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From increasingly ‘regular’ contributor, Alasdair, definitely not George, Galloway
For me, this started from watching ‘Politics Today’ (BBC2) on Wednesday 20th October (Truss’s final PMQs). You can find it here https://www.bbc.co.uk/iplayer/episode/m001d98k/politics-live-19102022. There is no need to sit through the whole thing. The part I am interested in – a rant by the then Northern Ireland Minister, Steve Baker – comes toward the end, starting at 1 hour and 31 minutes.
His argument is that since the National Insurance Act 1911 (not a typo – 1911!) there has been “100 years of reckless spending promises that couldn’t be honestly be funded through tax”. This, he argues, is where Truss was right. Growth was crucial to the country to meet its commitments.
In particular, he is concerned about pensions, on which he says there will be a default within 20 years because the National Insurance Fund will be “exhausted”. The only way to avoid this is through growth, he claims.
Now, there is no doubt that economic growth – and with it more revenue coming in through tax (more people in employment, more buying and selling so more VAT etc) – would be an advantage. However, it always escaped me why taxes have to be lowered first to encourage more entrepreneurship.
First entrepreneurship is not the only way to growth. Another would be to encourage leading firms in a particular industry (or probably better, industries) to amalgamate and secure economies of scale, and take a larger part of world demand.
But more importantly, it seems to me to get the horse in before the cart. I don’t imagine there are too many potential entrepreneurs reading this, but imagine if you will that you have a pretty good business idea. What is going to give you most encouragement to act on it?
- That there is good strong demand for your product, you can find suitable premises at a good price, there are plenty, well trained reliable employees to be hired
- The government fixes tax so that you won’t pay as much tax on the profits you make.
My view is the former – that you need to make the profit before you are going to start to worry how much of it the government will leave you with. In fact many small business never have to worry their heads about how much tax they will pay – they aren’t in business for long enough.
How much of Thatcher’s support for entrepreneurship was just a cover for tax cuts for her wealthy pals? How many of the new small firms that it set up were simply bought over (or worse, forced out of business) by much bigger concerns?
The UK’s economic model, Baker asserts, is based on cheap credit which reorientates the UK away from production, causes the productivity problem and drives up house prices. And yet, putting your entrepreneurial hat back on, if interest rates are nice and low would this not encourage people to set up in business? The problem with the UK’s economic model is that sources of credit (or as you will know them, the banks) seek profits much too quickly. There is no sense of partnership, but instead a demand to show profit quickly, when all the evidence is that small businesses need time to mature – to find a customer base, to iron out teething problems etc.
As Mark Blyth has pointed out “the UK’s growth model is an economy of rents, where ownership of assets that generates income (rents) and the squeezing of labour combine to produce one of the most unequal and unproductive economies in the OECD.”
In any case, I don’t recognise Baker’s claim that “credit has been so cheap for so long”. I’m happy to give him since 2008, when the banks blew up the economy, but before then? I still remember Black Wednesday when rates went up from 8% to 15% and back to 8% in a matter of hours. I remember when Thatcher won the 1979 election and following the economic catastrophe that was Friedmanite economics, interest rates went up to “squeeze inflation out of the system”. Other than the last 15 years or so, I just don’t recognise this “rates were too low” claim.
He is also critical of “money creation”, the best example of which is Modern Monetary Theory. This suggests that we should worry less about deficit, and more about having the economy working at or near capacity, subject to not breaching an inflation target. Even a nodding acquaintance with such as Stephanie Kelton’s work would show that MMT writers would not have endorsed Kwarteng’s tax cutting budget, because of the rate of inflation.
The alternative, of course is Quantitative Easing (QE), which does much the same thing as MMT, except in MMT it’s the government doing the spending, setting the policy aims and so on. With QE, government buys back government debt from banks and they decide how the funds will be spent. Which one do you think the banking fraternity prefer?
But this is the usual guff that such as Baker talk, so why does it anger me so? At one point, as above the claims that the National Insurance fund will be exhausted and pension cheques will bounce as a result. Clearly this is not something that anyone would want, but what does he mean?
Pensions etc are paid from the National Insurance fund, which sometimes runs at a profit (which the government will take out) and sometimes at a loss (so the government has to stick some more money in). Baker’s argument is within 20 years the loss on the National Insurance Account will be so great that commitments cannot be met. This is just wrong for two reasons.
- As MMT points out, the UK’s is a sovereign currency. Only the UK government can issue Pounds Sterling. Pensioners want these to buy from supermarkets, pay the energy bill etc (if they can).
- But more importantly – and this is really why I am angry about this – there is a way to fill up the National Insurance Account some more, but no one – and I mean NO ONE – dare mention it any more (it seems to me at least). Stick up taxes, and I don’t mean a penny or two. I mean REALLY put them up. Introduce new taxes that will assist with equalising the UK. A Land Tax would be a good start (for one thing it’s the one asset that is impossible to put beyond the reach of the state). When I started in employment (1977), the standard rate of tax was something like 33%. Since 1979, governments, including Labour governments, have acquiesced in a rush to tax less than the other party (or at least not any more). Other countries – but by no means all – have done the same thing, so such as Baker can make out how much people in the UK are taxed.
This is all possible because the hegemony of “allowing people to spend more of what they earn” – ie a sort of radical personal independence. But at the same time as we think we should be allowed to decide how to spend as much as possible of what we earn by ourselves, paying “greasy spoon café” prices as a result, we also think we should get “table d’hote” service from the public sector, and if anything goes wrong – at least in Scotland – it must be the fault of the government, who, as we have all been told endlessly, couldn’t run a minodge.
It is in this sense that I have some sympathy for at least one thing that Baker said (though for quite different reasons), that we “have lived beyond our means”.
Baker’s argument that “100 years of political economy since 1991 Act is now blowing up because we have lived too long on cheap credit, because politicians make promises they can’t honestly meet” is quite simply wrong and unsupported by the evidence.
Likewise, his argument that the problem is with social democratic ideas (for instance the kind the Labour Party used to at least talk about) that government should do more, spend more, tax more, regulate more and so on (ie all the things that Baker and his chums don’t want) is wrong, perishes on two rocks
- We live in a community. It always makes me laugh when “entrepreneurs” complain about having to pay tax, when they produce the wealth. At the same time, they will quite happily use the road system to get their product to market, expect the Police to keep the peace so that they can do business, expect employees with the kind of skills they need to be churned out by the education and training systems, and these same employees to be kept in decent health by a publicly funded health system. Where do the resources come from for that?
- The Welfare State ONLY become unsupportable if we will it so. Or, more dangerously, it we stop caring. There has been a proposal to reduce the standard rate of tax to 19% which is about 60% of the standard rate of tax in the 1970s. The argument for this is that high tax pushes out enterprise, yet the top marginal tax rate in Denmark is 55.9%. There is, though no sign of growth collapsing there. Compared to the situation before the pandemic, Eurozone growth was 1.8%, while the UK lost 0.2%: https://commonslibrary.parliament.uk/research-briefings/sn02784/#:~:text=In%20the%20Eurozone%2C%20GDP%20growth,UK%20GDP%20growth%20was%207.5%25
UK GDP per capita is $47,000, while Danish GDP per capita is $67000 – almost half as much again, higher personal taxes and all.
Why might this be? See my comments about paying “greasy spoon café” prices but expecting a “table d’hote” quality of service. Perhaps the Danes have got the idea that if you don’t pay the price, you don’t get the quality? Or put another way, if their public services didn’t meet their needs, how happy would they be to pay taxes at that rate?
But do you see another party prepared to look the Scottish electorate in the eye, to say “we are going to provide you with 21st century public services, not just health but education, housing etc as well.”. OK, I think they say this (sometimes, usually in the run up to, or during elections), but would it not be more honest to say “like the Scandinavians, tax will have to go up to pay for it”.
As Baker points out, that would only be honest. Instead, we have politicians telling us how great public services will be, if only we would pay for them. Or maybe not all politicians. Michelle Thomson has recently put a Scottish Government report on a National Care Service to flight by asking where the money is coming from.
What is needed are two things
- Politicians with the haw maws to tell their PR and spin doctors to shut it, and instead to tell the public, if you want this (whatever “this” might be) you’ll have to pay for it.
- A debate on how much tax is reasonable, if we are to live together in a community which is genuinely “better and fairer”, rather than a warm, cuddly soundbite. If we just work out what it is that is “better and fairer” without putting a cost on it, hiding the latter without winning the debate, we just store up trouble for ourselves.
This is the key to Baker’s argument. He was in discussion with Lisa Nandy (who always looks to me like a rabbit in the headlights) who mainly argued the Tories have had 12 years to sort this out, but never, not once, said “well what about filling the gap with higher taxes”. And to be honest I don’t really blame her. Just as Brown would have been crucified if he had dared regulate the bankers before 2008 (and in that way maybe minimised the disaster), Nandy was not going to cover herself in the opprobrium that would have followed by arguing for THAT. Baker knew this, and so could happily argue if we don’t reduce the demands on the Welfare State – fewer pension rights, maybe in due course removing health care, replacing current education with a privatised system – then its going to be bust. He knew the only counter argument was to argue for a higher proportion of national wealth to go to public services via tax rises, repealing the cuts that his party – and Labour – have introduced over the last 40 years.
Arguing for higher tax would be difficult – I don’t doubt that – but during the late 60s and into the 70s arguing for lower taxes was difficult as well. Hayek for much of that time was considered a crank, but these ideas became mainstream. Is there a reason the more communitarian ideas of the Danes, and other Scandinavians, cannot become central here? Well, there is one – nobody makes the argument. The consequence is that in practical terms Baker is right. As we reduce taxation we make the Welfare State’s survival more marginal, and if the libertarian, neo liberal ideas of our new PM, are not challenged, even thought they could be, Baker will be proven right. And that makes me angry.