The low tax model vs. the welfare state…

…I paraphrase, but a report from the ‘cross-party’ 2020 Public Services Trust, a UK based think tank, entitled The Deficit: The Longer Term View has a very stark outline of the choices facing that society – and by extension our own.

You can read the Report, which frankly looks like a very slightly souped up Powerpoint or Keynote presentation here. It’s always a bit depressing to see the Ernst & Young logo attached to anything, but… what can one do?

Main features?

The Coalition has agreed to a “significantly accelerated reduction” of the structural deficit over the course of this parliament. The main burden of deficit reduction will be borne by reduced spending rather than increased taxes.

And…

But the problem is even more serious than the current debate would suggest. There is little mention of the longer term cost drivers that are only adding to the size of the fiscal black hole.
Even HM Treasury’s projections acknowledge that the costs of our ageing society will push up public spending.
Total age related spending is expected to increase from 20.4% GDP in 2008 to 24.1% (2020) and 26.1% by 2030.
Work for 2020 PST by LSE Professor Howard Glennerster (2010) shows an additional 6% GDP will be needed by 2030 to meet the social costs of ageing while meeting existing cross-party commitments (e.g. reducing child poverty).
Alongside HM Treasury forecasts, this would increase the share of national income spent by government to over 45% by 2020 and nearer 47-48% by 2030.
Given public tax receipts have rarely risen above 40%, Glennerster argues that our current welfare funding arrangements are not sustainable.

But not sustainable in what sense?

If the tax take remains fairly constant and the costs of public services rise (e.g. through ageing, climate change, depreciation of infrastructure) then the funding gap will only get worse.
Whilst GDP growth and productivity improvements will fill some of this, we might have to reconsider the nature of our welfare settlement. How much are we prepared to pay in tax? What do we expect from the state in return?

And there’s a crucial quote beside that:

“The British public want Scandinavian level public services for US level taxes.” Ben Page, Ipsos Mori (2009)

And this is part of a trend that was established in the 1980s – surprise, surprise.

In the early post-war years the UK was a relatively high tax country. The large increases in the UK’s tax burden during the 1960s meant that it remained so into the 1970s.
In most other industrial economies the size of tax burden increased into the 1980s and often beyond. But the absence of a similar trend in the UK means it is now a relatively low-tax country in comparison with the G7 and EU averages.

So, today the UK sits a little behind Germany and…

Latest comparative statistics from the OECD (2009) show that the UK is the lower half of the rankings [at 35% - wbs] for total taxes as a proportion of GDP. Denmark and Sweden top the charts with nearly 50%, while the USA and Japan are fourth and fifth from bottom (each with just under 30%).
The UK’s tax take is similar to that of Germany and New Zealand, but highest among the English speaking post industrial economies.

Yeah, that includes us in the Republic down there at just over 30%.

Tax receipts have stayed fairly constant (approx 35%) since the 1970s – we have relied until now on borrowing to fill the gap between public spending and revenues.
BUT as net public debt heads towards 80% GDP, the gap between revenue and spending is becoming increasingly unaffordable.
In answer to calls from the IFS, OECD, IMF, other respected institutions and wider commentariat, all
three main political parties have pledged to cut the deficit. The timing of this cut will be important, but the most difficult question is perhaps not when, but how, at a what cost for our public service

What comes through loud and clear from the 2020 report is that there is no political appetite for substantive tax increases.

There will be no Scandinavian solution for the problems Britain faces.

Let’s consider something that Larry Elliott mentioned in the Guardian this week in light of the UK Budget.

…The chancellor will announce both tax increases and benefit cuts on Tuesday. The need to show “that we are all in this together” means that there will be a levy on banks, an increase in capital gains tax and no reduction in the top rate of income tax from 50%. The Institute for Public Policy Research, a left-leaning thinktank, suggests that the fairest way to raise money would be to push up the standard rate of income tax from 20% to 23%, its level when the Conservatives left office in 1997. While far less regressive than an increase in VAT, there is no possibility of Osborne going down this route. The last chancellor to raise the standard rate of income tax was Denis Healey.

Denis Healey, eh? And there we can see the dead hand of history preventing any shift forward… just because.

What I find fascinating about this is that at heart we’re talking about rationing. We’re talking about means testing or ‘directed’ provision rather than universal provision (and I’ve discussed before why that is both inefficient and inequitable as a means of providing services). And yet we know that this isn’t an inevitability, that were political parties to make choices that pushed towards higher levels of taxation it would also be possible to ensure the sustainability of much higher levels of service provision and that such levels are efficient in and of themselves as well as being more equitable. And if 2020 Public Services Trust is unwilling to countenance seriously tax increases in a Britain which takes in a fair few percentage points more than in this state then how massively more difficult in this state to do likewise.

We’ve heard a lot of talk about how we have to ‘live within our means’ and ‘face up to reality’, some of it sincere, some of it not. And truth is we do have to do both of those. But what we should not do is accept that orthodoxy hasn’t already tilted the terrain to its own advantage and attempted, so far with considerable success, to shape the debate in a way that is very much to its liking.

An interesting piece in the current issue of Village by Mark Lonergan notes that our current plight here in terms of the fiscal deficit is ‘alarming’.

Approximately €10 bn of the 2007 Tax take was property-related in terms of VAT, CGT and stamp duties. Revenue from these taxes is unlikely to pick up soon.

If ever.

But he continues…

This fiscal gap highlights the need for a clear need for a more sustainable source of revenue for Government rather than increased governmental borrowing.

His solution? Raising Corporate Tax from it’s current level of 12.5% to 20%. That may be too large a hike, but it’s worth comparing and contrasting what our rate is against other states in Europe. ‘The UK rate is 28%, the German rate is 30% and the US rate is 39.5%’. As Lonergan, who is a Chartered Accountant working with MNCs, notes, ‘we currently have in effect a third-world corporate tax level’. He also notes that in conversation with Finance Directors of MNCs the sentiment is one where the CT rate is relatively peripheral to decisions on basing jobs and factories in the Republic.

Actually that UK rate is coming down according to the UK Budget, but… look by what…[by the by note the emphasis on consumption taxes in that budget - usually regressive]

Nearly a million of the poorest paid people will be taken out of the income tax net altogether by raising its starting point and the headline rate of corporation tax will drop by one percentage point to 27 per cent next year and then keep falling to 24 per cent within four years.

Perhaps Lonergan is wrong – and it’s certain that one way or another increases in CT alone aren’t sufficient to stabilise revenues. Perhaps an increase to 20% is too great in the short term. There are plenty of intermediate levels that it could be set at, perhaps with agreements that it would remain at those for a period of five or ten years.

But again, the point is that the Republic has a low tax level as against our European partners, or more widely the OECD
countries. But this isn’t inevitable, it isn’t some function of our specific economy. It is the result, as noted in the two reports released this last month, of political and economic policies that were utterly ill-thought out. And that being the case, beyond the current problems, the argument for a thorough reworking of the situation in the future becomes overwhelming.

One would like to think that there is a new-found zeal for attempting to position us precisely for that level of future sustainability. But reading that…

…the government is considering introducing an Irish version of Germany’s balanced budget law, which would prohibit it from running budget deficits above a certain size.

Brian Lenihan, the Minister for Finance, has asked an Oireachtas committee to examine the case for the so-called national fiscal rules, which legally impose tighter fiscal discipline on national governments

.

… I’m not convinced.

As long as we are locked into the present low tax model fiscal discipline on the deficit side will merely see us replicate a situation where public services are underfunded. If, however, we were to move to a broader approach where low tax stopped being a mantra, and tax policy instead became a tool to be used as was necessary in order to underwrite public services, and fundamentally that means that they could be lowered or raised as appropriate (and indeed to be used decisively during economic booms in order to build up reserves – something that was not done in the last decade and a half) then such fiscal discipline would be welcome.

By the by, many of my caveats about EU oversight of the Irish budget would be very very much ameliorated were it a case that there were significant on-going social transfers (and I’m not talking about the sort of bail-out transfers currently on line) that typify the US federal case. But curiously we don’t have that. Instead we’re faced with a situation that, except in extremis, we see no intervention from the EU. On one level that’s as it should be, as sovereign states. But of course we’re now way beyond that sort of relationship between the component parts of the Union. And therefore I find it somewhat disturbing how this has been introduced essentially as a de facto measure.