Some Major Topical Political Issues in UK

The Deficit

(Originally written 11th February 2011)

Is the Deficit a Serious Problem?

Yes, but not as serious as the government pretends. Contrary to what they say, the deficit as a percentage of GDP is not the worst ever and is not, as the government claimed, causing international markets to desert the pound and so depress the value of the pound relative to other currencies. However it is large and does need to be reduced, but the problem is nothing like as urgent as the government makes out.

Are the Cuts Necessary?

Definitely not! This is not a matter of how urgent the need is to cut the deficit, but a case of this being completely the wrong way to go about it. The cuts are almost entirely being achieved by cutting services and so reducing the number of people employed to provide them. This creates an immediate increase in unemployment, with consequent increases in government expenditure on unemployment benefit (or whatever else they choose to call it this week) and a reduction in consumer expenditure on goods and services. That leads to further cuts in the numbers employed, this time by companies providing those goods and services, producing a sort of snowball effect. Not only does this result in total government expenditure increasing by more than the original savings, but it also means people pay less tax (PAYE and VAT) because they earn less and spend less. Cuts are well known to increase the government's financial deficit in times of recession such as we are now experiencing, as well as making the recession worse. Nick Pearce of the well-respected think tank the Institute for Public Policy Research said in his blog on 3rd Feb 2011 Arguing that cutting spending in the teeth of the recession would have cut the UK's deficits or its debt stock is not just economically illiterate: it is the real deficit denial.

The government's second excuse for making cuts is that this will make more room for private companies, who will increase their spending to fill the vacuum caused by the cut in public spending. This is nonsensical. The effects on private companies will be two-fold. First, as described above, the resultant reduction in consumer spending will reduce sales by private companies. Second, much of the government spending being cut is in the form of purchases of goods and services from private companies, again reducing their sales, and hence their profits and the numbers of people they employ. In these circumstances private companies understandably cut back on their investment spending; they only increase it when they expect their sales to increase.

So What Should Be Done?

The deficit is the difference between government expenditure and government income. It arose because the Blair/Brown governments borrowed far too much to finance expenditure instead of using the main source of sustainable government income - tax. This is easily corrected by increasing tax now. If government expenditure is increased (such as building railways, hospitals and schools and maintaining roads properly) instead of being decreased, this will stimulate the economy by having the opposite effect to that of the cuts, and without imposing misery on the poorest and most vulnerable and destroying so much that is valuable in our society (e.g. libraries, forests).

Won't Increasing Tax Also Make the Economy Shrink?

If it is done wrongly, yes it will, but not if it is done properly. It is well established that the poorest members of society spend all or almost all of what they receive on necessities such as food, heating, clothing and transport, while richer people are able to save more and in fact do so. This means that extra tax applied to the poor immediately reduces the money circulating in the economy, as well as imposing an unfair burden on those least able to bear it, but extra tax applied to the rich does not have that effect but instead reduces how much they save. The answer, therefore, is to increase taxes on the rich, by a more progressive income tax system, and if anything reduce VAT which hits the poor hardest. This will directly reduce the deficit without damaging the economy and without hitting those least able to withstand it.

The top rate of income tax was reduced by the extremely right wing Thatcher governments to 40% from the higher levels that prevailed earlier. What is needed now is to increase the tax for the very rich, not by increasing the 40% rate but by introducing higher rate bands for those with very high incomes at a series of increasing rates, perhaps in 5% steps as was the case until 1988, when the highest rate was 60%. In addition, there is a need to clamp down on the use of tax havens and so force people to pay the tax they should. Income earned in this country should be taxed in this country, regardless of whether the earner lives (or the company is based) in this country or not, ending the special status of "non-doms" (with allowance made for tax they can prove they paid on UK income in their country of residence).

All three major political parties, and the media, are totally ignoring the option of increasing taxes on the rich, presumably because their leaders would be among the ones to suffer.

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