After The Rose Garden 4: Fiscal Balance
It is unpleasant to admit it, but dear old Blighty has been a deadbeat for over a century. Our central fiscal characteristic is that we don’t pay our way. To modern eyes, this is not a hanging offence: everyone is at it, what with war, depressions and of late the ‘08 crash and Covid. But it’s not trivial. What matters is how we stack up against the competition? answer - not so hot; and how is our freedom of action affected? answer - increasingly, given Trump’s disruptions. Thus this post, exploring how to position ourselves fiscally for the two options before us: bridging Europe to other trading nations - liberal leadership; and going it alone - Singapore on Thames.
The ASI is all about the fiscal responsibility attaching to restrained government. Postwar, this has been an uphill slog. The chart below depicts government finances since 1700. It shows that public deficits, once a feature of war, have come to be a peacetime commonplace.
The chart above only runs to 2016. Since then, the position has deteriorated, as the more up-to-date chart below illustrates, with deficits in every year but three since 1970-71.
Since 2020-21, it’s worse still. Some is the £229bn of public support over Covid; some is further pandemic hangover, where we can’t do much; some is policy dysfunction, where we certainly can.
First, expenses: HMRC sends the figures below to all taxpayers.
Let’s focus on the biggies. Defence is on the up and spend beyond foreign aid will have to take the strain. Our thinking about health etc can be found in the post on public services in our earlier series of “Manifestos to Lord Mandelson”; maybe we are approaching the agony-barrier which propels such heresy into the Overton window, as explored below. The other candidate for the Overton window is tough love for welfare recipients. The chart below shows how Britain’s level of economic activity has deteriorated by comparison with the competition, calling for fixing slack medical and self-certification.
This is no time for generous pay settlements. Let’s also take a more general scythe to expenditure, while avoiding Musk disruptions. Better to alter incentives at the top. Let civil servants on Grade 5 and above be awarded early retirement on full pensions and £10m tax-free for every one half of one percent they delete permanently from public spend. Let task forces be instituted for the purpose, with similar arrangements. Let’s throw in KBEs and keys to the lodges of Oxbridge principals as vacancies arise. The politics of hope indeed!
Now for income: the table below applies to the same year.
NIC’s are a tax on employment, which has fallen after Reeves’ recent rises. This is a typical Treasury own goal, also seen in the capital flight and reduced returns from CGT following the removal of the Non-Dom regime, the fall in tourist spend following the removal of VAT refunds after Brexit, and the reductions in receipts from earlier increases in income tax rates. Company taxes call for the same: we should be attracting investors, not fleecing them, all the more so if setting out our stall as Singapore on Thames. It would be easy to blame zealots overruling civil servants, but in truth the Treasury consistently mistakes elasticities and second-order effects. Some taxpayers are physically mobile and most can doctor their books. So, an easy win is revisiting the Treasury’s models, with a view to better tax decisions. There’s a much tougher win in public services, with the prospect of over £400bn of receipts for a government willing to face reversing a lifetime of secular religiosity.
Finally, there is the balance between income and expenditure. On 23 April we learned that last year, Britain’s public deficit was £152bn, some 11% higher than the OBR’s estimate a few days earlier. The deficit was always planned to grow this year; now it threatens far worse. Gordon Brown introduced the liar’s contest of “fiscal rules” which kick the can down the road: Reeves’ promise was that deficits will reduce by the end of this parliament. Now who knows? Mervyn King thinks she should abandon her rules because they’re unbelievable; Labour activists think she should abandon them so they can splurge.
Fat chance! The bond markets are less forgiving than a few weeks ago, with vigilantes set to pick off the weak. Let that not be us: Reeves needs to sharpen her pencil with what industry calls “zero-based budgeting”, that is starting from first principles. To recap our points above, the Treasury should goose up its models, bringing in elasticities and second order effects more reliably, in particular revisiting higher tax rates, to promote economic activity. As to expenditure, we need tough love in wages and welfare, prizes for civil servants who slash expenditure and (if braced for iconoclasm) capital raising from public services. We defer tax reforms bearing upon capital markets to our next post.
These remarks apply more fully to Singapore on Thames than to a campaign of liberal leadership drawing us into close contact with the EU. The Europeans are loosening their own disciplines for increased defence spend, some of which we’re hoping to see. But let’s not catch their cold.
Next post - capital markets
Miles Saltiel