Why I’m Attending the Rally Against Debt
Hey all,
I'm not sure how many of you have heard of the Rally Against Debt, but it's going to be a small peaceful gathering for the silent majority to air their concerns about the delusions which are being spread in the mainstream that our level of borrowing is reasonable.
The national debt is not a partisan issue -- whether you prefer great public services or business-friendly taxes, everybody should understand that running sustained deficits is an issue; so people of all political persuasions are welcome to come to the rally and show their support.
The unions want to think that we can clear the deficit purely with growth. This is a very naive position to take. Let's assume for the sake of argument that we can achieve 2.5% growth per year for the next ten years (average from 1955 to 2010 was 2.36%), without lowering any taxes, so the tax intake will grow by 3% real terms per year.
In real terms £2011, this will raise the tax intake from £548 billion in 2011 to £701 billion in 2021. This doesn't appear too far off our current public spend of £704 billion per year, but unfortunately, there's a missing factor in here.
As the national debt increases, so too will the interest, so let's take a look at how much the debt will increase assuming £704 billion spending per year and 2.5% growth rates per year. The total spend will be £7.04 trillion (£2011) and the total intake will be £6.292 trillion. This will add £748 billion to the current national debt of £1,105 billion (excluding pension liabilities & PFI).
But even this figure doesn't calculate it all, because I haven't increased public spending for interest. Taking the total spend of £7.04 trillion and the current interest rate of 3.91%, we can work out that interest repayments will increase from £43.3 billion per year to £72 billion per year. As I'm not going to calculate the interest each year for the ten years, we'll just use 50% of this increase per year over the ten years to work out the total spend again. The real rate would be higher than this, because the interest would compound on the debt, and create yet higher interest.
The increase is £28.7 billion over ten years, so we'll use half of this (the mean increase) and multiply by ten and add to the debt in ten years. This brings the debt up to £1.996 trillion (£2011) in 2021 and the interest repayment up to £78 billion, so public spending increases to £738.7 billion per year in 2021, with a £701 billion tax intake.
In other words, even with an unrealistic rate of growth, an assumption of no more recessions, an assumption that our tax rates are not vastly reducing potential growth, an assumption that our credit rating would not get downgraded, and an underestimated debt increase due to interest, we still cannot achieve a balanced budget by 2021 doing what the unions want.
Now that we understand exactly what the alternative is, we can start to look at some of the other important facts and explain why the scare stories which have been propagated are so overstated.
Cash spending will rise from £704 billion to £763.8 billion between 2011 and 2015. This represents a cash terms increase of 8.4% and a real terms cut of 3.7% in public spending, over four years. In other words, spending will fall by less than 1% per year in real terms.
Public spending in real terms in 2015 will return to 2008 levels, and public spending as a percent of GDP will return to 2006 levels. These are the cuts which we are constantly told go too far, too fast and will take us back to the 80s.
Because some areas (such as the NHS & International Aid) have had their spending protected, and the size of the debt interest will increase, swallowing more and more of our public outlay, some areas will suffer cuts in the region of 20% over the four years, however, these are the exception and not the rule.
Public sector jobs will, unfortunately, be lost, but these are jobs which were built on an unsustainable platform, and as such the far-left putting all of the blame on the current government is painfully naive, but also seems to be very effective given its lack of substance.
Although it is an unfortunate circumstance for anybody to find themselves in, the damage caused by these job losses will be largely personal, as the cost to the taxpayer from funding a public sector job is significantly higher than funding benefits for the same worker. As these people move into the private sector, growth will start to rise and as such, tax intake will start to rise.
The rally will support minimisation and eventual repayment of our debt, freeing up £120 million a day for spending on better public services, tax cuts or investments in assets which will pay off over the years instead of needing to be paid off.
Will it be as big as the union rally? Of course it won't, it doesn't have the financial backing of the massive unions and the self-interested people marching for their own jobs and salaries. It's a lot harder to get people to march for their country and the future generations than for their own immediate interests.
However, this can be the start of a movement which can deliver real change. A movement which is vocal, peaceful and supports the majority view that public spending has gone too far, that our taxation regime is uncompetitive and needs to be relaxed to encourage investment, and that with the right fiscal policy, this country can become industrious and productive once again.
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April 8th, 2011 - 13:57
Why do you choose to look at just a single part of the alternative (policies for growth), and ignore the other parts – closing the tax gap & raising more income from a tobin/robin hood tax and also ideas not supported by the tuc march for the alternative – eg: ending prohibition of drugs, a windfall tax on the richest 1000 people (whose wealth increased by 30% – £77bn between 2009 and 2010) and scrapping trident/trident replacement?
Your analysis about growth may be perfectly correct (and I haven’t had the time to actually look through your figures, but I’m going to assume it is right), but by ignoring the rest of the package you do not do your argument justice.
The other side of the argument is the question of whether austerity measures will lead to another recession.. in a week or so we should get the figure for UK GDP in Q1 2011, and if it’s another reduction then we will be officially in a recession, and recessions are always accompanied by an increase in govt. deficit and debt afaik.
Whilst some lefties will argue the deficit is not a problem, that is not my position – I just think there are better ways to deal with it than these austerity measures.
April 8th, 2011 - 22:08
Tom, thanks for your comment.
Having done a lot of study into the viability of a Robin Hood tax, it seems to be nothing more than a repackaged Tobin tax, which was little more than a repackaged financial transactions tax. What appears to be a tiny tax (0.05% on financial transactions) would in fact be devastating in the forex market which is mostly a market of very small profit margins with very large sums of money.
I can’t show you all of the maths here, as I’m not a forex investor by trade (but I have dabbled), but something like fifty percent of all of the profits on current forex transactions would be taxed by this measure.
As you can imagine, this would vastly reduce the number of transactions on the forex, and as a unilateral measure would quickly see the London stock exchange become very uncompetitive in this area, and specialist forex traders move away from the country. It’s just a badly thought-out idea.
In my opinion, the banks should be regulated via breaking them up into safe-practice banks which would follow a banking code and be protected by the taxpayer insurance, and ‘casino’ operations which would not be liable to the code and would not be protected if they went bust (more: http://logicalconclusion.net/2011/02/the-new-banking-crisis/). The levy already in place is also a good measure to bring some cash out of the financial sector.
I’ve always been in favour of scrapping prohibition of drugs, and it would help somewhat with the cuts to the policing and justice budgets, as well as providing a tax revenue circa £1-2 billion a year, but might result in increased costs to the NHS. It’s a good idea but alone it won’t solve the debt problem.
Windfall taxes would just result in a taxodus of the richest people leaving for havens and taking their employees with them. Punishing people for being rich is not good policy. Scrapping trident, I am somewhat in favour of, but it might jeopardise our position on the UN security council. Again, the financial benefits are not enough to deal with the debt problem.
For what it’s worth, I’m not a supporter of everything this government has done. I think the VAT increase is a disasterous policy which probably risks putting the economy into contraction, and I think some areas of spending should have been frozen (foreign aid, EU contributions) or delayed (climate change act).
I also think the 50% tax rate is probably causing growth to stagnate, and hope that Osborne’s review comes back and it is scrapped, which I believe will help kickstart growth again.
All in all, I highlighted the policies for growth because there are a lot of lefties, including those in the unions, who think that we can use taxes and growth with no cuts at all to get out of the deficit issue, which I feel to be wildly mistaken if only because taxes usually slow growth. Public spending is nearly 50% of GDP, which is obscene by any measure.
April 10th, 2011 - 19:15
Thankyou for your considered reply.
Yes, as far as I know a Robin Hood tax is a renamed Tobin tax, but as many people look blankly at me when I mention a Tobin tax, I tend to use robin hood tax even though I don’t like the name.
I would not claim to be an expert in such things, and you may be right, it’s one of the first times I’ve actually seen a considered response to the suggestion rather than a knee-jerk taxation is bad type of response.
We are in absolute agreement about the separation of high street and casino style banks though, if this separation had been in place in 2008, then we could have let the casino banks go to the wall and not been in the situation we are now.
I think you understimate the amount of net revenue for drug legalisation. Transform have estimated that ending prohibition on heroin and cocaine could produce a net saving to the economy (not govt. revenue) of between £4.5bn and £14bn depending on change in usage patters (+100% usage -> -50% usage). The bulk of that is made up of reduction in cost of crime, but it’s not clear how much of that is savings in the criminal justice system, and how much is savings to businesses/individuals.
http://www.tdpf.org.uk/TransformCBApaper.pdf
IDMU estimate that direct taxation revenue from legalised drugs would be nearly £4bn – but this only counts excise duties, not the income taxes/business taxes that would also result from legalisation.
Aside from the Transform document, I’ve never seen any reasonable research into potential increase in costs to NHS of legalising drugs so I can’t account for that, except to note that any increase in costs would be down to a rise in use accounting for more problems than are solved by the existence of a regulated supply.
Nothing like enough to solve the debt problem of course, but then I’m not trying to claim any single measure would be, but that as part of a package of measures that could be used in place of (some) cuts.
The windfall tax is not about punishing people because they are rich, it’s about saying that it is not right that when the economy is in recession and many people are losing jobs and services, that the richest 1,000 people should see their wealth increase vastly. If the richest 1,000 people had seen their wealth decrease in line with the economy, or even if it had been stagnant, I would not be suggesting this.
Totally agree about VAT, of all the places to raise tax, that is just about the worst, if for no other reason than psychology – people see prices rising, at a time when they are concerned about their job, bad combination, I think worse than if income tax was raised so people saw their income fall slightly. (No peer-reviewed evidence for that bit of analysis btw, just my thought).
Essentially this comes down to the choice of closing the deficit by cutting spending or raising income (or rather what ratio of each you do). Personally my economic instinct is that raising income (through taxation in the right places) is going to do less damage to an economy in weak, jobless growth than cutting spending.
I hope I’m wrong, but I think we are going to be back in recession when the Q1 2011 GDP figures are released (should be in the next few days I think), and that can only be bad for government finances.
April 10th, 2011 - 23:06
Tom,
Thanks for your well thought out reply.
I wasn’t saying that the Robin Hood tax was a rebranded Tobin tax to be pedantic, I mentioned it because the tax has been proposed three or four times, and many governments have looked at it and chosen not to implement it.
In the UK, we are relatively equal with Switzerland and Hong Kong in the ‘race to the bottom’ for financial services. For better or for worse, this has left our tax pocket very exposed to the financial sector, and as such I’d be very worried about anything which could make the financial sector uncompetitive.
As I said, I’m not a forex trader, but I know a number of investment bankers who have tried to explain forex to me, and from what I can put together, the Tobin tax could tax as much as 70% of their profits on a typical forex transaction. In practice, this would widen the profit margin which is required to make a trade in the UK, but the Swiss/HK/NY would be able to make the trade.
As an example, (I know the number is much smaller but the margins are much smaller too and I don’t want to catch you or myself up on numbers) let’s say you’re taxed at 20% on every chocolate bar you sell, but another guy is taxed at 10%. If you bought it for £0.80, you couldn’t sell it to me for £1 and make a profit, but he could.
If that’s the situation this tax puts the UK banks in, against the Swiss/Hong Kong/New York banks, in the way that my limited knowledge makes me believe it is, then this is my main worry about a Tobin tax.
I may have underestimated the figures for drug legalisation as I was concentrating purely on tax revenue (believe the industry is about £3 billion so even at huge tax rates tax would be no higher than £1 billion) but even if we say £10 billion it’s still a tiny part of the deficit (it’s less than 10%) and you have to account for the higher health sector costs of increased drug use and increased access to health for existing users who currently don’t want to say they have a problem.
“The windfall tax is not about punishing people because they are rich, it’s about saying that it is not right that when the economy is in recession and many people are losing jobs and services, that the richest 1,000 people should see their wealth increase vastly. If the richest 1,000 people had seen their wealth decrease in line with the economy, or even if it had been stagnant, I would not be suggesting this.”
This seems very ideological, in my opinion. I don’t think it’s right to tell people they can’t become more wealthy, especially when their wealth is likely to be linked to hundreds of employees or large investments in British business. If you want to tax the rich, I think a mansion tax at a reasonable level (not £1 million, higher) would be acceptable.
The OECD suggests that consumption taxes and recurring property taxes are the most compatible with growth, so VAT isn’t the worst in terms of growth but it is very aggressive to increase VAT at a time like this, and seems to hit pensioners and the unemployed the hardest (but this is somewhat offset for the working poor by Income Tax allowance rise).
I, too, think that a lot of it comes down to proportions of cuts versus proportions of tax rises, but in this country, we’re about as over-taxed as can be.
Take a (fairly) typical earner on £25,000. He’ll pay £3705 in tax and £2120 in national insurance, totalling £5825. This means essentially if he works Monday to Friday, one of those days he is working entirely for the state.
But that’s not all, he’ll pay council tax (no less than £1000 a year), VAT (probably close to £2500), fuel duty (£500 or so), road tax (£120) and other taxes depending on what he chooses to do. Even just what’s above comes to £9945, just under 40% of the money he earns.
Essentially he’s working Monday & tuesday for the state, and wednesday, thursday & friday for himself. This guy isn’t rich, he’s a typical wage earner. Can he really afford any more tax, or should we shove it all on the very rich, and risk losing the job creators and big businesses to greener pastures?
This country is *very* over-taxed, Tom, I really don’t see that as an option any more.
I don’t think we’ll be back in recession, but I think the growth is going to be terrible for Q1 2011. Maybe 0.2-0.3%.