How to fix the structural deficit, the fair way

There has been considerable debate about how best to fix the structural deficit.  Figures of £25billion have been posited as how much is needed to do this.  There is some dispute as to whether this figure is really accurate; but for now the assumption that it is can be made.  There is also confusion between the various measures of balancing the books.

 

The speech by Nick Clegg at the Mansion House talks about both the commitment to end the structural deficit by 2018 (which is relatively uncontroversial) while also committing the party to George Osborne’s aim to reduce debt as a proportion of GDP by 2016-17.  The latter is dependent on economic growth and is arguably a small victory for those more critical of Coalition economic policy.  (Indeed, the absence of non-deficit reduction measures from the economic narrative of some top Lib Dems is a brake on the party’s political growth, but that’s a topic for another day.)

 

Below are ten ways in which the difficult task of eliminating the structural deficit can be undertaken in a fairer way.  Some are under active consideration, some are not (and should be).

 

1. Make the ‘pensioner perks’ – the Winter Fuel Allowance, the free TV licence – a taxable benefit and strip out bureaucracy by simply adding the value to the basic state pension. This would not raise much (maybe £0.5bn) but is important.  (There needs to be a discussion about the value of the bus pass, which is used by many working-age people over 60.  It is a matter in the hands of local authorities, but there is an argument to protect this benefit, while making it taxable for wealthy pensioners by adjusting the level of taxable allowances.)

 

2. Adopt a general principle that any cuts to welfare should fall on the non-working-age population in equal measure to those of working age.

3. Commit that after the Treasury study into its implementation is complete, legislation to enable a national Land Value Tax scheme is brought in by 2018 at the latest. This would not help to eliminate the structural deficit but would be an essential component of a fair fiscal system for the years beyond.  Indeed, it appears that even the IFS has shifted its position: ‘We cannot say conclusively that the administrative hurdles to replacing business rates with an LVT could be overcome at reasonable cost. But this is such a powerful idea, and one that has been so comprehensively ignored by governments, that the case for a thorough official effort to design a workable system seems to us to be overwhelming. In particular, significant adjustment costs would be merited if the inefficient and iniquitous system of business rates could be swept away entirely and replaced by an LVT.’

4. Finally bring in the urgent reforms to defence procurement. For too long UK policy has bought unnecessary kit under pressure from the defence industry and pork-barrel politics.  The most recent figures for Government spending on subsidies for the arms trade were in excess of £500million.

 

5. Bring in a UK Living Wage as soon as possible. Implementation of the Gaining from Growth version would make a difference to the tune of £3bn+ in added revenues and welfare savings.

 

6. Increase taxes on the wealthiest, starting with a Mansion Tax and adding the other measures in the tax paper which total around £11bn. Further tax changes could be considered, and Liberal Democrats should support the temporary restoration of the 50p tax rate, even if (and this is of course controversial) its yield is relatively small.

 

7. The quid pro quo is that the proposed increase in the tax threshold would have to be funded from the proceeds of growth not spending cuts. (Not all the £11bn would be spent by 2018 but much of it would.  Nick Clegg’s speech attempts to commit the Lib Dems to a ‘flagship policy’ of increasing the tax threshold which the IFS is uncomfortable with, as well as much of the party; but it is uncosted and its affordability is questionable.  Additionally, the IFS cites its distribution, far from being the ‘workers’ bonus’, as being guided to higher earners and non-working taxpayers such as pensioners.  A more sensible and progressive option would be to look to increase the National Insurance threshold as the economy allows.)

 

8. On housing, whereas the most obvious solutions involve ‘invest to save’ measures that would create jobs and tackle long-term housing issues that would save the country money, but not immediately, much could be achieved by revenue-neutral measures such as using pension fund assets to fund building houses and ending the Housing Revenue Account borrowing cap that absurdly stops councils borrowing against their own assets to build homes. [Interestingly that London Councils report also adopts Liberal Democrat policy of a vacant land tax: the first step towards Land Value Taxation to tax landbanking by developers.]

 

9. There are additional savings – harder to quantify in some cases – from further tax changes. Scrapping the marriage tax break would save £4-500m. Stopping debt-ridden companies offsetting their debt against tax would save more (as would banning state subsidies to utility companies and the like with links to tax avoidance until they clean up their act.) Pressing successfully in Europe for reforms to make largescale corporate tax avoidance harder – even better.

 

10. Of course scrapping Trident replacement would save around £4bn per year.

 

There are of course many other measures which Liberal Democrats would like to see that would eliminate unnecessary Government spending: the elimination of hidden subsidies for new nuclear power stations, as specified in the Coalition Agreement, would be but one.  Any additional revenues available through underspends and the proceeds of growth should be used to fund measures which promote work and reduce inequality, such as childcare support for those on the lowest incomes.

 

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