BURNING OUR MONEY

Local Income Tax grab

Voters in the Lib Dems' target seats across the Southeast should familarise themselves with the proposed Local Income Tax (LIT), and how it would impact them.

Vince Cable and others keep telling us that LIT would be 'fairer' than the Council Tax, gainers would outnumber losers, and the average family would be better off. But that is the national picture. In London and the Southeast the outcome would be very different.

Nationally, the IFS estimates that 49 per cent of families would gain, 27 per cent would lose, and 24 per cent would remain broadly unchanged. As you might expect, most of the losers are in the top quartile of the income distribution. But not all of them. Surprisingly, given all that pious stuff about 'fairness', 1.5 million of the loser families are on incomes below the median. They would lose because they currently receive Council Tax benefit, which the Lib Dems would abolish.

Overall, the IFS estimates a small average net gain of £1.37 per week. Although Cable likes to crow about this, it's nothing to do with the magic of LIT: it arises solely because the Lib Dems would contribute an additional £2.3 billion from general taxation to soften the switch to LIT, thus ensuring gainers outnumber losers. £2.3 billion amounts to half the additional revenue they reckon would flow from their new 50 per cent top income tax rate. So while presenting the net gain as an attraction of LIT, all they're actually doing is to reduce one tax by increasing another. Bribing us with our own money to accept their pet scheme.

And these are national figures. The big problem for voters in the Southeast is that many of their incomes are significantly above the national average, so many more than 27 per cent would lose out. According to ONS's Regional Trends, average household income in London and the Southeast is about 30 per cent higher than the national average (and before anyone says they don't care about rich bastards in the stockbroker belt, remember that the cost of living is also much higher- housing costs are about 40 per cent above the national average).

Take Guildford. In 2001, the Lib Dems ousted the Tory MP for the first time since 1428, and they are doing their damnedest to retain the seat.

Yet the average household income in Guildford is more than ten grand above the national average- a gap of 35 per cent which puts the average for Guildford in the top quartile nationally (eg see here).

Now, the IFS and others reckon the LIT would need to be charged at an average rate of about 3.75 per cent. So with their higher incomes, the average household in Guildford would be paying about £400 pa more than the national average. And more than their £1300 average Council Tax, which is in itself way above the national average.

Of course, in theory, the point of LIT is that it's a local tax, so given their higher tax base, the local authorities in Guildford would have scope to set a lower rate. Hmm...that hasn't worked with Council Tax, and it's unlikely with LIT. Central government controls the big purse strings, and routinely 'equalises' tax resources between authorities by allocating rate support grant away from affluent areas like Guildford. There's no reason to think a Lib Dem government operating LIT would be any different.

No, whatever the national picture may be, that average hard-working family in Guildford would be worse off under LIT. As would the average family in Maidenhead, Newbury, Reading, and a host of other Tory/Lib Dem marginals across the Southeast.

There is no doubt.

It's just that somehow we have to get it across without making voters nod off.

Back from sick leave

Back from unscheduled sick leave straight into the election.

Depressingly, the Howard Flight affair underlines just how far away we are from being given an open and proper choice on tax and spend.

I must say I'd thought when the Tories said 'are you thinking what we're thinking?' they meant what Flight implied- ie don't worry, once we're elected, we'll have a proper go at the whole shooting match.

But it seems I was wrong, and the Tories have now gone and painted themselves in.

You'd think- well, I'd think- enough people would want lower taxes to make small government a saleable proposition.

True, history is not encouraging.

For example, I've been leafing through British Political Opinion, a collection of Gallup Polls between 1937 and 2000. And it turns out tax has rarely featured particularly highly among the hot issues.

Even when Thatcher was elected in 1979, people who thought public services should be extended even at the cost of higher taxes, outnumbered those that wanted lower taxes by two to one. By 1997 the ratio was ten to one.

Of course, many people really mean someone else's taxes should be increased. Not theirs. And that highly visible taxes like the Council Tax are disproportionately unpopular. But by and large, tax has not been a knockout issue.

Yet surely things are changing. Those 66 stealth taxes and the almost universal agreement that Labour will hike taxes again after the election does seem to be having some effect of opinion.

YouGov's Budget poll showed that those who want more tax and spend still outnumber tax cutters, but the margin is now quite narrow (49 per cent against 41 per cent).

Such a shame no party has the balls to pick that up.

Flat tax entering mainstream

The flat tax debate won't make it into this election because none of the parties want it to. But it is certainly getting closer to the mainstream.

Last week's Spectator carried an article by Nick Herbert of Reform ( here) in which he weaves a flat tax proposal into Reforms' existing scheme to restrain public spending growth, and suggests the combination could be used to deliver substantially lower taxes for the poor.

Currently the poorest 20 per cent pay an average 40 per cent of their incomes in tax, actually higher than the overall average tax rate of 36 per cent. Under Reform's outline proposal this would be more than halved in the lifetime of the next parliament.

He concludes:

'The principled luxury of progressive taxation which doesn't actually work is no longer one we can afford.'

We're not there yet, but we are thinking about how flat tax could be made to fit with with a broader policy agenda.

Future tax rises

I've been trawling through the small print of Gordo's final budget to see how he got the fiscal arithmetic to add up, without needing to include those inevitable post-election tax rises.

The answer's quite simple: he's just assumed that somehow he'll get sharply higher tax revenues without the need to raise tax rates. Simple as that.

So income tax is projected to generate £4 billion more next year than would be implied by his GDP growth forecast, and corporation tax a staggering £8 billion more.

4+8= 12...why, that's pretty well the figure the IFS and others are pencilling in for those tax increases.

But...splutter...he can't just do that can he? How's he got the brass neck?

Well, of course, the small print burbles on about fiscal drag, and on the big £8 billion corporation tax figure it adds:

'...above trend growth is expected in 2005, as the remaining slack in the economy is absorbed. Receipts growth in 2005-06 should also benefit from financial company taxable profits returning towards trend, the impact of higher equity prices on receipts from life assurance companies and the impact from of anti-avoidance measures.'

These effects are expected not only to stick, but actually to increase further out in the forecast. So by 2009-10, tax, national insurance, and other receipts are forecast to have increased by no less than 2.3 per cent of GDP, despite there being no explicit increases in tax rates beyond what was announced last week, plus the usual price indexation.

However, as others have pointed out, 2.3 per cent of GDP in 2009-10 will be £35 billion. So instead of the £35 billion spending cuts Labour say the Tories will make, under Labour we'll have £35 billion of extra tax.

A neat equivalence.

And of course it's bitterly ironic that Gordo's got to depend on the City to pull the fiscal fat out of the fire. New Labour have subjected the financial sector to such a torrent of taxation, regulation, and general vilification that it's a wonder we still have a stock market or any financial firms left to tax at all.

Public sector jobs boom

As has been widely reported, the ONS has revised up its figures for public sector employment. It says:

‘From 1991 to 1998, public sector employment fell every year, with an overall reduction of 815,000 for that period. From 1998 to 2004, public sector employment rose every year and is now 583,000 (11 per cent) higher than in June 1998. It is still, however, below the levels of 1991 and 1992. In the year to March 2004, employment in the private sector rose by 119,000, compared with a rise of 146,000 in the public sector.’

The ONS numbers are a year out of date: I estimate another 150,000 public sector jobs were created in the last 12 months, taking the total increase since 1997 Q2 to 725,000 thousand.

We hardly need to spell out again why this is the road to ruin, but it is interesting to compare New Labour’s achievement with the job creation record of previous socialist governments.

Amazingly it turns out they’re already streets ahead of both Wilson and Callaghan. The dismal 1964-1970 Wilson government managed just 550,000, and even the almost terminal 1974-1979 Wilson/Callaghan lot only clocked up 570,000.

What’s more, we know that Blair’s existing spending plans will give us at least another three years of expansion. At the end of which they will have created at least 1.2 million public sector jobs.

Revolutionary heroes everywhere must be proud.

Monbiot grapples with Swedish model

When it comes to burning taxpayers’ money, Sweden is in the Champions’ League. Tax and spend runs at around 60% of GDP, compared to our 40%. But big government is surely bad for your wealth, so how come those Swedes have such a high income level? It can’t all be Abba’s royalties, surely.

Anti-market types always like the Swedish model, and good old George Monbiot is no exception:
‘The surprise, for anyone who has swallowed the stories about Britain’s unrivalled economic dynamism, is that, in terms of gross domestic product, Sweden has done as well as we have. In 2002 its GDP per capita was $27,310, and the UK's was $26,240. This is no blip. In only seven years between 1960 and 2001 did Sweden's per capita GDP fall behind the UK's.’

As always you have to check George’s facts, and the latest OECD figures (for 2003) actually put us on $29,000 with the Swedes on $28,100. And those seven years he mentions were actually the most recent years, which kind of suggests their success is waning. But still, they’ve only fallen a bit behind so let’s hear him out:

‘For countries hoping to reach the promised land, there is a choice. They could seek to replicate the Swedish model of development - in which the benefits of growth are widely distributed - or the UK's, in which they are concentrated in the hands of the rich.’

Ah.

Well, where to start?

Let’s look a bit more closely at the history. Up until the sixties, Sweden’s public spending (as a percentage of GDP) was actually lower than ours. In the thirties it was only about half, and in the forties they saved loads more by contracting out of the fight against fascism. Even in 1960 they were only on 31% compared to our 32% (source: Public Spending in the Twentieth Century, Tanzi and Schuknecht).

And guess what- it was during that period that Sweden overtook us in terms of GDP per head. The crossover year was 1957.

Of course, in the swingin’ sixties, most western governments started binge spending, with the appalling Wilson ramping us up to 37%. Even so, by 1970 Sweden was still ‘only’ on 42%.

It wasn’t until Abba came along that things really started going haywire. Guided by the insights in Money Money Money (‘ah-ha, ah-ha, there’s a lot I could do, if I had a little money- it’s a rich man’s world’), Swedish tax and spend soared through 60% by 1985, eventually peaking at almost 70%! Only the Soviet Union was higher.

And that’s when the bills started to come in. By the early nineties the fiscal position was collapsing, growth had slowed and unemployment was rising.

It was no passing aberration, but a crisis of a kind that Britain had faced two decades earlier. The Swedes were forced into an anguished public debate, and all credit to them, they decided to confront reality. A savage programme of fiscal retrenchment began. Cash limits were imposed, and welfare payments cut.

But history shows the debilitating effects of fiscal indulgence last for years. The body economic becomes very fond of its welfare diet. Arteries get clogged, and the desire for ten-mile runs or even just getting off the butt dims. Wriggling back into those electric blue sateen culottes takes a superhuman effort.

Sweden had a quarter century of world leading tax and spend. During that period it enjoyed the fruits of its strong industrial base, which had actually been built up during an era of much lower taxes. It apparently had its cake and ate it.

Now the process has gone into reverse, it will be very interesting to see whether Sweden can stick at 60% or will need to get down closer to the European average. I wouldn’t want to be Swedish and poor.

In any event, for George or anyone else to hold us up as the model of small government, to be compared to redistributive big government Sweden, is grossly misleading. Predictably, Britain under New Labour is muddling along somewhere in the middle, quite possibly getting the worst of both worlds.

The real choice is between the Swedish model, with 60% tax, and the United States with 30%. Sweden certainly has much lower income inequality, but only at the cost of per capita GDP that is 25% lower. And that gap is growing.

Public sector pensions black hole

A useful piece from Watson Wyatt on the government’s unfunded public sector pensions liability. They estimate this to be £690 billion, more than twice the size of our declared national debt. What’s more, it’s index-linked. And Watsons haven’t even included the substantial deficits in local authority pension schemes.

All of which makes Gordo’s boasting about how he’s slashed government debt ring pretty hollow. The second of his famous Golden Rules- his Sustainable Investment Rule- calls for net debt to be kept below 40 per cent of GDP. But adding in this unfunded pensions liability takes us to 92 per cent.

And let’s be clear- pension liabilities are a forward commitment to pay, just like any other kind of debt. In fact, just like those forward service contracts with the providers of all those PFI schools, hospitals, roads etc. Not to mention the massive off-balance sheet liabilities now being run up to renew the railways.

In this country, unfunded pensions only exist in the public sector, the idea being that members needn’t worry about not getting paid out, because when the time comes the government will raise the dosh by just taxing the rest of us. No private sector company would be allowed to get away with unfunded pensions on the basis that they can always screw more out of future customers. And certainly not since that fat Labour MP fell off his yacht.

Of course, as public sector employees are already discovering, governments will always welsh on their liabilities if they possible can. Which is why Unison is now balloting its 800,000 members on strike action over the plan to raise their retirement age from 60 to 65.

None of which takes any account of the other great slug of unfunded pension liabilities- the state pension. This runs at about 5 per cent of GDP annually (taking the sum of the basic state pension, State Second Pension, Minimum Income Guarantee and Pension Credit, Winter Fuel Payments, Over 75 TV licences, and Christmas Bonus). So capitalising that lot, using the same discount rate as Watson Wyatt, gives a further liability of 250-300 per cent of GDP!

So much for fiscal prudence, although I s’pose we have to blame Lloyd George and Bismarck, rather than Gordo, for unfunded state pensions.