(Originally written 11th February 2011)
Is the Deficit a Serious Problem?
Are the Cuts Necessary?
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?
Won't Increasing Tax Also Make the Economy Shrink?
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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