have been higher than expected and the deficit continues to fall. As a result, we are likely to see some small but headline-grabbing giveaways to a nation weary of austerity.

He is less likely to note that the Coalition and Conservative governments have so far missed all of their self-imposed debt targets. Or that beyond the short-run jump in tax revenues, the longer term outlook is darkening: the Office for Budget Responsibility has finally conceded it has been guilty of “supply-side optimism” and will downgrade growth forecasts. Even the revised forecasts are likely to be unrealistically optimistic.

The chancellor is also unlikely to discuss a different kind of debt: that of households. Household debt, particularly unsecured debt such as credit cards and car loans, is growing rapidly. The total stock of unsecured debt has reached around £200bn and is increasing by around £20bn per year.

The relationship between deficit reduction – austerity – and the growth of household debt is remarkably stable. Adjusting for inflation, for every £2bn in public sector deficit reduction, the annual rate at which households have taken on new debt has increased by £1bn. Over the longer term, the connection between the two is surprisingly persistent – and also appears to work in reverse. During periods in which the deficit has been growing, household debt accumulation fell.

So the chancellor’s inevitable claim that the UK’s debt problem is finally under control should be taken with a large dose of salt. By squeezing incomes, rolling back crucial public services and refusing to invest for the future, governments since 2010 have consigned the UK to nearly a lost decade of stagnating wages and incomes.

The Bank of England has done what it can to make up for the shortfall in spending power but monetary policy is the wrong tool for the job. In holding interest rates at nearly zero and pumping money into the financial system, the Bank has managed to get banks lending again. Unfortunately, this lending has not been to businesses, for productive investment, but to households.

These households, facing an unprecedented squeeze on incomes, have relied on consumer credit to make ends meet. Household consumption has been the driver of economic growth in recent years. Growth in mortgage lending, in the absence of wage growth, pushes house prices up, putting home ownership ever further out of the reach of young people.

If the current pattern were to persist – a big if – and the chancellor were to achieve his “general aim” of a balanced budget, household debt would then be increasing at a rate of around £100bn per annum.

This looks unlikely in reality. The apparently stable relationship between the public finances and household borrowing may break down – as macroeconomic relationships usually do. More likely still, the chancellor will fail to achieve a balanced budget. Even he no longer claims this can be achieved within the current parliament.

Instead, the chancellor needs to concede what many of us have said all along: the public sector deficit is the wrong target for policy and austerity was a mistake – a deadly one. What is needed from this budget is plainly obvious: higher public investment. With interest rates close to zero and both public and private sector investment at historically low levels, the chancellor must reverse the policy direction of the last seven years.

A programme of public sector investment, along with a carefully implemented industrial strategy, is the most promising solution to the problem underlying most of the UKs current woes: very weak productivity. Without productivity growth, long run increases in income and declines in debt ratios – both public and private – will be impossible. Evidence is growing that weakness in productivity is the result of austerity – it is caused by lack of demand.

Such a reversal would be politically difficult for the chancellor. It would require him to admit, at least implicitly, that the austerity policies imposed over the last seven years were based on the lie that public debt is the most important issue facing policy-makers. It is clear that the public willingness to tolerate further cuts to wages, living standards and public services is exhausted. It is time for the chancellor to change course.

Paradoxically, this is likely to be the best way to reduce the level of debt. Higher investment should spur productivity growth, allowing for wage rises, increases in tax revenues and, ultimately, less reliance by both households and the public sector on debt.

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“The Falklands”, they said, “are British”. They are so British that we went to war for them. We also went to war for Akrotiri and Dhekelia, the British Overseas Territories on Cyprus. That’s where Saddam Hussein was supposedly able to get his weapons of mass destruction to within 45 minutes. And, less than a year ago, we were measuring ourselves up against Spain when they were threatening Gibraltar.

The Cayman islands are British, too. And Bermuda. And the British Virgin Islands – they even put it in the name.

Specifically, they are British Overseas Territories, the last vestiges of empire. Their citizens are entitled to British passports. They are, as much as English or Scottish or Welsh or Northern Irish people, subjects of Queen Elizabeth II.

And so when said Queen is revealed to store millions of pounds of her wealth in the Cayman islands in order to avoid paying the Treasury for it, it’s a misunderstanding to treat this as unpatriotic. It’s a misapprehension to imagine that the term ‘overseas’ means foreign. Tax dodging is as British as fried breakfast, the Bengal famine, and castrating Mau Mau leaders.

Like any good parent, Her Majesty loves her country just as we are. And what we are is the world centre for tax havens and secrecy areas.

The reason this story is so resonant is that it brings together the two ends of the British constitution. It’s the collision between the bling we parade in public and the cobwebs lurking in the corners. It forces the celebrities whose personal stories are used to maintain popular support for our empire state into the same narrative as the network of tax havens and secrecy areas, with London at its centre, which is how Britain’s elite maintained its wealth as land empire dissipated.

I often ask British people what they know about our Overseas Territories: how many there are, what their names are, where they are, how big they are. I bore my friends by delighting in telling them that Britain is responsible for more penguins than any other country on earth and more land in the Southern Hemisphere than the northern.

But the reason I do is this: the British constitutional issue which impacts on most people in the world is not our awful election system. It’s not even the unelected House of Lords, nor the fact that Westminster is the most centralised parliamentary system in Europe – especially for those who live in England outside London, and enjoy no serious devolution.

No, the piece of our uncodified constitution which matters most is the parts that mean that most of the wealth, and most of the biodiversity, for which the British state is ultimately responsible lies not in this North Atlantic archipelago, but in our fourteen Overseas Territories; the parts which allow the crooks of the planet to hide their ill-gotten gains in island chains protected by the might of the British state – and to launder their money through the centre of that web, the City of London, and the capital’s ever-inflating property market.

It’s the part which led the Tax Justice Network to rank the UK as the world’s most important player in tax havens. It’s the part which famously led the top mafia expert, Roberto Saviano, to call the UK “the most corrupt country on earth”. It’s the bit which ensured that more than half of the companies in the infamous Panama Papers were registered in Britain or its Overseas Territories. It’s the section which helped ensure a trillion dollars have been stolen from African countries since the UK and other European countries ended formal colonisation in the 1960s and ‘70s.

None of this is incidental to Britain. It’s core. The British state was built to manage an empire. It’s central constitutional principle – that the crown in parliament is sovereign – is asserted on the assumption of global dominance. It’s ability to stave off revolutions as they set most of Europe aflame came from the capacity of its elite to placate the anger of the domestic working class by parting with small amounts of the proceeds of plunder.

These days, the direct plundering is usually done by others. Britain with its Overseas Territories acts as the middle man – the safe haven. Support for the system is secured through increasingly shrill demands for loyalty to Queen and country, expressed culturally through increasingly tasteless British Empire Kitsch, and by channeling rage at outsiders: immigrants, Europe, whoever else can be blamed as wages shrink and the wealth of the ultra-wealthy mysteriously vanishes from sight.

And at the centre of all of this is the Queen, with her Jubilee street parties, and her adorable great-grand-children, the world’s biggest celebrities in an era of TV-celebrity rule.

And so, yes, the Queen stores millions of pounds of her wealth in her Dominions Beyond the Seas, as her original title called them. Why wouldn’t she?

The Cayman Islands are British, after all.

The post The Queen of the Cayman Islands appeared first on New thinking for the British economy.

This article was written for International Politics and Society and is republished here with permission. 

A financial transaction tax (FTT) — a charge on the buying and selling of stocks, bonds and derivatives — is an idea with widespread support amongst leading academics, many politicians and, most importantly, citizens. It was initially proposed by Maynard Keynes, the greatest economist of the twentieth century, and developed by Nobel Prize winner James Tobin.

The economist’s answer to Robin Hood

Numerous studies have shown a transaction tax helps diminish risks of costly financial crises by discouraging speculative behaviour and the short-term churning of assets. It is easy to implement, and can yield valuable tax revenue which can be used for financing investment. This in turn leads to inclusive and sustainable growth. Nicknamed the ‘Robin Hood Tax’, FTT is very progressive, as it is paid mainly by those with the deepest pockets. Indeed, a recent study by the US Tax Policy Center estimates that if an FTT were implemented in the US, the top one per cent of the population would pay 40 per cent of the total tax bill, and that the top 20 per cent would pay 75 per cent of the tax. This is because ownership of financial assets is concentrated among the richest people.

Numerous studies have shown a transaction tax helps diminish risks of costly financial crises by discouraging speculative behaviour and the short-term churning of assets.

It is encouraging that most recently the United Kingdom Labour Party, in its electoral manifesto, made a clear commitment to ‘introduc[ing] a “Robin Hood Tax” on financial transactions’. Announcing the proposed tax, which would be an extension of the existing stamp duty, Shadow Chancellor John McDonnell said it would ensure the financial sector ‘pay its fair share after it received huge public bailouts in the crash’.

Previously, there was important progress in the US, when language was approved at the 2016 Democratic Convention citing the FTT as part of the Democratic Party’s platform for the first time:

‘We support a financial transaction tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets. We acknowledge that there is room within our party for a diversity of views on a broader financial transaction tax.’

The tax has strong US support

Bernie Sanders, the left-wing presidential candidate, had proposed a Wall Street Speculation Tax to pay the college fees of less well-off students. The policy received strong coverage in mainstream media, including an opinion piece in the New York Times. Sanders’ democratic rival, Hillary Clinton, responded by proposing a narrower, but valuable use of FTT to help rein in the practice of high-frequency trading used to manipulate financial markets.

It is very encouraging that in both the US and the UK, with some of the largest financial markets in the world, progressives are now so strongly committed to implementing a financial transaction tax; hopefully once they come to power they will make it happen. Of course, as the International Monetary Fund wrote in a report to the G20, more than $30 billion worth of financial transaction taxes are already collected in the jurisdictions of 20 major countries. These countries, which include South Korea, Taiwan, and Switzerland, are amongst the most dynamic in the world. It just goes to show that financial transaction taxes do not have a negative impact on growth, as some claim, and may indeed contribute to it.

More than $30 billion worth of financial transactions taxes are already collected in the jurisdictions of 20… of the most dynamic countries in the world.

The UK Labour Party initiative proposes to expand and modernise the existing stamp duty, which applies only to shares. Currently, stamp duty – a tax that has existed for 300 years – raises £3.3 billion (€3.6 billion) annually for the Exchequer. The Labour Party initiative would broaden this tax to cover transactions in corporate bonds and cash flows arising from equity and credit derivative transactions. It would also largely remove the market maker exemption.

The extensions to the UK stamp duty proposed by the Labour Party would raise an estimated £4.7 billion (€5.1 billion) in additional tax a year, or £23.5 billion (€25.4 billion) in a parliamentary term. This estimate comes from a rigorous study by Avinash Persaud, founder and Chairman of Intelligence Capital and a former financier.

Like taxes on carbon emissions, taxes on financial transactions such as the UK stamp duty aim to curb socially dangerous behaviour such as high-frequency trading, which is destabilising and has no positive social function. The proposed expanded UK stamp duty would probably discourage all such high-frequency trading. From an economic perspective, this is a tax on the build-up of systemic risks, and thus helps diminish the likelihood and scale of costly financial crises. The massive cost of such crises is not just fiscal (as taxpayers inevitably bail out the financial sector); it also results in lost output, investment, jobs and wages.

A Europe-wide transaction tax

After the 2008/9 global financial crisis, there was strong support in Continental Europe for an EU-wide financial transaction tax. The European Commission actively supported the initiative and the European Parliament approved it. Not all countries wanted to join. The ten countries that did, representing over 80 per cent of Eurozone GDP, approved a European FTT in principle and have been hashing out the details for a couple of years, under the enhanced co-operation procedure. This grouping includes the EU’s largest economies – Germany, France, Italy and Spain. Indeed, France and Italy have each unilaterally introduced limited versions of an FTT at home. However, progress on the joint European initiative has been painstakingly slow.

After the German elections in September, there will likely be a further push towards greater EU integration, spearheaded by France and Germany. An important part of this will be raising additional revenues, to be channelled into higher national and European public investment. This will be key to promoting more dynamic, sustainable and inclusive growth in the EU. The tax will raise resources mostly from the richer segments of society. Crucially, it will reduce the risk of future financial crises, which, as the US sub-prime crisis and the Eurozone debt crisis demonstrated, can be so destructive of people’s livelihoods.

Civil society groups and progressive political parties were initially very successful in promoting financial transaction taxes in the EU after the 2008/9 financial crisis. When popular discontent with the financial sector was at its highest, with the public demanding the financial sector pay its fair share, even some centrist and centre-right parties in Europe seemed supportive.

Progressives now need to take hold of the baton and ensure the FTT not only stays on the EU policy agenda, but is implemented very soon. Equally, in the UK and the US progressive forces must continue to support the tax, so it can be implemented once Labour and the Democrats are elected.

Under a Europe-wide FTT, many more people would gain than lose. Adopting it soon would show that governments are able to design and adopt rational solutions that favour their citizens: a positive response to the right-wing populism that has swept much of Europe.

The post Robin Hood had the right idea: Why the left needs to deliver on the financial transaction tax appeared first on New thinking for the British economy.

When the Guardian reported that the former Chancellor of the Exchequer George Osborne had been appointed Professor of Economics at the University of Manchester, it seemed like an April fools joke or perhaps some fake news. But it turns out to be true, despite the objections from many of the economics students at the university who have for many years railed against the neoclassical teaching they have to endure. Luckily Professor Osborne is not being paid for his endeavours, whatever these may be.

George Osborne is the person responsible for the appalling state of the public finances as a result of policy decisions taken when in office during the period 2010-2016. Of course his policies were also those of the coalition government between 2010 and 2015 and thus the Liberal Democrats bear part of the responsibility for what happened during those years.

But the core responsibility for economic policy in the period since 2010 lies with the Tories, and they are now faced by a storm of problems which have their origins in their doctrinaire and misguided strategies for Britain. What they have done over the past 7 years has resembled Thatcherism on steroids, and the rest of us have had to bear the costs. These have been huge, and focused on the poorest and most vulnerable members of society. As always it is worth recalling what Thatcher said – “there is no such thing as society” – so who cares whether social and economic policies create further divisions, add to income and wealth inequality, and make the poor poorer.

Indeed, a basic mantra of the Tory government continues to be that inequality is good for economic growth and for the health of society, despite the clear evidence that this is untrue. This has been demonstrated by the experience of the Nordic countries and is fully documented in ‘The Spirit Level: Why Equality is Better for Everyone’ by Richard Wilkinson and Kate Pickett.  They concluded that, “there is a strong tendency for ill-health and social problems to occur less frequently in the more equal countries….Health and social problems are indeed more common in countries with bigger income inequalities, The two are extraordinarily closely related”.

But then whose interests are the Tories representing? Not the disabled, the sick, the single parents, the unemployed, the homeless, the increasing numbers in low paid and insecure employment, the poorly educated and inadequately trained. There was a time when the Tory party reflected the interests of British business, of those firms and industries that were productive. But as their importance has declined, the hedge fund managers, asset strippers, bankers and property developers have taken their place. The fiscal policies that have been followed have favoured the extractive and destructive activities of the unproductive rich.

Privatisation and deregulation

One of the core principles of Thatcherism is that the public sector is bad and the private sector is good. Hence the raft of privatisations of more or less everything that could be sold so that neoliberalism could be advanced. The results could have been predicted – and were – but no one in Government was listening. There is no evidence that the privatised industries have performed better than when they were in public ownership. Indeed, rather the opposite – with results that have been catastrophic.

Anyone interested in the effects of privatisation should look at the recent book by James Meek, ‘Private Island: Why Britain Now Belongs to Someone Else’. It is evident that market power has been used by former public utilities to engage in ‘tax farming’ – a process whereby prices are raised to enhance profits and with nothing consumers can do to escape extreme exploitation. Instead of creating a share owning class as promised by Thatcher we have instead industries with monopoly and oligopolistic power, often foreign owned, which are in many cases no longer public companies but privately owned and managed. The case of water privatisation speaks for the general effects of these policies, which are worse than anyone could have imagined.

In the case of housing, not only has little new social housing been built despite the huge rise in household formation, but low cost housing has been forcibly taken out of public ownership and almost all of it ended up in the private rental sector. So the supposed objective of creating a property owning class has ended up with a huge increase in the number of households who are privately renting – often at rents that take 50 to 60% of family income. Often these are properties that are poor quality and poorly maintained.

Not only do we have exploitation by private landlords (encouraged by tax concessions from the Tory Government) but to a significant degree the rents are being funded by rent support provided by the government. Thus we have a totally inadequate housing stock which is poor in quality and in quantity and increasingly in the hands of private landlords, where rents are both excessive and in part funded through the public purse. What kind of social policy is this?

All that seems to have been important for Tory Governments is that the public sector be shrunk and the private sector take its place. Indeed, the former Deputy Prime Minister, Nick Clegg, reported during the coalition years that the only concern that Osborne had when there were discussions of tax and social policy was ‘how would supporters of the Tory party react and whether they would benefit’. What kind of calculus is this for a Minister supposedly concerned about national interests?

But the costs of privatisation are not confined to the appalling consequences of the government’s failure to meet housing needs. It is everywhere that there has been privatisation – railways, energy, water and sewage, telecommunications, bus services, airport management and so on. We are only too aware of the failures of many of the private companies that now own and manage these services and of the price gouging that has happened over many years.

Regulation of former public enterprises where it exists has been nothing more than window dressing, for how else could these companies have got away with levels of service that are often poor together with high and rising profits, massive management fees and executive pay and bonuses. For the high profits to be possible, prices had to increase exorbitantly with much of the profits transferred to overseas companies often themselves in public ownership. In many cases we have swapped British public ownership for foreign public ownership. Is there any logic in this? If there is then it is hard to see how consumers have benefited by the changes in ownership and de-regulation that simply increases the profits of companies.

The banking group Santander carried out research on their customers pay and expenditure on utilities and other core outlays, and concluded that over the past decade:

“Basic household bills have increased by an average of 43 per cent in the last decade – more than double the rate of wage growth… Gas and electricity are the biggest drivers of price increases, rising 73 per cent and 72 per cent respectively in the last decade, while water bills have increased by 41 per cent – all significantly higher than inflation at 32 per cent. Council Tax has risen by 27 per cent and TV, phone and broadband prices have all risen by 24 per cent, albeit slower than inflation but still faster than wage growth (19 per cent).”

The findings are summarised in the following Table:

Source: Santander, 2017

Transport is not included, but anyone who travels frequently on trains will confirm how outrageous the fares are, and how much faster these have risen since privatisation. Railway fares in UK are much higher than elsewhere in the EU and it seems that government subsidies in practice simply bolster the profits of the train operators. Standards of service are also lamentable compared with railways in Europe, which are still largely in public ownership. Investment in the railway infrastructure has also been totally inadequate, as the 300,000 commuters who have suffered now for several years from disrupted Southern Rail services can attest. Costs of other public transport are also high – the London underground is extremely expensive – and buses similarly are also costly for regular users who are not pensioners.

That wages and prices have behaved in the way detailed in the above table is scarcely accidental, but in significant part reflects government policy. It reflects the privatisations undertaken by the Tories, together with a belief that deregulation produces the best results. For years the Tories have followed a programme of dismantling regulations, and have followed a policy of two regulations abolished for any one new regulation – irrespective of the consequences. Public resources have flowed into an organisation established by David Cameron called the Red Tape Initiative, the intention of which is to dismantle regulations as part of their neoliberal programme. This did not appear in any manifesto.

The collapse of effective fire regulations has in part been the direct consequence of this policy, together with the underfunding of local government (including the fire service). Unfortunately, it is not surprising that the disaster at Grenfell Tower happened given the general dismantling of local government responsibilities and the subcontracting of housing development and management to private companies. Where private profit dominates and regulation is weak, standards will decline. This is only too evident in relation to social housing.

Cutting Public Sector Employment and Pay

As a direct consequence of Treasury policy under Osborne and now under Phillip Hammond, there have been enormous cutbacks in employment across huge area of the public sector. The fire service and the police have lost thousands of jobs, with consequences for the effective response to emergences and a reduced ability to monitor terrorists and to be able to respond to attacks. Similarly, in education and health there have been budgetary cutbacks and reductions in staff which have had knock on effects on the quality of teaching in schools and colleges and health care in the NHS.

But the government seems largely uninterested in the effects of its policies, and despite the evidence continues to ignore the pressure to reverse their policies on the funding of public services – including those for the disabled and the mentally ill. There is a pressing crisis in social care, as demographics increase the pressure on services that are increasingly inadequate.

Years of pay restraint have been key to the Treasury’s policy of reducing the funding of the public sector. The public services are big employers, much of it highly educated with professional skills and experience that have taken years of training to acquire.  This last point is important: it is not sensible to simply compare wage trends between the public and private sectors since former as a whole has a more educated and better trained labour force.

So the argument often trotted out by Government and others that public sector pay should not increase faster than that in the private sector has no merit given the differing composition of the two sectors and quite different needs with respect to recruitment and retention of labour.  At the present time key public services such as the NHS are losing skilled and experienced workers at all levels, and are facing a crisis in recruitment both as a result of underfunding and of Brexit. Both of these factors are reversible by government through increasing funding in real terms and issuing guarantees to EU staff with respect to their rights to remain in the UK.

There has been a freeze on public sector pay for many years, and this has reduced the real value of pay for employees across the public sector. The scale of this has recently been documented by a report from UCL and the NIESR for the Office of Manpower Economics which advises Government on pay. That there is now a crisis in recruitment in the public sector is unsurprising given the erosion of the real pay of workers since 2010 which is directly as a result of government policy.

The following table gives a picture of what has happened over the period 2005 to 2015 for a selection of occupations.

It is worth emphasising that these changes in real earnings are annual rates and the cumulative fall in the period since 2010 has been substantial across all of the occupations listed in the table. Thus, in the case of doctors the loss in real earnings per hour 2010-2015 is 22% ,for nurses 7.5% and for police officers some 10%. In practice the decline has been greater than estimated in the table since it does not take account of the losses of real earnings since 2015 – in part caused by the fall in the value of sterling which itself is largely a result of the policies of Government together with the continuation of the pay freeze.

Fiscal austerity – a veil for neoliberal policies

Osborne was responsible for the conduct of fiscal policy from 2010 until he was removed from office by Mrs May in 2016. During this period fiscal policy was lamentable both in its detail and in its effects on the aggregate performance of the economy. In the period immediately before the financial crash in 2008 fiscal policy under the Labour government was in reasonable balance, with the deficit close to that which had prevailed during the post war years. Even the IMF subsequently confirmed that the destabilisation of the budget was due to the cost of bailing out the financial system which was facing collapse in 2008, and was not caused by financial recklessness on the part of the Labour government.

The mantra of the Coalition and subsequent governments from 2010 onwards that the problems with the deficit were caused by the Labour Government is simply untrue. The destabilisation of the budget was the inevitable cost of rescuing the banking system, but the subsequent fiscal policy choices were exactly that – choices by the Coalition and subsequent governments under the economic leadership of Osborne and now Philip Hammond. The current Chancellor has pushed the achievement of the Government’s fiscal targets into the future, and public expenditure is expected to be more or less flat for the next few years rather than continuing to fall as forecast by Osborne. But Hammond is as determined as Osborne to establish a balanced budget in the near future independently of the state of the economy.

While public sector debt as a share of GDP rose sharply between 2008 and 2017 this was largely caused by bailing out the banks, plus the subsequent contraction of GDP which in large part was caused by the tightening of fiscal policy. Even with a much higher level of public sector debt as a share of GDP, now approx 90% compared with 30-35% prior to the financial crisis of 2008, there was still capacity for additional borrowing in order to finance government expenditure, and thus avoid the unnecessary losses of output that ultimately occurred.

Osborne chose to set targets for the fiscal balance which had no foundation in the needs of the economy, but reflected a preference for a smaller state – a level of state activity that reflected neoliberal objectives irrespective of the consequences for public services and the performance of the economy overall. There was a sharp fall in GDP after the financial crisis and subsequently GDP growth has been weak and well below trend. The fact that there has been such a weak recovery is in part the direct result of the fiscal policies pursued by Osborne.

VAT was raised in 2011, which is highly regressive, and while an expansionary fiscal policy was needed to re-establish economic growth Osborne chose to follow the opposite in pursuit of the chimera of a small state and a balanced budget. One of the obvious results of the fiscal contraction was economic growth that was well below trend and tax receipts that lagged.

Not even Milton Friedman, the economic guru of the right, would have applauded this policy stance, and he well recognised the need for fiscal and monetary policy to behave counter-cyclically. This is precisely the opposite of what Osborne did and, not surprisingly, the target for fiscal balance moved further and further into the future as the economy limped along with extremely low growth rates. Aiming for fiscal balance irrespective of the state of the economy is something Friedman would never have supported, and neither would Keynes or most other macroeconomists of note.

The other key aspects of Osborne’s fiscal strategy were also counter-productive, both individually and in the aggregate. It is worth quoting the Resolution Foundation in their overall assessment of tax policy:

Such tax cuts have obviously helped to support living standards for different parts of society, but they have also come at a cost to the Exchequer. Using OBR estimates of the costs of income tax, corporation tax and fuel duty giveaways at the time they were made,…..the total cost is set to add up to £45 billion by 2021-22, which is almost three times the expected size of the deficit in that year. Indeed, in the absence of this suite of tax cuts, public sector net borrowing would be in surplus by 2018-19.

It is worth noting the Foundation’s estimates of the cumulative costs of the various tax changes between 2010-2021/22. The cuts in corporation tax are estimated at £72bn, changes to the personal tax threshold at £132bn and the freezing of fuel duty at £62bn. There are specific arguments that can be marshalled against all of these tax changes plus the cut in the top rate of income tax from 50% to 45%, but it is essential to note that the changes were in all cases discretionary, and were made by Osborne irrespective of the general state of the economy.

Corporation tax has been reduced from 28% in 2010 to 20%, with the aim of reducing it to 17% by 2020. By then the UK will have the lowest rate of any major country and will be well below the OECD average of 25%. It is hard to see the economic case for reducing the rate of corporate taxation other than a determination to undercut our competitors. The result is simply to add to the fiscal deficit while at the same time doing more or less nothing to increase the level of private investment which has remained weak over the whole period since 2008. Cutting corporation tax is not an effective way to increase the rate of investment – there are more strategic tax incentives that are less costly in terms of revenue lost. A considerable share of the cuts in tax will have accrued to foreign owned enterprises.

There is clearly no economic case, quite the opposite, for the fuel duty changes. From Spring 2017 a litre of petrol is 28 pence less than it otherwise would have been under the previous tax regime. Clearly the primary aim of fuel duty taxation was to raise revenue and this has partly been reversed. As a secondary objective increases in the rate would have achieved something towards reducing the impact of carbon emissions and thus contributed to targets relating to air quality and climate change. Policy has therefore made the achievement of these targets even more difficult despite the evidence that transport is a major source of CO2 emissions. Clearly policy was driven by purely political objectives, since cuts in the real level of fuel duties will have been popular with corporations and with those voting for the Tory Party.

The uprating of tax allowances seems in principle to have been a sensible strategy and it was certainly popular – not least with the Lib Dems who pressed hard for the changes. The target is to take the level to £12,500 by 2020, which would be some £4,000 higher than if just uprated with inflation. As we can see from the data above, the changes are extremely costly for the Exchequer and although some of the gains will have been received by those on low incomes in practice most of the benefits go to those in the higher rate bands since the tax free sum would have been taxed at a higher rate. In effect this is a very expensive way to help those with low incomes, and more targeted tax and expenditure changes would have achieved better outcome at much lower cost for the Treasury.

The losses to the public revenue due to the discretionary changes in tax rates, together with a fiscal policy that was deliberately contractionary in its impact, became essential to the case being made by Government for austerity. But there really was no case for austerity, and the setting of arbitrary targets for the deficit together with tax cuts had no merit. Indeed, austerity was and is a veil for other economic and social objectives – to roll back the state to a target level of 30% of GDP irrespective of the effects of such policies on what makes the UK a civilised and caring society.

Assessing the Costs of Austerity

Discretionary tax increases and spending cuts by Government since April 2008 are around 10.6 % of national income – some £200 billion at 2017 prices. Of this fiscal tightening, 16% were net tax changes and 84% reductions in public spending, with some two-thirds of the fiscal contraction achieved by 2016-2017. Policy decisions were taken which loaded the fiscal adjustment on expenditure cuts with a much smaller role for tax changes in the conduct of fiscal adjustment. Most of the tax changes benefitted the rich, especially the cut in the top rate of income tax. During this period the share in total government receipts rose sharply for council tax, VAT and NICs, and fell for Business Rates and Corporation Tax.

The increase in VAT and council tax were highly regressive with the impact much greater on those with lower incomes. One of the most egregious changes was the imposition of the so called ‘bedroom tax’ on households with a ‘spare room’, despite the fact that there existed no alternative social housing for those affected.

It is also clear that in the early stages of the coalition government that the impact of fiscal adjustment on the real economy was much greater than the Treasury had assumed. It has been estimated that the loss of GDP between 2008 and 2016 was £5,700 per head. This represents a permanent loss in part due to the collapse of the economy after the 2008 financial crash, and in part due to the weak recovery afterwards which had superimposed on it the contractionary fiscal policy of the coalition government. This loss of per capita income was much greater than in previous economic downturns in the 1970s and 1990s when management of the economy was much better aligned with economic needs.

It is worth detailing how drastic the changes in government policy have been since 2010, changes which reflected policy choices and a determination to reduce the size of the public sector irrespective of its impact on the social, economic and political system. It is evident that many people in government do not understand the critical role that that state plays in a modern economic system. Not least the fact that much of public current expenditure has a significant investment element both directly and indirectly. This is most evident in the case of education and training, but the same is true of investment in housing and in health, in the legal system, and social services as well as in infrastructure. Much technical innovation originates in state supported research programmes, often undertaken by universities.

The swingeing cuts we have seen in recent years in public expenditure have nothing to commend them. In the period between the 1950s and 2010 government spending increased in real terms at an annual rate of 2.9% and the UK had a level of public expenditure relative to GDP comparable to most other OECD countries. Since 2010 the increase in government spending has fallen to an annual rate of 0.3% with the result that per person real spending per head has been flat. By 2020/21 per person real government spending per person will have fallen by 4% compared to 2010 when the coalition took office.

Within government there have been catastrophic cutbacks in departmental spending (17% overall) with cuts to education (14%), defence (18%) and Communities and Local Government (25%). The NHS has had an increased level of funding (5%) but this is totally inadequate to meet demographic growth and the needs of an ageing population. Welfare spending per person (excluding pensioners) has fallen 10% in real terms since 2010. All of the increases in child benefit made between 1999 and 2009 have been reversed, and job seekers allowance is now lower than at any time since 1992.

It should also be noted that public investment has fallen to levels not seen in the post-war period, with results that are everywhere apparent in terms of a crumbling infrastructure. The gap between needs and performance is most evident in the case of housing where investment by government has more or less ceased despite the recommendation of the Barker Commission that we needed an annual investment of 250,000 houses to keep pace with demand.

Government rejected the advice of many economists who said it should expand its investment programme during the post 2008 downturn so as to expand demand at a time when borrowing costs were extremely low. The enormous shortage of affordable housing in the UK has its origins in the failure of government to undertake the required public investment.

One of the consequences of the cutbacks in Government spending has been an enormous loss of jobs in the public sector. In Local Government the cuts have been about one-third, with a loss of critical services for which there is no private sector provision such as libraries, parks, children’s and youth services etc. Overall General Government (including Local Government) now has total employment below 5million for the first time this century, with an estimated loss of jobs of about 500,000 since 2010. The biggest workforce cuts are health and social services (35%), armed forces (25%) and police (22%). How could anyone defend such an erosion of public sector employment and the associated services?

Along with the losses in employment have gone cuts in the real pay of employees. Public sector pay was frozen in 2011 until 2013 and then was subject to a 1% cap thereafter. As we have seen above this has massively eroded the pay of employees and it is unsurprising that many key sectors face major problems of retaining and attracting labour. It has been reported that since 2011 25% of newly qualified teachers have left the profession on account of low pay together with excessive working hours. Average public sector pay was £26,780 in 2009 and is projected to be £25,430 in 2020 – a fall of £1,300 which can be compared with a rise of £1000 for average private sector pay over the same period.

The Tories have tried to create an ideological shift against the public sector by diminishing public employees as ‘bureaucrats’ or ‘penpushers’. The denigration of experts that has taken place is part of a longer trend in under-valuing technical expertise and paying those with engineering and other technical skills much less than in competitor countries such as Germany. We are now witnessing the consequences of these attitudes and policies as the quality and quantity of public administration has fallen dramatically. Not least in the capacity of central government to deal with the complexity of Brexit and all the activities that are affected by the ‘planned’ withdrawal from the EU.

A final summary statistic that strikingly portrays the failure of Osborne’s strategy is that real household per capita income was a mere 1% higher in 2017 than it was a decade ago. In the years before 2007 the average annual increase in household real per capita income was 2.6%, however since then it has fallen to a mere 0.3%. This has to be the worst performance by any post-war government in the UK.

The economic consequences of Mr Osborne

In 1925 Keynes wrote a very powerful analysis of the failures of government economic policy which he published in a book entitled ‘The Economic Consequences of Mr Churchill’. The decision that Churchill took at that stage to return to the gold standard at an over-valued parity directly led to massive unemployment which contributed to the Great Depression of the 1930s.

It is evident that when Chancellor Mr Osborne knew nothing about the effective conduct of economic policy. As a result the UK looks set to experience a decade or more of insecure employment and stagnant real incomes within a society that is deeply fractured.  At the same time, the rich will get richer.

The UK is a deeply unequal country and one that is getting more unequal by the day. There was a remarkable rise in inequality from the 1980s, with the Gini coefficient increasing from 25% in 1979 to almost 40% in 2010. It is remarkable that the Gini in 2016/17 was higher than in all the years since 1961 except for the short period of 2007-2010.

The Resolution Foundation in ‘The Living Standards Audit 2017’ concluded that:

“In 2015-16 the share of income going to the top one per cent reached 8.5 per cent, broadly returning to pre-crisis levels although below 2009-10’s record peak of 8.7 per cent. Both these years of high income shares reflect, in part, income being shifted between years in response to tax changes.”

So the rich not surprisingly managed to protect themselves from austerity while incomes for the other 99% at best stagnated after the 2008 financial crisis, with a further widening of regional income inequality. And how successful has the Osborne strategy been in reducing the risks faced by the economy? A report from the OBR in July concluded as follows:

“A decade after the outbreak of the financial crisis and recession, net borrowing is well down from its peak. But the budget is still in deficit by 2 to 3 per cent of GDP – as it was on the eve of the crisis – and net debt is more than double its pre-crisis share of GDP and not yet falling. As a result, the public finances are much more sensitive to interest rate and inflation surprises than they were.”

This doesn’t sound like much of a success story, and its unsurprising that the population have had enough of austerity and the government and political party responsible. One could add that the public finances are also subject to a wide range of other risks including the economic meltdown caused by Brexit and the high probability of another financial crisis. The UK is now in a much worse state to deal with imminent risks than it was before 2008, not least because of a decade of failed economic and social policies.

The post Austerity in one country: The case of Britain appeared first on New thinking for the British economy.

A great deal has been written in recent years on the topic of inequality. The books of Thomas Piketty and the late Tony Atkinson are just two recent examples. It is hard to believe that anyone can be unaware of the issues and the possible explanations of why there has been such a massive shift in income and wealth distribution in both rich and poor countries. And yet it is still possible to be surprised at what is going on at the highest echelons of business. Here is just one example, as reported in the Guardian earlier this month:

Burberry is to hand Christopher Bailey shares worth £10.5m next month when day-to-day management of the luxury goods retailer switches to a newly recruited chief executive. Bailey is to receive 600,000 of the 1m shares he was awarded in 2013, at a time when the company was concerned he might be poached by a rival. Bailey will receive the rest of the 1m shares at a later date and at the current share price of £17.65 the 600,000 that he will receive are worth about £10.5m.

 

The annual report published on Tuesday shows that Bailey was paid £3.5m last year – up from the £1.9m the previous year. While he waived his entitlement to any annual bonus for the year, his total was boosted by a £1.4m payout from a further award of shares in 2014. ….In 2014 the company had endured a bruising annual meeting with its shareholders, who voted against its remuneration report to protest about Bailey’s pay. His pay deals also include a £440,000 allowance to cover clothes and other items.

 

Bailey’s salary will remain at £1.1m when he becomes president next month, following a year in which underlying profits fell by 21%.

Burberry isn’t exactly at the forefront of technical innovation and nor is it a company supplying a product that most of us would consider essential to life and limb. It caters of course to the global rich and its success until recently in expanding sales has depended on precisely the shift in income and wealth that has been measured by Piketty and others. But relative to average wages in the same company and to median household income in the UK, the scale of the payments to Bailey seem unreasonable. This is someone who has presided over a 21% fall in profits, and yet is still rewarded by a huge set of payments. What does this say about corporate governance and any supposed relationship between payment and performance?

It is perhaps unsurprising that in the land of Thatcherism the UK comes out very unfavourably in international comparisons of income and wealth distribution. In the UK the top 10% of households have disposable income 9 times that of the bottom 10%. But the level of inequality is much higher for original pre-tax incomes where the top 10% is 24 times higher than the bottom 10%. It is even worse than this within the top 10% where the level of inequality is greater; the top 1% of households on average had an income of £253,927 and the top 0.1% had an average income of £919,882 in 2012. The UK is the 7th most unequal country in the OECD, and the 4th most unequal country in Europe.

In the case of wealth, inequality is even greater. The richest 10% of households hold 45% of all wealth and the poorest 50% have 8.7%. Within the OECD countries the UK has a gini coefficient for wealth inequality a little higher than the rest of the members [73.2 compared to 72.8].

In an interesting paper in 2012 the Bank of England argues that more or less every citizen gained to some degree from the fact that monetary expansion after the 2008 crisis generated additional demand and growth in GDP of 1.5 to 2.0%. Perhaps, but more importantly quantitative easing (QE) both directly and indirectly increases asset prices, and since ownership of financial assets is skewed most of the capital gain accrues to those with the largest holdings. Thus it is the top 5% of households in the UK hold 40% of financial assets who gained the most.

This is equivalent to the top 5% each receiving £128,000 as a result of QE in the years prior to 2012. Since QE has continued to be central to monetary policy in the UK since then, the richest have continued to be the main beneficiaries. It is reasonable to assume that in the 5 years since the Bank made its estimates that another £130,000 or so has been added to the wealth of each of the top 5%.

It is also worth noting that the UK has had massive property price inflation in part as a result of the liquidity generated by QE. Again, the greatest benefit will have accrued to the richest segment of the population. This gain is an additional transfer to the top 5% since real gains on property were excluded from the Bank’s estimates. The scale of the rise in house prices both has been enormous. Nominal house prices on average increased between 1975 to 2016 by more than 800%, while real house price growth (after inflation is considered) was 333%. The following chart from Nationwide the biggest UK lender for housing finance maps the trend over the whole period since 1975.

What we face in the UK and elsewhere in the EU is a situation of deep and growing income and wealth inequality which in part has its origins in globalised trade but also in trends in technological development that substituted precarious work for previously well paid and secure employment. But we also witness governments both in the UK and across the EU following tax policies that are increasingly regressive in their impact, with greater dependence on indirect taxes and reductions in the degree of tax progressivism in income taxes.

In practice corporate taxes are increasingly easily to avoid, which also raises the returns to owners of capital. Meanwhile, the power of labour organisations has weakened which has enabled capital to grab a larger share of net product and hence a higher share of national income and wealth. To these forces we have also identified the actions of central banks who through their activities have directly and indirectly caused further income and wealth inequality.

Present levels of inequality threaten social, economic and political stability. It is now generally agreed as to what to do, but the problem is that years of increasing inequality have embedded the interests of the rich and powerful such that governments more or less everywhere have been captured and are no longer representative of their populations. But the structural forces at work will make it difficult for governments to continue with present policies, and they will have little option but to change direction. Populism and the rise of extreme parties of the left and right will inevitably lead to change, but why wait for this to happen?

The broad outlines of policy reform are clear:

1. Monetary policy needs to revert to its more traditional role with a much reduced level of dependence on QE. Savers need to be offered higher real rates of interest and credit needs to be brought under more effective control. Banks and other financial intermediaries need to be effectively regulated and their stability should be the focus of the monetary authorities. Where QE is continued it should be used to serve the interests of the country and not the rich few, and this would mean using monetary expansion for financing public investment in a sustainable way – both social and economic investment.
2. Fiscal policy needs to be given a much greater weight and needs to become much more progressive in terms of tax structure. The current regressive nature of the tax system needs to be reversed with much greater reliance on income taxes and much less on indirect taxes. Corporate taxes need to be increased and loopholes closed so that the effective tax rate is moved closer to historical levels. In particular corporate taxes should be based on where revenue is received rather than on profits so as to make it much more difficult for companies to avoid taxation. Wealth taxes need to be made more effective and loopholes closed especially in relation to the passing of wealth between generations which is presently a major avenue for processes of inequality to persist and deepen over time.
3. Political reform is essential so that the role of money and corporate power is removed from the political process. This has become even more critical now that it is evident that social media such as Facebook have been infiltrated by organisations that manipulate data and information in the interests of the rich and powerful. Political systems have become corrupted and urgently need reform.
4. Wages are too low and this threatens economic stability. It is critical that real wages be increased in part through changes in wage policy in respect of public sector employees where there has been wage restraint, and in part through policies to strengthen organisations representing the interests of labour. The insecurity of work especially in the so called ‘gig’ economy needs to be addressed via regulations which require workers to be treated as employees and not as self-employed. The weakening of the bargaining power of unions should be reversed through public policy since this is an effective way to raise wages and reduce the dependence of workers on debt and fiscal transfers from government. The shift in the shares of national income to capital has to be reversed so that employment incomes can be raised and with it increased consumer expenditure. Economic growth nearer to long term trends is essential if employment and income levels are to be restored.

Will the above reforms happen? Time will tell, but the clock is ticking. If structural reforms are not undertaken by government then we will all reap the consequences – and these will not be pleasant.

The post Inequality: how we got here, and what should be done appeared first on New thinking for the British economy.

This election comes during a remarkable period in British economic history. Over the past ten years real wages have suffered a larger decline than in any other advanced country apart from Greece. Mark Carney, Governor of the Bank of England, recently said that Britain is experiencing its “first lost decade since the 1860s”.

Faced with an unprecedented squeeze on living standards, families across the country have resorted to desperate measures. The number of people using food banks in the UK reached 1.2 million in 2015-16 – up from just 26,000 in 2008-09. Unsecured household debt – credit cards, overdrafts and other forms of consumer borrowing such as payday loans – is set to reach record highs.

Years of austerity has pushed public services towards breaking point. A steep decline in funding relative to GDP has left the NHS facing a “humanitarian crisis”, while cuts to school budgets have forced head teachers to axe staff and raise class sizes. Decades of underinvestment has left the UK lagging far behind other advanced economies. British workers are now 22% less productive than workers in the US, 23% less than in France and 27% less than in Germany. Precarious jobs and zero-hours contracts have grown throughout the labour market.

Now, with Brexit on the horizon, things are likely to get worse before they get better. According to the Office for Budget Responsibility, a combination of stagnating wages and cuts to working-age benefits means that real earnings will be lower in 2020 than they were back in 2008. According to the Resolution Foundation, we are on course for the biggest increase in inequality since the days of Margaret Thatcher. Never before has the outlook for living standards been this bleak.

But this period of economic decline is not the result of “natural” forces. It is the result of a faltering political and economic order that has reigned supreme in Britain for four decades. A system which has put blind faith in market forces, and tipped the balance of power towards capital and away from labour. A system which has prioritised London’s status as a global hub for financial services, while leaving other regions to suffer at the hands of industrial decline. A system which has allowed wealth to flow upwards by rewarding value extraction more highly than value creation.

In 2008 this system came crashing down when the poster boy of deregulated market fundamentalism – the financial sector – failed catastrophically, taking the whole economy down with it. But without a clear alternative to take its place, the response was to double down on a broken model.

Nearly ten years on, and the economic recovery has been the slowest on record. In fact, when measured properly, there has been no economic recovery – output per head of population still remains below the pre-crisis trend. Interest rates remain stuck at zero, while the Bank of England has relied on £435 billion of quantitative easing to keep the economy afloat. Despite the upbeat rhetoric from the government and right wing press, the reality is that Britain’s economy remains on life support.

It is within this context that the political upheaval of the past twelve months – both at home and abroad – must be viewed. If an economic model delivers stagnating living standards, rising inequality and growing insecurity, it should not be surprising when citizens revolt.

In different ways, both Theresa May and Jeremy Corbyn are symptoms of this faltering economic model. Despite backing Remain in the EU referendum, Theresa May’s reign as prime minister is a direct product of the Brexit vote. While the reasons for Brexit are complex, evidence shows that geographical distribution of living standards, industrial decline and exposure to austerity played a key role in determining how people voted.

Since becoming prime minister, Theresa May has made a concerted effort to appeal to Brexit voters. Rather than tackle the root cause of genuine fears – a failing economic model – she has played into a toxic narrative which attributes blame to immigrants. In both style and substance, Theresa May’s Conservative party is bearing an increasing resemblance to Nigel Farage’s UKIP: a party hell bent on pursuing a hard Brexit, obsessed with reducing immigration, and nostalgic for archaic remnants of a bygone era – from fox hunting to grammar schools.

But despite the rhetoric of “an economy that works for everyone”, the Conservatives’ manifesto offers nothing new in the way of economic policy. Instead, we are presented with more of the same: more cuts to welfare and public services, lower taxes for corporations and the well-off, slashing “poor and excessive government regulation” and Orwellian rhetoric around a “strong economy”.

Where new polices do appear, their effect is usually to make peoples’ lives worse, not better. The commitment to reduce net immigration to “tens of thousands” is not only steeped in xenophobia, but is an act of gross self-harm. Even the government’s own forecasters say that reducing immigration to the tens of thousands will seriously harm growth and increase government borrowing by up to £30 billion. Combined with scrapping of free school lunches, the means testing of winter fuel allowance and the now famous ‘dementia tax’, the direction of travel is a continuation of the status quo, but slightly worse.

Jeremy Corbyn’s Labour party, meanwhile, embodies the mood of discontent and a hunger for something different. After twenty years of politics dominated by spin, sound bites and triangulation, millions of people viewed Corbyn’s sincerity and honesty as a breath of fresh air. Initially written off by the political and media establishment, his resilience in the face of constant attack has gradually won over sceptics. But it is not personality or persona that is Labour’s secret weapon – it is policy.

Corbyn’s unashamedly social democratic manifesto represents a marked departure from the politics of recent decades, and contains many sensible policies. A new National Investment Bank would provide long-term patient finance to upgrade physical and social infrastructure across the country. Taxes would be increased on the wealthy to pay for struggling public services. Key utilities would be brought back into public ownership, student tuition fees scrapped, corporation tax increased and workers’ rights strengthened.

Unsurprisingly, the right wing press decried that the manifesto would “drag us back to the 1970s”. But none of Labour’s flagship policies are remotely controversial in Germany, which is the most productive and dynamic economy in Europe, or in the Scandinavian countries, which consistently sit at the top of global rankings on socio-economic development. The hysterical response from the media shows just how detached Britain has become from the mainstream of European economic thinking.

Labour’s proposal to double the size of the co-operative sector – supported by the introduction of a “right to own” policy – is a bold and ambitious way to reinvigorate enterprise and democratise ownership of capital. The proposal to break RBS up into a network of local public banks would create the kind of mid-tier banking system that is the lifeblood of Germany’s industrial power. The pledge to utilise the public sector’s £200 billion spending power in procurement to help create good local jobs, protect the environment and reduce inequality could be transformative. The promise to introduce a financial transaction tax would put a break on harmful financial speculation, and help return finance to its rightful place as the servant, not the master, of our economy.

Many commentators have been quick to judge party manifestos on the basis of whether each individual policy measure has been “fully costed”. Journalists get excited about the prospect of tripping up politicians with questions about “where the money will come from”. Unlike the Conservatives, Labour made a noble attempt to the cost their manifesto. But as many economists have already pointed out, obsessing over specific policy “costings” may be good journalism, but it is bad economics. It makes little sense to obsess over whether each item of addition spending is matched to a measure to raise additional revenue, because this is not how government spending actually works.

Moreover, assessing individual policies in isolation overlooks the dynamic interactions which determine the health of the economy. Taken as a whole, Labour’s manifesto would reboot the economy by kick starting the positive feedback loop between investment, productivity, wages and tax revenues. It would also help to rebalance the economy away from London and towards other parts of the UK.

But while Labour’s offering is a welcome step in the right direction, it is no panacea. There are many areas for improvement. Addressing the housing affordability crisis means not only building more homes, but fixing our broken land market. An ageing population and growing intergenerational needs a bolder approach to social care and inheritance. Moving towards a low carbon economy requires a systematic greening of the economy, not just targeted investment. Automation, big data and the changing nature of work demands a more radical rethink of welfare policy, and a more sophisticated debate about ownership in our economy.

The media has failed to engage in this debate, or even acknowledge the scale of the challenges we face. That’s why at openDemocracy we are bringing people together to get to grips with the long running economic crisis unfolding in Britain, and figure out a new economic programme.

Join the conversation, and help us build an economy to meet the challenges of the coming century.

The post We have a real choice between different economic futures appeared first on New thinking for the British economy.

The outcome of the coming election will be determined by the electorate’s view of which party will best negotiate the optimal Brexit deal. The danger is that with so much attention being paid to Brexit per se, not enough thought will be given to what we want for the future. Brexit should be taken as an opportunity to ask and answer the question ‘what sort of economy and society do we want to see developing in the nations and regions of the UK over the coming decades?’. The timescale will be decades because the imbalances that currently affect the UK have taken decades to unfold and the remedies will not be quick although the shock of Brexit could help galvanise more radical change.

Questions regarding the future direction of the economy and society are not confined to the UK and recent political developments in other parts of the EU and the US point to an electoral  reaction to economic and social changes that have adversely impacted many since the start of the millennium or even earlier. In the UK it has taken the Brexit vote to reveal the strong undercurrents of discontent that have been simmering for years. The causes of this discontent started well before the financial crisis of 2008 but that crisis had a cathartic effect on the thinking of many and its economic impact continues to be felt. Official forecasts for the UK suggest that GDP per adult in 2022 will be 18 per cent lower than it would have been had national income grown by 2 per cent a year since 2008 – broadly the rate of growth at that time[1]. Put another way the UK economy by 2022 will be some £360bn lower than trend and the corresponding loss of tax revenue roughly £100bn at unchanged tax rates. Given the growth in the demand for public services arising from the ageing of the population, public spending will be under severe and increasing pressure.

These trends were usefully summarised in a report by the OBR earlier this year which concluded that ‘in the absence of offsetting tax rises or spending cuts this (trend) would widen budget deficits over time and put public sector net debt on an unsustainable upward trajectory’[2]. There are few signs of the loss of capacity in the economy being clawed back and thus the impact of the crisis will be long lasting and the consequent economic losses make the actual cost of rescuing the banks pale into insignificance.

Given the loss of potential growth and flat productivity it is hardly surprising that after seven years of austerity, public spending is broadly back at the pre-crisis level when compared with national income.

It can be argued that in the second half of the twentieth century many people, particularly those on lower incomes, acquiesced to the market based capitalist system because it delivered for them and their families: delivered in the sense that they could look forward to ever rising standards of living and had a reasonable expectation that their children would, in the future, enjoy a higher standard of living than theirs. Such a promise was an effective counterweight to concerns regarding the inequities and other drawbacks of the economic and political system. Will this acquiescence now prove to have been a Faustian deal for too many people? Recent political developments in the UK, the rest of Europe and the US indicate that the deal may now be broken.

Average real wages in the UK have fallen by about 10 per cent over the last decade and productivity has stagnated. Superficially a bright spot has been the rise in employment rates but many of the jobs created have been insecure and poorly paid. For example, the number of workers across the UK on zero-hour contracts has grown from 120,000 in 2005 to over 900,000 in 2017[3]. Put simply the UK economic model, if such a thing exists, relies excessively on growth in low paid, poor quality jobs.

 Put simply the UK economic model, if such a thing exists, relies excessively on growth in low paid, poor quality jobs.

Citing statistics and trends for the UK as a whole fails to reveal many issues felt more acutely in many parts of the UK. Examination of regional disparities shows the overwhelming dominance of London and the South East of England. GVA per capita in London is 172 per cent of the UK average while it is 71 per cent in Wales and 75 per cent in the North East of England. The UK business model has over many years been one where power, both political and economic, has concentrated in London and the surrounding region. London has for centuries been the dominant centre but since the decline of extractive and manufacturing industries in the second half of the last century, this dominance has become even more pervasive. A major factor behind this increasing dominance has been the explosive growth in financial services. From 1970 to 2008 UK finance grew twice as fast as UK national income and most of this growth, particularly at the high value end, took place in the City of London[4]. As memorably described by Adair Turner, former Chair of the FSA, much of this activity is ’socially useless’ but it has distorted the economic balance of the UK to the detriment of other sectors such as manufacturing and also geographically with the concentration of financial services in London. As a result of this concentration both sectorally and geographically successive governments have been in danger of being captured by special interests. In 2012, four years after the financial crisis, more than 2,500 bankers in London were earning more than £1 million per year[5]. Given that 27 per cent of income tax is paid by the top 1 per cent  (300,000) of earners one can understand the nervousness of politicians in seeking to curb excessive dependence on banking and the power of the banking lobby.

What should be done to start answering the question I posed: ‘what sort of economy and society do we want to see developing in the nations and regions of the UK over the coming decades?’ Here are some modest proposals to rebalance the UK economy both sectorally and geographically:

1. Accept that Brexit will mean a reduction in financial services activity in London. The UK government should be bold and be prepared to negotiate away some advantages in the financial services sector in return for protecting other key sectors such as manufacturing and food. While posing some short-term challenges weaning the UK off its overdependence and overexposure to the financial service sector will enable the government to shift its priorities to other sectors and crucially to the other nations and regions of the UK.
2. Oblige banks to concentrate more investment into business other than real estate. According to the Bank of England bank lending in the UK is dominated by mortgages (65 per cent of total lending) followed by commercial real estate (14 per cent) and consumer credit (7 per cent). 14 per cent only of bank lending is to business for non-real estate investment i.e. investment in wealth generating capacity. Given such a skew in investment priorities it is hardly surprising that house prices have boomed and that business investment has lagged our international competitors. A way of nudging banking in the right direction would be to require more capital to be set aside for real estate lending compared with industrial investment. Such an approach could help productive business investment while also cooling down the overheated property markets both commercial and private.
3. Rather than concentrating on a further lowering of corporation tax across the UK why not discount the rate in poorer regions with the loss of revenue being offset by a higher rate in the more prosperous areas? Companies wishing to claim the discount would have to demonstrate economic activity in the region concerned. Corporation tax liability would depend on the allocation of business activity. Many countries have well-tried formulae for allocating tax bases across regions. One way is based on an enterprise’s headcount at various locations[6]. The current government believes that lowering corporation tax is a powerful tool for helping business: let us use that power geographically to help rebalance the UK economy.
4. If the UK is to overcome the current malaise the issue of low productivity needs to be addressed. Productivity is key because in the medium to long term prosperity is determined by productivity: growth in real wages is a function of growth in productivity. A number of factors drive productivity growth including; education levels; skill levels; pay structures; R&D; business investment; and infrastructure. In the case of skills which many employers consistently complain are in short supply, we must stop neglecting the 60 per cent or so of school leavers who do not go on to university and ensure that they get a fair deal in terms of financial support for acquiring relevant skills. Note how much time and attention is devoted by politicians to those who do go to university and to such related issues as tuition fee policy. As recently as the end of the 1970s 100 MPs came from manual working class backgrounds and fewer than a third of Labour MPs were graduates. The number of graduates is now close to 90 per cent[7]. Young people not going to university are largely forgotten by our politicians who overwhelmingly are graduates themselves and are divorced from the interests and needs of young people not going on to university. This neglect in turn starves industry of the skills needed to expand.
5. It is widely agreed that infrastructure investment can facilitate productivity growth and wealth creation. At a time when interest rates are still at historically low levels the government should be bold in increasing infrastructure investment but it needs to be directed to stimulating growth in the poorer areas of the UK. This requires the UK government to stop being so London focussed. An example of this is HS2 which an analysis of the economic impact showed it brought most benefit to London and not to the Midlands and North of England whilst at the same time disadvantaging Wales, the South West and East of England[8]. If the government is serious about a geographical rebalancing it would invest in HS3 joining up the cities of the north of England and dump HS2. London with Crossrail and other investment has taken too large a share of transport investment. Public expenditure per head on transport in London was 272 per cent of the level in the North East of England in 2014-15[9]. Wales is one of two countries in Europe which does not have a single kilometre of electrified railway track. At a strategic level the government should embark on a major infrastructure investment programme of the order of an additional 1 per cent of GDP for each of the next five years making a total additional investment of more than £100bn. Interest rates are at historically low levels, often negative in real terms, which invested wisely could bring a short-term stimulus to the construction industry and in the medium to long term help boost efficiency and productivity.

This list is not meant to be definitive. It simply illustrates that Brexit as well as being a formidable challenge to the status quo could be a catalyst for fresh thinking and implementation of policies that more effectively address the needs of those who feel let down by the current system. Failure to address these issues could well lead to further disruptive politics in the years ahead.

Eurfyl ap Gwilym.

[1] IFS. Briefing Note BN199. May 2017.

[2] OBR. Fiscal sustainability report. January 2017.

[3] ONS quoted in Financial Times. 15 May 2017.

[4] Between Debt and the Devil. Adair Turner Princeton 2016.

[5] European Banking Authority, High Earners, 2012 Data quoted by Adair Turner.

[6] Independent Commission on Funding & Finance for Wales. July 2010.

[7] The Road to Somewhere. David Goodhart. Hurst 2017.

[8] KPMG. September 2013.

[9] Public Expenditure Statistical Analyses 2016. Cm 9322. HM Treasury. July 2016.

The post The five things the next government must do to rebalance our economy appeared first on New thinking for the British economy.

The economist Steve Keen was one of the few to predict the 2007/8 collapse. We interviewed him about how to avoid the next one.

The post Podcast: Steve Keen’s manifesto appeared first on New thinking for the British economy.

The Chancellor painted a rosy picture of a robust UK economy enjoying strong economic growth and low unemployment. He also talked about how the government is helping ordinary working families and building an economy that works for everyone.

That’s far from the reality facing most people this morning. Here are five things he forgot to mention:

• We are facing an unprecedented lost decade in living standards

Since 2007 real wages – income from work adjusted for inflation – have fallen by 10%. Wages in Britain have fallen further than in any other advanced country apart from Greece. This represents the longest sustained decline in British living standards since records began.

According to the Office for Budget Responsibility’s (OBR) forecasts which were published alongside the budget, we face another year of wage stagnation in 2017. The OBR expects that the weaker pound caused by Brexit will push up inflation, eroding the purchasing power of any wage increases.

While the OBR does expect moderate earnings growth beyond 2017, this will not be sufficient to make up the loss ground. In fact, the OBR expects that in 2020 real earnings will still be lower than they were back in 2008. The implications of this are stark: we are facing an unprecedented lost decade in living standards.

But these aggregate figures mask varying fortunes across the income distribution. The problem of low wage growth is further compounded by the government’s cuts to working-age benefits which will hurt the incomes of those at the bottom of the income distribution.

In a report published last week, the Institute for Fiscal Studies projected that while most households can expect moderate income growth over the next five years, the incomes of the poorest 15% of households will fall (after adjusting for housing costs and inflation). As a result, income inequality looks set to increase.

• Private debt is ballooning, putting our economy at huge risk

Mr Hammond said that yesterday’s Budget was about continuing the task of “getting Britain back to living within its means”. He also said he will “not saddle our children with ever-increasing debts”.

He was of course referring to reducing government spending. Yet when we look at the consequences of the Chancellor’s Budget on private households, the government’s own figures show no signs of progress towards any conception of a society that is living within its means.

The below graph is taken from the OBR’s latest set of forecasts which were published alongside the Budget. It shows what has happened to household debt relative to income over the last decade or so, and what they expect to happen over the next five years:

So, the government’s own forecasters think household debt relative to income will increase dramatically in the next five years.

What’s going on here? Firstly, the OBR is forecasting that mortgage debt will continue to rise as house prices grow more quickly than incomes. With UK house prices already nine times average incomes – a consequence of financial deregulation and ill-thought out housing policy – this is a worrying sign.

Secondly, in recent years the UK economy has become increasingly reliant on household consumption spending. With wages failing to keep up, households have only been able to increase consumption by borrowing more or drawing down on savings. And with a government determined to curb spending, a trade deficit that is a drag on economic activity and sluggish business investment, the only way that growth can plausibly be achieved is through debt-fuelled consumption. This is not sustainable – eventually, an economy which relies on households spending beyond their means will crumble.

• The NHS isn’t getting the funding it needs

In his Budget speech Mr Hammond declared that “we are the government of the NHS”. This comes amid reports of a “humanitarian crisis” in hospitals, while doctors have warned that mounting pressures on the NHS are putting lives at risk.

The Chancellor said that he is committed to making more funding available, but by simply reeling off big numbers – “an extra £10 billion” – he obscures the underlying reality.

The most effective way to evaluate trends in health spending is by comparing it to the size of the economy. There are good reasons why health spending should increase relative to the size of the economy over time. An ageing population means that demands on health services rise since older individuals on average consume more, and more expensive, healthcare. Demand will also increase over time as a result of the rising prevalence of some chronic conditions, improvements in access to care, and improvements in technology.

Over recent decades spending on the NHS has indeed increased: in 1970 total UK health spending was 4% of GDP, rising to between 5% and 6% through the mid-1990s. From 1997 until the financial crisis in 2008 there was a steady increase, reaching nearly 8% in 2010.
Since 2010 however, this trend has reversed. As the Kings Fund has reported, we are now experiencing the largest sustained fall in NHS spending as a share of GDP in any period since 1951.

The extra money announced for social care in the Budget may help to alleviate pressure on the NHS by freeing up some beds. But the inescapable reality is that the NHS needs much more funding. Where this money should come from is an important question.

According to the Institute of Fiscal Studies, the corporation tax cuts since 2010 have cost the government £10.8 billion a year in tax revenue. In the Budget the Chancellor confirmed that he plans to reduce corporation tax even further to 17% by 2020. This is money that could go a long way to fixing the problems in the NHS.

At a time when the NHS is in crisis caused by lack of funding, slashing corporation tax further seems grossly irresponsible.

• What about the housing crisis?

The Chancellor failed to mention housing even once, despite the fact that we are in the grip of a serious and escalating housing crisis. One of the things fuelling that crisis is the fact that the government is insisting on selling off public land rather than using it to help deliver more genuinely affordable housing.

At the current rate, the new homes target on sold-off public land will not be met until 2032, 12 years later than promised. And the majority of homes being built on the land sold are out of reach for most people — only one in five will be classified as ‘affordable’. Even this figure is optimistic as it uses the government’s own widely criticised definition of affordability. If the government ended the public land fire sale they could use that land to partner with local authorities, small developers and communities themselves to deliver the more affordable homes people need.

According to the latest Nationwide House Price statistics, as most people cannot afford to buy now even with a mortgage, cash buyers such as second homeowners and buy to let landlords are propping up the market. Things are getting worse for people left at the mercy of this failing market. The Chancellor could have put a stop to the fire sale of public land yesterday, but instead he acted as if there were no housing crisis all.

• The Chancellor quietly ducked acting on the environment

With the nation’s cities gasping for clean air and ever-louder calls for politicians to act on dirty transport, the Chancellor had been widely expected to announce a new scrappage scheme for diesel cars – but he didn’t.

Pollution from traffic is the biggest factor in the 40,000 early deaths in the UK every year from dirty air, of which diesel vehicles are the biggest culprit.  New research shows that a scheme to incentivise trading in dirty diesel cars for cleaner new models would be popular and successful, as well has helping support the Government’s broader industrial push to be a global hub for making low-emission cars.  But the Budget documents deferred the decision on the scheme until later in the year, and Mr Hammond made no mention of the country’s air pollution crisis at all.

This Budget had little time for anything environmental. Previous promises that it would see an announcement of post-Brexit subsidy plans for renewable energy were also ducked. Yet there was the usual succour for the country’s fossil fuel producers, already basking in the “unprecedented support” of successive Budgets. This time, they will help design a tax change that will encourage smaller companies to wring every last drop of oil from the UK’s declining North Sea – despite the Government admitting most of the world’s fossil fuels will need to be left in the ground.

Today the Chancellor faces a growing backlash over National Insurance rises and whether it constitutes a breach of the Conservative’s 2015 manifesto. But yesterday’s Budget represents a wider failure.

This was a moment to take the first steps towards an economy that really puts people in control and to prepare Britain for life outside the EU. Instead, the Chancellor ducked the big issues and dodged difficult choices.

This piece first appeared on the New Economics Foundation blog.

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Toby Lloyd from Shelter, and Josh Ryan-Collins and Laurie Macfarlane from the New Economics Foundation have a new book out helping us get to grips with what’s gone wrong and how to fix it. I had a chat with Laurie in the NEF offices to find out more – enjoy.

The post Podcast: to rebalance Britain’s economy, we must rethink land and housing economics appeared first on New thinking for the British economy.

Income tax. 30 million people in the UK pay it. As taxes go, it’s reasonably well known and understood. And it’s politically salient. But discussions about re-engineering it for the 21st century seem confined to the margins.

Following the post-independence referendum Smith Commission, Scotland now has wide-ranging powers over income tax. This means that last year’s Holyrood elections were the first to really grapple with the issue. Previously, the only devolved income tax power available to Scottish parliamentarians was to increase or lower tax rates uniformly across all bands – a bit of a chocolate teapot if you’re interested in progressive taxation. Now, income tax above the personal allowance can pretty much be completely redesigned if the parliament chose to.

In the lead up to the 2016 election Scottish Greens published detailed tax proposals. The income tax plans were based on principles of progressive taxation. Progressive taxation is normally understood as “tax the rich”, but the most significant part of the Green proposals was actually its effect on low earners and in-work poverty. The proposals’ starting point was that anyone earning under the average median income should pay less tax than at present, while people earning more than the average could pay more. The purpose was explicitly twofold: to reduce income inequality and raise money to fund public services.

The effect of the proposals would have been to reduce inequality (as measured by the GINI coefficient) by four times more than proposals from the SNP, and raise an additional £331m for public services. For individuals, the data showed median income to be around £24,000 in 2013/14. Under the Scottish Green plans, everyone earning less than £26,500 per year would have seen their income tax reduced. People earning the median gross full-time annual pay in Scotland (£27,710) would have only paid £24 more.

To create the “split point” of £26,500, i.e. the point at which people go from paying less to paying more, the Basic Rate was split into two. The first section was lowered to 18% and the second section raised to 22%. This was a reasonably simple adjustment to help people affected by in-work poverty and add more progressivity to the system. To my surprise even this turned out to be depressingly beyond the creativity of other political parties. Scottish Labour in particular got tied up in knots explaining how they would protect people on low earnings from a rise in the basic rate with a “£100 rebate” administered by Councils. Eventually they dumped the policy which was generally accepted as completely unworkable. The Scottish Lib Dems seemed content to forge on with promoting a 1p rise across the board as if the most significant new power devolved to the Scottish Parliament since its creation didn’t happen. The SNP seemed content to largely just do-as-the-UK-do on income tax.

For me, this lack of creativity and narrowness of proposals for the Basic Rate (82% of tax payers pay only the basic rate) was the most surprising thing to come from the new debates on income tax in Scotland. But even this seems more lively than the eerie silence where you’d hope to hear any serious discussion of income tax at Westminster: since Brown’s abolition of the 10p rate, almost everyone has seemed content to stick with roughly the same income tax structure and to fiddle only with rates and thresholds, despite notable changes in the spread of incomes being taxed.

Where there has been debate, it has focussed mainly on what the top rate (paid by 1% of tax payers) should be. The day after the Scottish Green proposals were published 90% of print media coverage led with a tax change that would affect 0.6% of the population.

Headlines the day after the Scottish Green tax policy announcement were all about the top rate, despite changes elsewhere affecting many more people.

How much the highest earning in society can expect to be taxed is important – and a high Additional Rate should be used as a mechanism to promote a more equal society – but it is not the whole picture. There are other important issues that should be in the frame: for example, stemming the increase of in-work poverty, reacting to the rise of insecure work, and shifting taxation from labour to asset wealth, where inequality is significantly greater. Addressing these requires us to think across the income spectrum. And while this debate is being pioneered in Scotland, the argument for a real restructuring of the income tax system applies equally across the UK.

Note: this article wrongly listed Adam Ramsay as the author when it was first published. In fact, the author is Iain Thom.

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A new research report published today looks at the current state and future prospects of a global public database of corporate accounts.

The multinational corporation has become one of the most powerful and influential forms of economic organisation in the modern world. Emerging at the bleeding edge of colonial expansion in the seventeenth century, entities such as the Dutch and British East India Companies required novel kinds of legal, political, economic and administrative work to hold their sprawling networks of people, objects, resources, activities and information together across borders. Today it is estimated that over two thirds of the world’s hundred biggest economic entities are corporations rather than countries.

Our lives are permeated by and entangled with the activities and fruits of these multinationals. We are surrounded by their products, technologies, platforms, apps, logos, retailers, advertisements, publications, packaging, supply chains, infrastructures, furnishings and fashions. In many countries they have assumed the task of supplying societies with water, food, heat, clothing, transport, electricity, connectivity, information, entertainment and sociality. We carry their trackers and technologies in our pockets and on our screens. They provide us not only with luxuries and frivolities, but the means to get by and to flourish as human beings in the contemporary world. They guide us through our lives, both figuratively and literally. The rise of new technologies means that corporations may often have more data about us than states do – and more data than we have about ourselves.

But what do we know about them? What are these multinational entities – and where are they? What do they bring together? What role do they play in our economies and societies? Are their tax contributions commensurate with their profits and activities? Where should we look to inform legal, economic and policy measures to shape their activities for the benefit of society, not just shareholders?  At the moment these questions are surprisingly difficult to answer – at least in part due to a lack of publicly available information. We are currently on the brink of a number of important policy decisions (e.g. at the EU and in the UK) which will have a lasting effect on what we are able to know and how we are able to respond to these mysterious multinational giants.

A wave of high-profile public controversies, mobilisations and interventions around the tax affairs of multinationals followed in the wake of the 2007-2008 financial crisis. Tax justice and anti-austerity activists have occupied high street stores in order to protest multinational tax avoidance. A group of local traders in Wales sought to move their town offshore, in order to publicise and critique legal and accountancy practices used by multinationals. One artist issued fake certificates of incorporation for Cayman Island companies to highlight the social costs of tax avoidance. Corporate tax avoidance came to epitomise economic globalisation with an absence of corresponding democratic societal controls.

This public concern after the crisis prompted a succession of projects from various transnational groups and institutions. The then-G8 and G20 committed to reducing the “misalignment” between the activities and profits of multinationals. The G20 tasked the OECD with launching an initiative dedicated to tackling tax “Base Erosion and Profit Shifting” (BEPS). The OECD BEPS project surfaced different ways of understanding and accounting for multinational companies – including questions such as what they are, where they are, how to calculate where they should pay money, and by whom they should be governed.

For example, many industry associations, companies, institutions and audit firms advocated sticking to the “arms length principle” which would treat multinationals as a group of effectively independent legal entities. On the other hand, civil society groups and researchers called for “unitary taxation”, which would treat multinationals as a single entity with operations in multiple countries. The consultation also raised questions about the governance of transnational tax policy, with some groups arguing that responsibility should shift from the OECD to the United Nations [deleted comma] to ensure that all countries have a say – especially those in the Global South.

While many civil society actors highlighted the shortcomings and limitations of the OECD BEPS process, they acknowledged that it did succeed in obtaining global institutional recognition for a proposal which had been central to the “tax justice” agenda for the previous decade: “Country by Country Reporting” (CBCR), which would require multinationals to produce comprehensive, global reports on their economic activities and tax contributions, broken down by country. But there was one major drawback: it was suggested that this information should be shared between tax authorities, rather than being made public. Since the release of the the OECD BEPS final reports in 2015, a loose-knit network of campaigners have been busy working to make this data public.

Today we are publishing a new research report looking at the current state and future prospects of a global database on the economic activities and tax contributions of multinationals – including who might use it and how, what it could and should contain, the extent to which one could already start building such a database using publicly available sources, and next steps for policy, advocacy and technical work. It also highlights what is involved in making of data about multinationals, including social and political processes of classification and standardisation that this data depends on.

Exhibition of Paolo Cirio’s “Loophole for All” in Basel, 2015. Paolo Cirio.

The report reviews several public sources of CBCR data – including from legislation introduced in the wake of the financial crisis. Under the Trump administration, the US is currently in the process of repealing and dismantling key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including Section 1504 on transparency in the extractive industry, which Oxfam recently described as the “brutal loss of 10 years of work”. Some of the best available public CBCR data is generated as a result of the European Capital Requirements Directive IV (CRD IV), which gives us an unprecedented (albeit often imperfect) series of snapshots of multinational financial institutions with operations in Europe. Rapporteurs at the European Parliament just published an encouraging draft in support of making country-by-country reporting data public.

While the longer term dream for many is a global public database housed at the United Nations, until this is realised civil society groups may build their own. As well as being used as an informational resource in itself, such a database could be seen as form of “data activism” to change what public institutions count – taking a cue from citizen and civil society data projects to take measure of issues they care about – from migrant deaths to police killings, literacy rates, water access or fracking pollution.

A civil society database could play another important role: it could be a means to facilitate the assembly and coordination of different actors who share an interest in the economic activities of multinationals. It would thus be not only a source of information, but also a mechanism for organisation – allowing journalists, researchers, civil society organisations and others to collaborate around the collection, verification, analysis and interpretation of this data. In parallel to ongoing campaigns for public data, a civil society database could thus be viewed as a kind of democratic experiment opening up space for public engagement, deliberation and imagination around how the global economy is organised, and how it might be organised differently.

In the face of an onslaught of nationalist challenges to political and economic world-making projects of the previous century – not least through the “neoliberal protectionism” of the Trump administration – supporting the development of transnational democratic publics with an interest in understanding and responding to some of the world’s biggest economic actors is surely an urgent task.

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Income tax thresholds are one of the geekier corners of fiscal policy. Where tax rates are round numbers you could put on a placard, the point at which you start paying them is a little more complex. That doesn’t mean that they aren’t important.

Even when they do get some public traction, they are usually widely mis-explained and misunderstood. The achievement that Lib Dems often shout about from their time in coalition with the Tories, for example, is the fact that they raised the income tax threshold, taking, as they repeatedly told us, millions of people out of income tax.

In reality, this was a surprisingly regressive policy. It did nothing to help the poorest, who were already below the threshold. In its first incarnation in 2010, only 6% of the cost of the policy – £1bn out of £16bn – went on the stated aim of helping the lowest income families, as a report from Landman Economics showed at the time. The other £15 billion was just a straight up tax cut for most of the rest of the country, at a time when public services were being brutally cut. In fact, perhaps counterintuitively, the research found that households in the second richest decile would gain on average four times more than those in the poorest decile. Getting the first £12,500 tax free is more relevant to those of us who earn more than £12,500.

But I digress. Income tax thresholds have become a political issue again because they are, it seems, the SNP’s preferred way to subtly stretch the fiscal muscles built up by the Scottish Parliament in recent rounds of devolution. The devolution of significant tax varying powers to the Holyrood was a major constitutional moment in the growing autonomy of Scotland. And the fact that the biggest party pushing for independence proposed in the election last year not to use these newly won powers certainly raised a few eyebrows.

But Nicola Sturgeon’s party doesn’t quite have a majority. And once it was clear that Labour, Tories and Lib Dems weren’t going to negotiate over passing a budget, the question was what deal her finance secretary, Derek MacKay, could do with the six Green MSPs. And the demands from the Greens were relatively simple: increase taxes on the wealthiest, stem cuts to local government.

The final offer extracted and accepted by the Scottish Greens today was a £160 million package – “the most significant change to any draft budget at a time of minority government since devolution”, according to MacKay. And perhaps the most interesting part of it is that the SNP are no longer proposing to increase with inflation the threshold for the 40p tax rate. It will remain at £43,000 (while Westminster is raising it to £45,000 for the rest of the UK).

At first, this seems like a slightly odd, semi-progressive policy. After all, the most obvious impact is that a few people getting cost-of-living pay rises in what many would think of as middle-income jobs will now find themselves hitting the 40p rate.

It’s important, first, to look at is earnings statistics: the median full time income in Scotland in 2015 was £27,710 (slightly higher than the UK median of £27,645). The median part time income was £9,837. If you are earning £43,000, you’re in roughly the top 10% of earners in Scotland. But, in any case, the reality is that just as the Lib Dem threshold raise applied to everyone above the line, this dè-facto cut applies to the earnings of everyone on more than £43k, while those who only just reach the line won’t see the full effect. This is, in other words, an effective tax increase on the richest 10% or so, expected to raise around £30 million.

Of course, none of this is the radical restructuring of income tax which the runaway inequality Scotland and the UK have seen in recent years demands. The SNP’s caution in touching the new powers it has over income tax rates is a false risk-aversion. Research at Stirling has shown that earners in the top 1% in Scotland have seen their income increase four times faster than even those in the next percent down. The share of total national income taken by the top 1% rose in Scotland from 6.3% in 1997 to 9.4% 12 years later. When the current is moving fast beneath you, you need to paddle faster just to stay still.

But the decision to freeze the income tax threshold – that is, to raise it in real terms – is more progressive than it seems, and is to be welcomed.

Adam Ramsay is a member of the Scottish Green Party.

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Housing is an issue that is rarely far from the news. Sky-high rents, insecure accommodation, and a lack of affordability are issues familiar to us all. It’s not surprising; housing has always been about more than just bricks and mortar. A solid roof over our heads and a stable home are universal desires, and for many of us they are the bare minimum for a dignified and respectable standard of living.

However, in the UK today many continue to struggle to achieve such basic necessities. The pitiful state of rental accommodation in this country in particular is a crisis that has been years in the making, with the disastrous decision to decimate the country’s social housing stock leaving millions of low income households without decent, affordable accommodation. Most find themselves shunted into the private rental sector, often living in sub-standard accommodation at extortionate cost.

Of course, not everyone is suffering in this housing crisis. Around a quarter of the UK’s richest 100 people have built their wealth, at least in part, through interests in housing. These 24 people now have a combined wealth of £78.55bn, the equivalent of 375,740 average priced houses. The reality is, the housing crisis is not being equally felt – some are earning a fortune from it.

For the unlucky rest, facing huge rental costs, the problem is compounded by archaic taxes on housing, like Council Tax, a tax on property that estimates the value of housing based on an evaluation conducted in 1991. Unsurprisingly, this provides a rather distorted picture of house prices, and therefore an unrealistic account of what residents can afford to pay.

Council Tax is not only outdated, it’s also hopelessly regressive, hitting the poorest households disproportionately hard. While a household in the richest tenth pays around 1.5 per cent of their income in Council Tax, a household in the poorest tenth pays around 7 per cent. That’s a huge drain on the finances of low income households, and partly explains why so many people are struggling to keep a roof over their heads and food on the table.

So what can be done? The most obvious step is a reform of Council Tax, with the current highly regressive model replaced by a progressive property tax.

Different models have been proposed for how a progressive property tax would work. For example, the Joseph Rowntree Foundation has suggested rates that rise modestly as property values rise and that, together, combine to deliver an overall revenue-neutral alternative to Council Tax. The rates would be 0.43 per cent on property value up to £110,000; 0.53 per cent on the whole of property value up to £160,000; 0.63 per cent on the whole of property value up to £230,000; 0.73 per cent on the whole of property value up to £400,000 and 0.83 per cent on the whole of property value thereafter.

They estimate such a tax would reduce the size of median gross bills by £279 a year compared to the Council Tax; reduce the bills of almost two-thirds of households by more than 10 per cent; and reduce gross median bills for the poorest tenth of households by £202. It would increase bills for the top tenth by £184. Clearly, this would be a huge benefit to those households struggling with high housing costs. In fact, an extra £202 would cover around a month’s worth of housing and heating costs for the poorest tenth of households. It could also pay for more than a month’s worth of food, an invaluable boost to incomes with Christmas fast approaching.

A progressive property tax would not come without challenges. Due to the significantly higher property prices in the capital, poorer households in London could find themselves hit even harder by such a tax. However, to offset this ‘London effect’ it could be left to local areas to determine how they develop the tax, to ensure poorer households aren’t disadvantaged.

In order to iron out such kinks, it is vital that a commission on local tax reform is established for England, as has been the case in Scotland. This would allow a range of options and their impacts to be systematically and methodically considered.

The temptation is to see the housing crisis as a generational divide – the lucky ‘baby boomers’ pitted against the jilted generation of ‘millenials’, but his misunderstands the scale of the problem, and who it affects. Many people within older generations are horrified at seeing their children and grandchildren trapped in sub-standard accommodation and paying a fortune for the privilege. Few of them want to see their children living in their spare room into their forties and fifties.

Politicians need to recognise that our housing crisis is in fact both a symptom, and a cause, of our extreme inequality. The richest 1,000 people in the UK now have more wealth than the poorest 40 per cent; and this is in large part due to the extreme differences we see in housing wealth. If we don’t want to see future generations trapped by impossible housing costs, we need a drastic overhaul of our housing policy, starting with a progressive property tax.

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When the government announced plans to cut £4bn of in-work social security in its summer budget last year, it was widely condemned by commentators and organisations for hitting some of the poorest working families hardest.

The cuts, which focused on tax credits, were subsequently scrapped by the Government during its Autumn Statement, but this merely deferred the pain. Rather than being shelved altogether, the cuts were instead transferred to the new social security system of Universal Credit (UC), now being rolled out. The result is the same: huge numbers of families are being squeezed, with their incomes reduced as they move onto the new system.

Universal Credit works by pulling together a number of social security strands into a single payment to recipients. As people earn more, their UC payments are then gradually withdrawn. In principle, it’s a simple idea that should make the system more efficient, but the design of the current policy comes with a fatal flaw – the swingeing rate at which UC is withdrawn.

Analysis by the Equality Trust found that once UC withdrawal and other taxes are taken into account, many recipients would keep barely a quarter of their additional earnings. Far from helping people ‘lift themselves out of poverty’, the eye-wateringly high marginal tax rates people face under UC mean they are more likely to be locked into low incomes. This is all the more galling when considering that a person in the richest 1% faces a far lower tax rate, keeping more than half of their additional earnings.

This might be consistent with a plan to reduce overall public spending, but the government remains committed to reducing taxes on the well-off at significant cost to the public purse. Raising the income tax personal allowance, the amount someone can earn before they pay income tax, will cost £4bn across this parliament, and will disproportionately benefit higher income households. Raising the threshold at which the higher rate of income tax is paid will similarly only help those on higher incomes.

These policy decisions reinforce the UK’s extreme levels of inequality, to the profound detriment of our society. The UK is one of the most unequal countries in the developed world, and evidence shows this extreme inequality damages trust and social participation, encourages crime, decreases social mobility, shortens life expectancy and increases debt. It means we suffer from poorer educational outcomes and worse mental and physical health than developed countries with greater equality. Our system of in-work social security, and the new system of Universal Credit, exacerbates this inequality.

So what can we do to change this? The answer is simple: the government should reduce the rate at which UC is withdrawn. The original plans for UC envisaged recipients losing 55p of every additional pound, but this was changed to a more punishing rate of 65p. Combined with other taxes this means recipients lose 76p of every additional pound they earn.  Reverting to a more generous 55p withdrawal rate would cost the government £4bn across a parliament, but it would make a real difference to those who are struggling. A single parent, for example, could be over £125 a month better off.

This could be paid for by freezing the planned increased in the income tax personal allowance, and unlike the personal allowance, it would be of far greater benefit to low income households and the famed ‘just managing’ that the Prime Minister has sworn to serve.

This wouldn’t just be a fairer system of social security; it would also be a more popular one. Polling conducted by Ipsos MORI on behalf of The Equality Trust found strong support for reducing this tax on aspiration, with a clear majority believing that people on low incomes should be able to keep more of what they earn. Smart politicians would seize on this, and offer the public what it wants.

Being able to make ends meet, to begin to save for the future and to be free of the blight of poverty and insecurity is an aspiration we all share. We all want to know we can secure a dignified retirement. We all want to build a better life and better opportunities for our children. When the social security system works well, it supports these goals, fighting poverty by supporting those out of work, helping people back into work, and encouraging progress through work. In doing so it also reduces our dangerously high levels of inequality.

Instead, Universal Credit acts as a brake on the opportunities for low income households. At the same time, successive governments have built a wider system of taxes and social security that prioritises lowering the taxes of the rich, whilst failing to tackle the barriers that impede the poor.This has to change; a system of Universal Credit that allows low income households to keep more of the money they earn would be a good place to start.

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The Labour party first discussed the idea of a universal basic income in the 1920s. The proposal has recently been resurfaced as a potential solution to the deep seated poverty crisis within the United Kingdom by politicians from across the party spectrum, like John McDonnell and Jonathan Reynolds. With the (relatively) new leadership of the Labour party elected on an explicitly socialist platform, there has never been a better time for the party to adopt a policy in favour of a universal basic income.

A universal basic income has five key components. It is universal, and every citizen is entitled to receive it. A person does not have to work, or show any willingness to work, in order to receive it. It is not dependent on family size or household numbers. It is periodic, and it is delivered in cash, rather than a voucher that can be exchanged for food or services, and it is up to each individual how they wish to spend it.

There is a moral argument for UBI that cannot be ignored. This should form the foundation for any proposal for a UBI policy to be adopted by any major political party. With rising levels of inequality and poverty in the United Kingdom, new and innovative responses are needed to address this. Measures to eliminate in and out of work poverty needs to be a key component of any political party’s next general election manifesto. Crucially, the fight for social justice should not end at providing a roof over someone’s head and food on the table. We should be fighting for more than the right merely to survive.

Early partial UBI schemes were usually linked to an obligation to perform some form of socially valued work. A true UBI is unconditional and is not linked to any other form of benefit or any “obligation” or willingness to work. A homemaker, a student, a pensioner, and a CEO are equally entitled to it. And this is at the heart of the financial and economic case for UBI. When humans aren’t working all hours of the day just to make ends meet, they can spend more time and energy developing their own projects; inventing, innovating and experimenting with new ideas, and technologies and business enterprises. This basic level of security would unlock the innovative potential of the whole population, which would otherwise be wasted. This is all the more important in an economy increasingly dependent upon technological and creative industries.

Furthermore, over-work is related to a whole host of mental and physical illnesses. A reduction of these work-related conditions would promise to hugely lighten the burden on the NHS. UBI frees people up to invest more time in their own health, and the health of their families. And moreover, having access to a reliable income means that people will reliably be spending, rather than saving or scraping by with little access to funds. This means that demand in an economy remains stable. Other kinds of welfare payments (such as housing benefit and jobseekers’ allowance) don’t play such an important role in stabilising levels of demand in the economy, as they don’t stay in the pockets of those who are most likely to otherwise have an unstable income. It can be used to top up wages, but it is important that it is not restricted to this role, and should be enough for a person to live on. In turn, this would hopefully push employers to ensure workers are given suitable conditions of employment as an incentive to continue working.

A basic income needs to be funded. But how? In the UK, the simplest way to pay for the system would be through a system of progressive taxation. Any taxation package would also need to include legal measures to close the existing loopholes that exist for the wealthy to funnel their income to tax avoidance schemes. It is a basic tenant of UK society that the rich should pay more tax, relative to their income, in order to redistribute wealth to the less well off in society.

In most proposals concerning UBI, a stripping back (or abolition) of existing means-tested benefit and welfare support is also included. While benefits such as job seeker’s allowance could be abolished, non means-tested disability benefits and non means tested child benefit would still need to exist to support those members of the community. Additionally, any disability benefit that is to be taken up by as many disabled citizens as possible must be simpler, less bureaucratic and discriminatory than that which currently exists in the UK. Existing working tax credits, already being dismantled by the Conservative government, would no longer be necessary — the UBI each citizen would receive would help bridge the gap between low wages and a decent quality of life.

Parents of children should be entitled to a non means-tested child benefit until the age of 18, at which point the child will receive the UBI. If for any reason a child or young person has been estranged from their family or needs to receive the UBI from an age earlier than 18, there should be clear procedures in place to enable a young person to apply to receive it at an earlier age.

Any measure like UBI needs to be accompanied by a process that will enable those residing in the country through illegal or unrecognised systems of migration a simple method of gaining citizenship, or permission for long term residency. The citizenship requirement of UBI is one that is contested — should it be limited to legal citizens? Or should it include those with a right to residency for a certain length of time? Are students included? Migrant families of legal citizens? These are issues that need to be addressed. The worry remains that for politicians within the UK, racist fears may have precedence to principles.

The uptake of a UBI scheme is likely to be higher under a system whereby every citizen receives it. Removing the stigma and shame that currently accompanies benefits in the UK would be a huge step forward. Research has found that stigma has a demonstrable impact on health, and these measures would go a considerable way to reduce the stigma associated with governmental benefits.

UBI would also address the unemployment trap generated by low-paid, insecure work. When this is combined with extortionate childcare or disability costs, for many people it does not make sense to take on work that will not pay. As UBI would not stop if a person began a waged job, there would be less of a risk to undertaking paid work, particularly if it is temporary. The solutions to this problem lie in creating well-paid, secure, accessible work. This is in sharp contrast to the solutions proposed by the Conservative and New Labour governments; preferring to keep governmental benefits at below-poverty wages. The argument, steeped in the ideologies of the Poor Laws of the nineteenth century, holds that anything above what is needed for basic survival provides a disincentive to work. Under a UBI system, you are given the income regardless of your economic circumstances. Therefore, it is indisputable that you are bound be better off financially if you’re working.

Our generation’s experience of work is radically different to that of our parents. In a world dominated by insecure work and temporary contracts, the need to provide citizens with stability of income and increased protection for low paid workers is paramount. A UBI must be implemented in collaboration with measures to secure and defend the welfare state, a properly funded education system, and public services like the NHS must stay free. A UBI is inevitable — but socialist political parties must shape the public discourse on the issue if it is truly to help those most in need.

The post Money for nothing? appeared first on New thinking for the British economy.

Britain’s economy has deep, structural problems.

Investment

The proportion of GDP invested by the UK is lower than almost anywhere else in the world. Excluding intellectual property, the ratio for the last quarter of 2015 had dropped to 12.7%. The world average is about 24% and in China it is little short of 50%. Fixed asset depreciation in the UK is running at about 11.5% per annum, so our net investment as a proportion of GDP is barely 1%. Just to avoid our accumulated capital assets being diluted down by our rising population we need to invest approximately 4% of our annual GDP. Furthermore, of the very low total we do have, barely a quarter is spent on machinery and technology, which are the only real drivers of increased output per head. This is why productivity in the UK is almost static.

Deindustrialisation

The proportion of UK GDP arising from manufacturing is now barely 10%, having been almost a third of GDP as late as 1970. Almost all low- and medium-tech internationally tradeable manufacturing activity has been wiped out. As a result we have lost very large numbers of good quality blue collar jobs; we have enormous regional imbalances in incomes, wealth and life chances; we have lost out on the productivity gains which manufacturing is much better at producing than services; and – perhaps most crucially of all – as most of our exports are goods rather than services, we do not have enough to sell to the rest of the world to enable us to pay our way.

Balance of Payments

Partly because of our large and rising trade deficit, we have the biggest balance of payments deficit of any advanced industrialised economy. It is not just our trade performance, however, which is a problem in this regard. We also now have a very substantial negative investment income position with the rest of the world, further aggravated by large transfers to the EU, net remittances abroad and on our aid programmes. By the last quarter of 2015, our balance of payments deficit was running at 7% of GDP and it appears still to be on a rising trend.

Debt

Both as a nation, through our government and as individuals, we are piling up debt far faster than our capacity to repay it. Our balance of payment has to be financed by the UK either selling assets or borrowing more money and we have been doing both. A major reason for our worsening balance on income from abroad is that every £100bn deficit financed by the sale of assets or borrowing – typically at the rate of about 5% per annum – adds another £5bn to our income deficiency cumulatively each year. Because the government deficit is largely the mirror image of our trade deficit, there is no prospect of the government ceasing to have its own very large deficit unless our foreign payments position is brought back under control.

Growth

What relatively little growth we have achieved in recent years, compared with the experience in many other parts of the world, has been driven very largely by ultra-low interest rates and asset inflation pushing up consumer demand rather than by growth being led by net trade and investment. We have seen a welcome reduction in unemployment but no increase in average incomes, partly as a result of our rising population and partly because any increase in household expenditure has been financed by rising debt.

The questions which need to be addressed, in the light of these imbalances, are:

1. Are current slow growth trends sustainable or is there – at best – going to be a long period of very low GDP increase, especially per head of our rising population, leading to static living standards for the foreseeable future or – at worst – a downturn in performance making conditions for many people even worse?
2. Are there any policy prescriptions which could reverse the imbalances, to enable the UK economy to perform much better? Would it be possible to do this without getting investment up from well under 13% to perhaps 20% of GDP or more? Could we get our balance of payments position into manageable condition without something like 15% of our GDP coming from manufacturing? What would a model of the main UK economic aggregates look like if we were to aim to get back to a sustainable growth rate of 3% or 4% per annum?
3. If the economy is to be rebalanced, how are the financial incentives to make this happen going to be created and what should the role of government be? How much would depend on demand side changes being made on monetary, fiscal and exchange rate policies and how much on supply side initiatives on training, planning. Would this need to be accompanied by some kind of industrial strategy?

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Keep a look out for our upcoming pieces examining how to rebalance the British Economy.

The post We need to rebalance the British economy appeared first on New thinking for the British economy.

Say, for instance, that a community group takes over an abandoned piece of land in their neighbourhood and works together to transform it into a thriving and well-used community garden and growing space. This happened in the Lower East Side of New York City in the 1980s. The new community garden will no doubt improve the physical environment of the neighbourhood, make it a more attractive and pleasant place to be in, and help to improve the wellbeing of the people who use it. On the surface everything seems great – a local community have come together to improve the area their live in. This is perhaps ‘regeneration’ as it should be. It seems that land is often safer in the hands of residents than those of land owners: Lower East Side landlords reportedly took it upon themselves to burn out occupants for insurance monies rather than let the land be put to good use. It was this act of destruction that inspired the founding of the community garden.

A more everyday – but no less devastating – problem arises when the value of properties nearby the now-thriving community garden begin to rise. The garden has had a positive impact on the ‘locational value’ of the neighbourhood – a spill-over effect or ‘positive externality’ that could eventually threaten the existence of the community which the garden helps to sustain. Rising property values will begin to attract buy-to-let investors, small-scale developers and, worst of all, land speculators – putting in motion a series of processes that will see rising rents push existing residents and businesses out. These economic agents are drawn to the area by the prospect of appropriating the positive spill-over in value produced by the garden for their own private gain. What’s worse, unless it is adequately protected by planning policy, the community garden could find itself under threat from profit-hungry developers and speculators. This is one of the tragic paradoxes of regeneration – that those places and activities which initially make an area attractive and desirable are ultimately displaced or destroyed as gentrification takes hold.

Enter land value tax (LVT) – an idea with a long lineage in economic thought and perhaps the simplest solution to the vexatious problem of regeneration-cum-gentrification.

Rather than tax property – as council tax and business rates do – LVT taxes the unimproved value of land. Agricultural, industrial, commercial and residential land all have different values – largely as a result of their different location and the use that is most appropriate to these locations. Thus, LVT is a tax on the ‘locational value’ of a piece of land, though this value is admittedly mediated through land-use designation of the planning system. Set at a flat rate of 5-10%, LVT, rises in line with the value of a piece of land. Hence, the rise in land value that results from any improvement to a neighbourhood or town centre – be it a community garden, new transport links, local street market, or enterprise hub – will be captured and socialised through an LVT. The windfall in land value that is produced by regeneration can no longer be appropriated by predatory developers and speculators, but is made available to the community that produced it for reinvestment in the continuing improvement of their area.

There are many arguments for LVT: it’s efficient and hard to avoid, encourages productive economic activity, and tackles inequality. To these we can now add a further point in favour: LVT allows local communities to enjoy the benefits of regeneration whilst mitigating against the risk of gentrification that regeneration brings.

The post Introduce a land value tax to curb gentrification appeared first on New thinking for the British economy.