THE TRUTH ABOUT THE UK DEFICIT PART II

Over the past few days economic news has filtered through which puts further doubt on the way the Coalition, George Osborne and David Cameron are portraying the deficit problem.

What choices should we take to deal with the deficit?

As explained in a previous post “The Truth About The Deficit” available at https://extranea.wordpress.com/2011/02/08/the-truth-about-the-uk-deficit/ the deficit has not occurred due to enormous out of control public spending by the previous Labour government.  Rather it has occurred due to the credit crunch and resultant recession reducing the tax revenue.

This has been caused by a variety of factors including the deregulation of the US banking system in 1999;  economic orthodoxy over the past 30 years;  light touch regulation; irresponsible banking operations;  banks lending to people that could not afford to repay their loans and the spread of risk through the market in derivatives.

News has now filtered through that the taxman has been able to collect an extra £3.6 billion in tax than expected n the month of January.  This means that there is a likely hood now that the chancellor will have an extra £8 billion tax revenue at the time of his budget in March.

This does not mean that we are not still borrowing large amounts of money above the amount the chancellor is collecting in taxes, but that the amount of the overspend will be less, meaning the deficit is reducing.

Some commentators on the right wing of the political argument are getting very nervous about this.  Those like Fraser Nelson (see http://bit.ly/fgpz7a) are worried that the chancellor may “give” away this money by not cutting public expenditure so quickly, or spending this extra revenue to save projects like the Big Society.

The reason why Fraser Nelson and others on the right are so worried is because they should be.  What this example of the increase in tax collected shows is just how the deficit in the end will be dealt with. It will be dealt with by increasing the tax take, and the growth of the economy.  As soon as the tax take increases the complexion of the deficit looks very different.

The right wishes to massively reduce the role of the state and public spending as an ideological course of action, as their right to pursue now they have what they regard as a Conservative government.

However, we need to look  at the argument for the steep cuts in public expenditure.  The argument is put forward that public spending is out of control and that is why there is the deficit and therefore we should reduce this to control the deficit and “save” the economy.  In truth however, although it will certainly help to reduce public spending and the deficit in this way, the only way that the deficit will really be dealt with is through growth.

Our whole economic ethos in a capitalist society, whether we believe in  a social democratic capitalist tradition like in Europe or a liberal economic position as in the USA,  we rely on the growth model in order to provide for our nation.  Without growth in our economic model we cannot increase our standard of living and become wealthier as an economy or society.

If we are to continue this tradition (and there is no sign in mainstream economic and political thought that this will not be the case)  then the only way the deficit will be dealt with is to encourage growth.  Growth in the economy will increase the amount of tax the chancellor will collect.  This will allow the chancellor to reduce the amount borrowed by the nation and finally balance the books and reduce the deficit to zero over time.

In addition, as the economy grows, inflationary pressure will begin to build which will also aid in reducing the relative impact of the deficit providing the inflation does not begin to spiral out of control.

What these recent taxation figures show is that, a small monthly increase in the tax take can rapidly increase the affordability of public services and make the chancellor’s job a lot easier.

The right wing are scared that this will reduce the ideological zeal for cuts and the wholesale privatisation of public services.  The truth is that the extent and depth of the cuts is a matter of political choice.  Some cuts are required, and it is sensible to have a re-balancing of public finances when money has been easier to come by.  Some inefficiencies will have been built into procedures and there is no doubt some in the public services are paid too much.  But this comes down to efficiencies and not necessarily  deep cuts in services.  This is what the nation was told would happen before the election, yet in reality we see few efficiency savings, and a lot of cuts to front line services.

We have also heard today that not only did the UK’s economy shrink in the final quarter of 2010, but that it shrank further than we originally thought.  So even taking into account George Osborne’s bad weather excuse, the economy did not just flat line but shrink. (See http://www.bbc.co.uk/news/business-12577154, GDP reduced by 0.6%)

This makes the danger of deep cuts in public services even more dangerous.  If deep cuts and the reduction of employment opportunities persist it will suck money out of the economy in a deflationary effect, limiting growth still further.

Growth of the economy will lead to a larger tax take and smaller deficit, negative growth or sluggish growth will lead to a smaller tax take and higher welfare costs making the deficit worse.

Taxation Changes and Avoidance

In addition to the growth question,  there is also other political choices that have been made.  It is now calculated that at least £13bn of tax is avoided by corporations and big business using tax loopholes and tax havens to avoid paying corporation tax.

George Osborne is now trying to make this easier with tax changes that have almost gone under the radar, so few people know about it.  See George Monbiot’s article http://www.monbiot.com/2011/02/07/a-corporate-coup-detat/ and a discussion on Newsnight see below

In this way the chancellor could collect even less tax and it will be ordinary tax payers and small/medium sized businesses that will share the extra burden.

The official corporation tax rate is constantly being reduced by British chancellors and George Osborne is no exception, trying to reduce it to 24% by the end of the Parliament.  This will mean the UK has the 3rd lowest corporation tax of the G20 countries.  Yet the biggest and 3rd biggest economies in the world have the highest corporation tax in the G20, namely the USA and Japan.

So should the reduction of corporation tax be a political priority anyway?  Is it more important to give tax breaks and lower tax rates to large companies when large cuts are being asked for?

Is it also right to encourage tax havens when they are a known source of illegal money? Is this the right course to take when We Are All In This Together, or is the accepted wisdom now, Some Of Us Are In It More Than Others!

Conclusion

There is a choice to be made, it is not being a deficit denier to point these things out, but the realisation that we have a real choice to be made, and not all cuts are inevitable or desirable both for the economy or society.

Lets repudiate the ideology, and have pragmatism in the face of difficult economic times.  There is a choice to be made, and I fear our government is making the wrong choices for the wrong reasons.

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