Alex Morton: How Sunak can save £30 billion a year

21 Oct

Alex Morton Head of Policy at the CPS and a former Number Ten Policy Unit Member.

Today, the Office for National Statistics will announce the provisional figures of Government borrowing for the first six months for 2020/21. They will be truly dire. We know because borrowing in the first five months alone were bigger than the previous annual total, and by August this year the national debt was larger than the UK economy, rising by over 10 per cent from 2019/20’s total.

Putting aside the ongoing – and crucial – debate about the nature of lockdown restrictions, it is clear even on the most optimistic forecasts, and with the best decisions, the UK will end the pandemic with a serious debt and deficit problem. Even assuming higher borrowing for years, something must give.

For that reason, the Centre for Policy Studies today publishes the paper Saving £30 billion: Nine Simple Steps, which discusses, on rough but plausible estimates, nine savings to cut £30 billion a year from the Government’s spending without jeopardising frontline services, or asking the politically impossible.

The Government is in the middle of a Spending Review, and we believe that now is the time for proposals to stop the threat of tax rises which will both hit growth and hard-pressed workers, companies and families. None of the savings would impact frontline delivery and none of them ask for MPs to vote through what would be political suicide.

Government efficiency

Despite the arguments made that austerity means no further reduction in spend is possible, we find significant potential savings across a wide range of areas, none of which impact frontline delivery. The first group of savings are thus about making the state more efficient.

  • We analyse the number of Government administrative staff versus the private sector and find initial convergence but significant disparities in reductions in recent years, with the private sector slimming down this group more effectively. We therefore propose benchmarking Government administrative staff totals to the private sector and reducing these in the public sector once a post-Covid recovery gets underway.

We also propose –

  • To abolish some quangos and to bring all quangos under the control of a relevant department. Each department should create a single body to manage HR, marketing, and other administrative functions for all quangos it oversees. This should also make bureaucracies more accountable and improve public sector productivity.
  • Pushing toward greater use of back office function sharing in local government, as occurs between Westminster and Kensington & Chelsea. There is no need for 350 councils to have distinct IT or press or procurement teams. The Housing and Local Government Department should publish data on the administrative costs for each council to push forward action. This should enable many of the savings around unitarisation without the massive political rows.
  • Improving e-procurement and data sharing, noting that other countries such as South Korea or Estonia have significantly improved productivity and reduced costs through this route, and agreeing with critics of the existing Government procurement systems.
  • Since the state owns land and property worth a staggering £1 trillion, we call for an inventory of all non-operational land followed by a sale and leaseback model across all this non-operational land, rather than past Spending Review’s top down land targets for each department. Just selling off the Network Rail arches gained £1.4 billion while boosting growth, and Covid-19 has changed office work patterns, so this should raise serious sums.

Ensuring a fair state

The second group of savings are about ensuring that the state does not give excessively to one or other group, and create a state focused on the core tasks of government. We propose:

  • Replacing the triple lock with a dual lock, which still gives pensioners the best of inflation or wage growth, and removing the tax anomaly of the Winter Fuel Payment and just treating as taxable income like other benefits.
  • Sell and replace high-value council properties when they fall vacant with a less expensive nearby equivalent. It is deeply unfair there are million-pound council properties in many parts of London and this is not what making sure people have a roof over their heads is about. This doesn’t even mean anyone has to move – just no more new expensive tenancies.
  • Roll child benefit into the child tax credit system with a further taper that reduces the top 10 per cent or so of households (essentially capturing those with two fairly high earners to bring them into line with a single high earner household).
  • Cut overseas aid to 0.5 per cent, still placing the UK in the top 10 donor countries and moving on from 2005 when this target was set at 0.7 per cent at a time when India and even China were legitimate UK aid recipients, not emerging economic superpowers. It would be both immoral and politically toxic to make the other savings while protecting a budget overseas that has nearly doubled in recent years.

Taken together, these savings would help bring down the deficit to an acceptable level. They involve some hard decisions and confrontation of vested interests, but not impossible ones, and all should pass through the Commons, even in its new rebellious state. The alternative, ever higher borrowing, or even worse, ever higher taxes, is unthinkable if we are to achieve what the CPS believes the number one priority post-pandemic must be – restoring sustained economic growth. We call on the Government to investigate and takes forward these ideas as part of the Spending Review process.

Alex Morton: How Sunak can save £30 billion a year

21 Oct

Alex Morton Head of Policy at the CPS and a former Number Ten Policy Unit Member.

Today, the Office for National Statistics will announce the provisional figures of Government borrowing for the first six months for 2020/21. They will be truly dire. We know because borrowing in the first five months alone were bigger than the previous annual total, and by August this year the national debt was larger than the UK economy, rising by over 10 per cent from 2019/20’s total.

Putting aside the ongoing – and crucial – debate about the nature of lockdown restrictions, it is clear even on the most optimistic forecasts, and with the best decisions, the UK will end the pandemic with a serious debt and deficit problem. Even assuming higher borrowing for years, something must give.

For that reason, the Centre for Policy Studies today publishes the paper Saving £30 billion: Nine Simple Steps, which discusses, on rough but plausible estimates, nine savings to cut £30 billion a year from the Government’s spending without jeopardising frontline services, or asking the politically impossible.

The Government is in the middle of a Spending Review, and we believe that now is the time for proposals to stop the threat of tax rises which will both hit growth and hard-pressed workers, companies and families. None of the savings would impact frontline delivery and none of them ask for MPs to vote through what would be political suicide.

Government efficiency

Despite the arguments made that austerity means no further reduction in spend is possible, we find significant potential savings across a wide range of areas, none of which impact frontline delivery. The first group of savings are thus about making the state more efficient.

  • We analyse the number of Government administrative staff versus the private sector and find initial convergence but significant disparities in reductions in recent years, with the private sector slimming down this group more effectively. We therefore propose benchmarking Government administrative staff totals to the private sector and reducing these in the public sector once a post-Covid recovery gets underway.

We also propose –

  • To abolish some quangos and to bring all quangos under the control of a relevant department. Each department should create a single body to manage HR, marketing, and other administrative functions for all quangos it oversees. This should also make bureaucracies more accountable and improve public sector productivity.
  • Pushing toward greater use of back office function sharing in local government, as occurs between Westminster and Kensington & Chelsea. There is no need for 350 councils to have distinct IT or press or procurement teams. The Housing and Local Government Department should publish data on the administrative costs for each council to push forward action. This should enable many of the savings around unitarisation without the massive political rows.
  • Improving e-procurement and data sharing, noting that other countries such as South Korea or Estonia have significantly improved productivity and reduced costs through this route, and agreeing with critics of the existing Government procurement systems.
  • Since the state owns land and property worth a staggering £1 trillion, we call for an inventory of all non-operational land followed by a sale and leaseback model across all this non-operational land, rather than past Spending Review’s top down land targets for each department. Just selling off the Network Rail arches gained £1.4 billion while boosting growth, and Covid-19 has changed office work patterns, so this should raise serious sums.

Ensuring a fair state

The second group of savings are about ensuring that the state does not give excessively to one or other group, and create a state focused on the core tasks of government. We propose:

  • Replacing the triple lock with a dual lock, which still gives pensioners the best of inflation or wage growth, and removing the tax anomaly of the Winter Fuel Payment and just treating as taxable income like other benefits.
  • Sell and replace high-value council properties when they fall vacant with a less expensive nearby equivalent. It is deeply unfair there are million-pound council properties in many parts of London and this is not what making sure people have a roof over their heads is about. This doesn’t even mean anyone has to move – just no more new expensive tenancies.
  • Roll child benefit into the child tax credit system with a further taper that reduces the top 10 per cent or so of households (essentially capturing those with two fairly high earners to bring them into line with a single high earner household).
  • Cut overseas aid to 0.5 per cent, still placing the UK in the top 10 donor countries and moving on from 2005 when this target was set at 0.7 per cent at a time when India and even China were legitimate UK aid recipients, not emerging economic superpowers. It would be both immoral and politically toxic to make the other savings while protecting a budget overseas that has nearly doubled in recent years.

Taken together, these savings would help bring down the deficit to an acceptable level. They involve some hard decisions and confrontation of vested interests, but not impossible ones, and all should pass through the Commons, even in its new rebellious state. The alternative, ever higher borrowing, or even worse, ever higher taxes, is unthinkable if we are to achieve what the CPS believes the number one priority post-pandemic must be – restoring sustained economic growth. We call on the Government to investigate and takes forward these ideas as part of the Spending Review process.

We need a Plan B for universities as well as schools – and much the same one

28 Sep

Government sources insist that students will be allowed to go home for Christmas – and not be locked up en masse, as they have been at some universities, unable to leave halls of residence.

Ruth Davidson has swooped on the shutdown in Scotland, writing that students have been confined to their rooms, barred from visiting shops to buy food – let alone pubs or restaurants – banned from travelling home, policed by extra security staff and threatened with letters instructing compliance under threat of suspension.

These, remember, aren’t people who necessarily have Covid-19, or who have been directly in contact with others who do.  It isn’t obvious that the situation is much different in parts of England, where some three thousand students are apparently also locked down.

Nor is it clear how many students will be able to be at home with their family when Christmas comes.  For either the Government’s latest restrictions will be in place, if Boris Johnson maintains his grip on policy, or else even stricter ones will have superceded them.  We hope that mass testing will be up and running by then, but aren’t counting our chickens, or Yuletide turkeys either, come to that.

In which case, the number of students allowed home will depend on the number who have symptoms of the virus, since those who have it must self-isolate for 14 days by law, as must those contacted by test-and-trace services.  Government guidance also says that “all other household members need to stay at home and not leave the house for 14 days” if another has the virus.  What happens when the location is not a home but student accommodation?

This provokes the further question of whether students should have returned to university.  If you want to attack Ministers, you will claim that the present tangle was forseeable.  If you want to defend it, you will counter that normality must resume – as nearly as possible, anyway.

There are a number of short-term means of plastering over the cracks, none of which will provide a smooth and seamless finish.  Some universities are offering vouchers for food, or rebates, or providing food directly.  Robert Halfon wants the students affected to recieve discounts.

The colleges will argue that they shouldn’t pay these, since they aren’t responsible for the lockdown rules.  The Chancellor might well say in response that this may be so, but the Commons can’t simply load more debt on the taxpayer indefinitely – or there won’t be any public money for universities in the first place.

There are issues for the long-term as well as for the short.  The central aim of the Government’s latest Covid-19 measures is to build a firewall between work and home, with the former operating as near normally as possible but the latter less, as part of the balance to protect livelihoods as well as lives.

Schools are placed in the former category, partly because parents will be unable to work normally if they aren’t, and partly because of the value we place on education.  University education also has value, both to the economy and in its own right.

But it has never been universally available to all regardless of qualification, as is obviously the case for primary and secondary schooling.  And as our columnist Neil O’Brien notes, the number of students in higher education is out of balance: for around ten per cent of women, and a quarter of men, their degree isn’t worth it.

He wrote recently that “highly subsidised universities would propose to government how they will reduce their cost to the taxpayer. That could mean reducing numbers on some courses, or making them cheaper with shorter degrees, or and doing more online. Or a mix”.  This is where student accomodation comes in.  Why do a higher proportion of British students leave home for higher education, compared to some other comparable countries?

The answer is bound up with the monopoly that Oxford and Cambridge held on university education in England from the medieval period until 1827, when University College, London, opened.  In consequence, an assumption was written into our educational culture that if students were to go university, they should go to it rather than it come to them.

This was less so on the continent, where local universities are more common – though our national picture has changed as new universities have suddenly sprung up fully-formed, or as other institutions have gradually become universities.

So for example, David Willetts, in his A University Education, traces the story of how, in Bradford, the Mechanics Institute morphed its way through Bradford Technical School to Bradford Technical College to the Bradford College of Art & Technology to Bradford College…to Bradford University.

However, there is no uniform story of locally-rooted colleges becoming Oxbridge-type universities, complete with ivy-laden walls or red brick or both.  The former colleges of advanced techology, such as Braford itself, have spells in industry as part of their courses.  Others have links to regional or local industries.

All of which reinforces the question of whether the country needs so many other universities and students following the Oxbridge model in the first place.

The short-term pressure on living space, accomodation and lecture rooms will intensify next year, as the knock-on effects of this year’s A-level fiasco work their way through the system, because of the students who have now qualified to enter a university, but have been forced to postpone entry until next year.

Meanwhile, the long-term trend to doing more online is being speeded up by the Coronavirus, as the move from learning together from lectures in big rooms to doing to separately from screens in smaller ones gathers pace.  Furthermore, universities aren’t always in full control of the living quarters that they offer students.

Halfon is certainly right in believing that the Government needs a Plan B for universities – mirroring the one that both he, this site and others have called for in schools, as the Covid-19 case numbers rise.

Obviously, universities have an independence from government that schools don’t.  But it wouldn’t be beyond the wit of man to design a fee and finance system that rewards universities for more online teaching.

Such a solution would be fiercely debated.  Moving schooling online temporarily is one thing; shifting “the university experience” online too would be another (though to some extent this is happening already).

We already complain that young people are stuck at home for too long.  Do we want them there during their university years, too?

What about the horizan-widening that moving to a new place brings, together with mixing with others from outside one’s home town, city or village?

Our bleak answer is that one can no more turn back the online tide than one could turn back a real one, and that the universities, like so much and many elsewhere, have no alternative but to sink or swim in it.

Angus Groom: Sunak must act to unshackle business from the dead weight of Covid debt

10 Sep

Angus Groom is a Research Fellow at Onward and the author of ‘Paying it Forward‘. He is also an ESRC Doctoral Training Partnership scholar studying Economics at Nuffield College, University of Oxford.

The economic recovery may be gathering pace, but we are not out of the woods yet. In our focus on how quickly demand will return to pre-crisis levels, it is easy to forget that many firms have spent the last six months piling on unprecedented levels of additional debt.

This is a double-edged sword: many have survived the worst of the crisis as a result, but there is a risk if ministers do not act that companies will spend the next few years paying down their liabilities rather than driving a dynamic recovery.

The coronavirus pandemic has meant that, both as a result of mandatory closures and lockdowns and due to voluntary public health precautions, people have been spending less and so businesses in almost all industries have been making less money. The unprecedented grant support from the Treasury, from the furlough scheme to tax payment holidays, has helped many businesses through the worst of the crisis. My new report for the thinktank Onward estimates that 350,000 businesses, employing five million people, would have faced a cash flow crisis in the absence of this government support.

But in addition to grant support the Government has provided what they call “liquidity support”: new debt that weighs down corporate balance sheets and that is mostly or entirely underwritten by the taxpayer. The CityUK’s Recapitalisation Group estimates that by March 2021 UK business will be holding £35 billion in coronavirus debt, accumulated in the space of a year. Even if the demand-side of the economy quickly recovers, this debt pile means that economic problems are far from over.

In fact, my report today estimates that nearly one in twenty firms are now technically insolvent as a result of losses and debt built up since March, and over one in five (21 per cent) could now be classified as so-called zombie firms, in that their operating profits at best only just cover their debt interest payments. There is a real risk that these companies spend the next few years worrying about how to make their repayments rather than investing in jobs and growth to spur the recovery.

Research published by the Bank of International Settlements, the OECD, and the NBER shows that zombie firms can harm investment, employment and productivity growth. Using this research, we estimate that the drag caused by the growth of zombie firms so far this year means that business investment will be lower by more than £40 billion annually and that productivity growth will be lower by by 0.39 percentage points – meaning missing GDP over five years equal to 1.9 per cent of current GDP, or over £500 per person in the UK.

Meanwhile the drag on employment suggests that unemployment will still be 6.4 per cent at the end of 2024, rather than the 5.1 per cent predicted by the OBR. This equates to an additional 400,000 unemployed in the year of the next general election.

To deal with this looming crisis, we propose a simple scheme, New Start, to allow firms to transfer their coronavirus debts into a long-term tax liability repaid out of profits—shifting payments to when firms are able to make them in the same manner as student loan repayments.

The benefit of the CBILS and BBLS, and to an extent the CJRS, is that they were designed in Whitehall but implemented by banks and businesses in the real world. The New Start Scheme keeps this flexibility as it can be run by the banks who have already issued the debts, and the scheme can run regardless of who owns, buys or sells the underlying asset.

The growth of corporate debt sounds like something that occurs in the balance sheets of City firms, but how it is dealt with will determine the strength of the recovery. The Chancellor has so far been reluctant to intervene in this debate, but this position cannot hold without the scarring effects of debt taking hold in the economy.

Ryan Bourne: A message for Johnson and Sunak on tax rises. Not now. And not these.

2 Sep

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

How’s this for a false dichotomy? Last Saturday, Prospect asked: “Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?” [i.e. through borrowing]. I shouldn’t need to tell ConservativeHome readers that “spend to grow” and “spend to grow”—the only difference being how to finance it—are not an exhaustive set of fiscal policy options post-pandemic.

But that tweet, sadly, reflects conventional wisdom. You should take the pre-Budget briefing in the Sunday papers about Treasury desires for £20-30 billion in tax hikes through capital gains tax, corporation tax, fuel duty, an online sales tax and restrictions on pensions tax relief with a pinch of salt. Before every recent budget such stories have emerged, perhaps due to kite-flying or overexcited journalistic coverage of illustrative exercises in how one could raise revenues. One suspects the briefings may even be a political ploy—raising fears in the Tory base before Number Ten saves the day.

Yet there’s undoubtedly an unnerving regularity to them. Alongside a steady drumbeat from “One Nation” Tories and such organisations as the Resolution Foundation, the idea that large tax hikes will be desirable and necessary is taking hold, with Covid-19 apparently making this agenda more urgent.

We are told, as the kitchen sink of argumentation is thrown, that the pandemic itself proves the false economy of a “hollowed out” state after a decade of austerity. Or that the “levelling up” and the “inevitable” higher spending we will now want on health, welfare benefits, and higher public sector pay means tax hikes are needed. Or that the crisis necessitates urgent repair to the public finances, and that there’s simply nowhere left to cut spending.

None of these arguments, however, stand the test of reason. Countries that have dealt with the Coronavirus better include those (South Korea, Taiwan, Australia) with much lower tax-to-GDP ratios than the UK and much lower health spending too. Many with higher tax-to-GDP ratios (France, Belgium, Italy) have seen similarly shocking death tolls to us.

At best, any failure to deliver resources where needed reflects bad state priorities, not an impoverished public realm. Indeed, the story of a hollowed-out state at a time of the highest tax burden since the early 1980s, coupled with this international evidence, suggests ascribing blame to austerity for poor performance is both ahistorical and parochial.

The wisdom or otherwise of  the “levelling up” agenda, and how best to pay for it, is largely unrelated to the pandemic too. Actually, to the extent that Covid-19 affects the desirability of infrastructure and public service spending in the regions, it throws substantial doubt on the benefits of projects such as HS2 and other city and town revival plans.

Who knows what lasting impact the crisis will have on remote working, the location of activity, and favoured transport modes? One Nationers arguing that the virus proves the need to level up would have us believe that the pandemic’s effects are significant enough for a tax revolution, but insignificant enough to alter the desirability of any of their proposed spending. One might almost suggest motivated reasoning here.

In macroeconomic terms, the case for significant tax rises now is weaker still. The point of bridging support through furlough was to shelter businesses and workers from this unexpected shock. To pass the bill to the private sector now as it struggles back to life would strangle the recovery. And for what? Borrowing costs are low, and we have no idea yet whether and how much this crisis will leave a permanent budget hole once emergency spending stops and private sector activity revives. In fact, even borrowing to date has not been as high as initially feared.

Of course, the extra debt to deal with the crisis has to be paid somehow, eventually. But, as I argued here before, unusual shocks such as pandemics and wars primarily result in step-level debt-to-GDP increases rather than ongoing budget holes, because you stop spending on the immediate threat afterwards.

The implication is that modest consolidation over decades is optimal to account for the extra incurred debt, rather than adopting large tax increases to compensate over a Parliament. Economists call it “tax smoothing”—debt provides a safety valve to allow us to only modestly change spending or taxation over long periods to maintain incentives. Of course, if the Government thinks that, for political reasons, it must expand welfare benefits or health spending permanently, this would be a normative choice: there is nothing inevitable about sharp tax hikes.

Even if you think permanent scarring will occur, those taxes suggested to raise revenue seem bizarre choices today. The Government presumably wants us to be Covid-cautious still. Two ways of reducing risks would be to drive more rather than use public transport and to shop more online.

Aside from all the other downsides of raising fuel duty and introducing an online sales tax, to use the tax system to incentivise worsening virus transmission right now by making driving and online shopping more expensive seems bizarre.

Raising top capital gains tax rates to 40 or 45 per cent would simply be self-defeating from a revenue-raising perspective. Capital Gains Tax on many investments represents a double tax. The justification for having it at all is to deter people hiding income as capital gains.

But there’s a revenue-maximizing balance between this effect and deterring people from selling assets. The Coalition government introduced a top 28 per cent CGT rate precisely because HMRC research suggested this raised most revenue. Though it was then lowered to 20 per cent under George Osborne, raising it to 40 per cent plus would reduce revenue relative to a lower rate. We’d get less investment and entrepreneurship when we need it most too.

And then there’s the mooted corporation tax rise from 19 back to 24 per cent. Taxes on mobile capital will deter foreign investment just as Brexit is set to happen, as well as reducing the after-tax return on new domestic projects. Who will bear the costs? Not just “the wealthy,” as commonly asserted, but workers too: evidence suggests that they bear between 30 and 70 percent of the burden of taxes on corporations.

Not only is the tax rise call premature then, but the specific proposals don’t conform to the pandemic’s needs or Boris’s Johnson’s ambitions to create a high-wage economy. Covid-19 may permanently scar the public finances, sure. But as yet its full effects are unknown and there’s little cost to pausing to see. Anything else at this stage is using the crisis as a pretext for raising funds for hobby horses.

If the Prime Minister truly objects to this rationale as reported and understands the threat to the nascent recovery of sharp tax rises today, he should take this message to his Chancellor: on tax rises, not now and not these.

Ryan Bourne: A message for Johnson and Sunak on tax rises. Not now. And not these.

2 Sep

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

How’s this for a false dichotomy? Last Saturday, Prospect asked: “Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?” [i.e. through borrowing]. I shouldn’t need to tell ConservativeHome readers that “spend to grow” and “spend to grow”—the only difference being how to finance it—are not an exhaustive set of fiscal policy options post-pandemic.

But that tweet, sadly, reflects conventional wisdom. You should take the pre-Budget briefing in the Sunday papers about Treasury desires for £20-30 billion in tax hikes through capital gains tax, corporation tax, fuel duty, an online sales tax and restrictions on pensions tax relief with a pinch of salt. Before every recent budget such stories have emerged, perhaps due to kite-flying or overexcited journalistic coverage of illustrative exercises in how one could raise revenues. One suspects the briefings may even be a political ploy—raising fears in the Tory base before Number Ten saves the day.

Yet there’s undoubtedly an unnerving regularity to them. Alongside a steady drumbeat from “One Nation” Tories and such organisations as the Resolution Foundation, the idea that large tax hikes will be desirable and necessary is taking hold, with Covid-19 apparently making this agenda more urgent.

We are told, as the kitchen sink of argumentation is thrown, that the pandemic itself proves the false economy of a “hollowed out” state after a decade of austerity. Or that the “levelling up” and the “inevitable” higher spending we will now want on health, welfare benefits, and higher public sector pay means tax hikes are needed. Or that the crisis necessitates urgent repair to the public finances, and that there’s simply nowhere left to cut spending.

None of these arguments, however, stand the test of reason. Countries that have dealt with the Coronavirus better include those (South Korea, Taiwan, Australia) with much lower tax-to-GDP ratios than the UK and much lower health spending too. Many with higher tax-to-GDP ratios (France, Belgium, Italy) have seen similarly shocking death tolls to us.

At best, any failure to deliver resources where needed reflects bad state priorities, not an impoverished public realm. Indeed, the story of a hollowed-out state at a time of the highest tax burden since the early 1980s, coupled with this international evidence, suggests ascribing blame to austerity for poor performance is both ahistorical and parochial.

The wisdom or otherwise of  the “levelling up” agenda, and how best to pay for it, is largely unrelated to the pandemic too. Actually, to the extent that Covid-19 affects the desirability of infrastructure and public service spending in the regions, it throws substantial doubt on the benefits of projects such as HS2 and other city and town revival plans.

Who knows what lasting impact the crisis will have on remote working, the location of activity, and favoured transport modes? One Nationers arguing that the virus proves the need to level up would have us believe that the pandemic’s effects are significant enough for a tax revolution, but insignificant enough to alter the desirability of any of their proposed spending. One might almost suggest motivated reasoning here.

In macroeconomic terms, the case for significant tax rises now is weaker still. The point of bridging support through furlough was to shelter businesses and workers from this unexpected shock. To pass the bill to the private sector now as it struggles back to life would strangle the recovery. And for what? Borrowing costs are low, and we have no idea yet whether and how much this crisis will leave a permanent budget hole once emergency spending stops and private sector activity revives. In fact, even borrowing to date has not been as high as initially feared.

Of course, the extra debt to deal with the crisis has to be paid somehow, eventually. But, as I argued here before, unusual shocks such as pandemics and wars primarily result in step-level debt-to-GDP increases rather than ongoing budget holes, because you stop spending on the immediate threat afterwards.

The implication is that modest consolidation over decades is optimal to account for the extra incurred debt, rather than adopting large tax increases to compensate over a Parliament. Economists call it “tax smoothing”—debt provides a safety valve to allow us to only modestly change spending or taxation over long periods to maintain incentives. Of course, if the Government thinks that, for political reasons, it must expand welfare benefits or health spending permanently, this would be a normative choice: there is nothing inevitable about sharp tax hikes.

Even if you think permanent scarring will occur, those taxes suggested to raise revenue seem bizarre choices today. The Government presumably wants us to be Covid-cautious still. Two ways of reducing risks would be to drive more rather than use public transport and to shop more online.

Aside from all the other downsides of raising fuel duty and introducing an online sales tax, to use the tax system to incentivise worsening virus transmission right now by making driving and online shopping more expensive seems bizarre.

Raising top capital gains tax rates to 40 or 45 per cent would simply be self-defeating from a revenue-raising perspective. Capital Gains Tax on many investments represents a double tax. The justification for having it at all is to deter people hiding income as capital gains.

But there’s a revenue-maximizing balance between this effect and deterring people from selling assets. The Coalition government introduced a top 28 per cent CGT rate precisely because HMRC research suggested this raised most revenue. Though it was then lowered to 20 per cent under George Osborne, raising it to 40 per cent plus would reduce revenue relative to a lower rate. We’d get less investment and entrepreneurship when we need it most too.

And then there’s the mooted corporation tax rise from 19 back to 24 per cent. Taxes on mobile capital will deter foreign investment just as Brexit is set to happen, as well as reducing the after-tax return on new domestic projects. Who will bear the costs? Not just “the wealthy,” as commonly asserted, but workers too: evidence suggests that they bear between 30 and 70 percent of the burden of taxes on corporations.

Not only is the tax rise call premature then, but the specific proposals don’t conform to the pandemic’s needs or Boris’s Johnson’s ambitions to create a high-wage economy. Covid-19 may permanently scar the public finances, sure. But as yet its full effects are unknown and there’s little cost to pausing to see. Anything else at this stage is using the crisis as a pretext for raising funds for hobby horses.

If the Prime Minister truly objects to this rationale as reported and understands the threat to the nascent recovery of sharp tax rises today, he should take this message to his Chancellor: on tax rises, not now and not these.

Ryan Bourne: A message for Johnson and Sunak on tax rises. Not now. And not these.

2 Sep

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

How’s this for a false dichotomy? Last Saturday, Prospect asked: “Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?” [i.e. through borrowing]. I shouldn’t need to tell ConservativeHome readers that “spend to grow” and “spend to grow”—the only difference being how to finance it—are not an exhaustive set of fiscal policy options post-pandemic.

But that tweet, sadly, reflects conventional wisdom. You should take the pre-Budget briefing in the Sunday papers about Treasury desires for £20-30 billion in tax hikes through capital gains tax, corporation tax, fuel duty, an online sales tax and restrictions on pensions tax relief with a pinch of salt. Before every recent budget such stories have emerged, perhaps due to kite-flying or overexcited journalistic coverage of illustrative exercises in how one could raise revenues. One suspects the briefings may even be a political ploy—raising fears in the Tory base before Number Ten saves the day.

Yet there’s undoubtedly an unnerving regularity to them. Alongside a steady drumbeat from “One Nation” Tories and such organisations as the Resolution Foundation, the idea that large tax hikes will be desirable and necessary is taking hold, with Covid-19 apparently making this agenda more urgent.

We are told, as the kitchen sink of argumentation is thrown, that the pandemic itself proves the false economy of a “hollowed out” state after a decade of austerity. Or that the “levelling up” and the “inevitable” higher spending we will now want on health, welfare benefits, and higher public sector pay means tax hikes are needed. Or that the crisis necessitates urgent repair to the public finances, and that there’s simply nowhere left to cut spending.

None of these arguments, however, stand the test of reason. Countries that have dealt with the Coronavirus better include those (South Korea, Taiwan, Australia) with much lower tax-to-GDP ratios than the UK and much lower health spending too. Many with higher tax-to-GDP ratios (France, Belgium, Italy) have seen similarly shocking death tolls to us.

At best, any failure to deliver resources where needed reflects bad state priorities, not an impoverished public realm. Indeed, the story of a hollowed-out state at a time of the highest tax burden since the early 1980s, coupled with this international evidence, suggests ascribing blame to austerity for poor performance is both ahistorical and parochial.

The wisdom or otherwise of  the “levelling up” agenda, and how best to pay for it, is largely unrelated to the pandemic too. Actually, to the extent that Covid-19 affects the desirability of infrastructure and public service spending in the regions, it throws substantial doubt on the benefits of projects such as HS2 and other city and town revival plans.

Who knows what lasting impact the crisis will have on remote working, the location of activity, and favoured transport modes? One Nationers arguing that the virus proves the need to level up would have us believe that the pandemic’s effects are significant enough for a tax revolution, but insignificant enough to alter the desirability of any of their proposed spending. One might almost suggest motivated reasoning here.

In macroeconomic terms, the case for significant tax rises now is weaker still. The point of bridging support through furlough was to shelter businesses and workers from this unexpected shock. To pass the bill to the private sector now as it struggles back to life would strangle the recovery. And for what? Borrowing costs are low, and we have no idea yet whether and how much this crisis will leave a permanent budget hole once emergency spending stops and private sector activity revives. In fact, even borrowing to date has not been as high as initially feared.

Of course, the extra debt to deal with the crisis has to be paid somehow, eventually. But, as I argued here before, unusual shocks such as pandemics and wars primarily result in step-level debt-to-GDP increases rather than ongoing budget holes, because you stop spending on the immediate threat afterwards.

The implication is that modest consolidation over decades is optimal to account for the extra incurred debt, rather than adopting large tax increases to compensate over a Parliament. Economists call it “tax smoothing”—debt provides a safety valve to allow us to only modestly change spending or taxation over long periods to maintain incentives. Of course, if the Government thinks that, for political reasons, it must expand welfare benefits or health spending permanently, this would be a normative choice: there is nothing inevitable about sharp tax hikes.

Even if you think permanent scarring will occur, those taxes suggested to raise revenue seem bizarre choices today. The Government presumably wants us to be Covid-cautious still. Two ways of reducing risks would be to drive more rather than use public transport and to shop more online.

Aside from all the other downsides of raising fuel duty and introducing an online sales tax, to use the tax system to incentivise worsening virus transmission right now by making driving and online shopping more expensive seems bizarre.

Raising top capital gains tax rates to 40 or 45 per cent would simply be self-defeating from a revenue-raising perspective. Capital Gains Tax on many investments represents a double tax. The justification for having it at all is to deter people hiding income as capital gains.

But there’s a revenue-maximizing balance between this effect and deterring people from selling assets. The Coalition government introduced a top 28 per cent CGT rate precisely because HMRC research suggested this raised most revenue. Though it was then lowered to 20 per cent under George Osborne, raising it to 40 per cent plus would reduce revenue relative to a lower rate. We’d get less investment and entrepreneurship when we need it most too.

And then there’s the mooted corporation tax rise from 19 back to 24 per cent. Taxes on mobile capital will deter foreign investment just as Brexit is set to happen, as well as reducing the after-tax return on new domestic projects. Who will bear the costs? Not just “the wealthy,” as commonly asserted, but workers too: evidence suggests that they bear between 30 and 70 percent of the burden of taxes on corporations.

Not only is the tax rise call premature then, but the specific proposals don’t conform to the pandemic’s needs or Boris’s Johnson’s ambitions to create a high-wage economy. Covid-19 may permanently scar the public finances, sure. But as yet its full effects are unknown and there’s little cost to pausing to see. Anything else at this stage is using the crisis as a pretext for raising funds for hobby horses.

If the Prime Minister truly objects to this rationale as reported and understands the threat to the nascent recovery of sharp tax rises today, he should take this message to his Chancellor: on tax rises, not now and not these.

Nicky Morgan: Ministers must act swiftly to avoid a disaster – bailiffs abusing vulnerable people over council tax arrears

21 Aug

Baroness Morgan is a former Secretary of State for Education, and for Digital, Culture, Media and Sport

Marie is 76, and usually pays her council tax via Paypoint at the Post Office. However, for the last five months she has been shielding due to a chronic lung condition. Recently, her council contacted her regarding council tax arrears of just £13, threatening court action.

The prospect of council tax arrears escalating to court action and enforcement is an imminent concern for people like Marie. From next Monday, bailiffs are set to restart in-person visits, and will be able to chase Coronavirus-related debts. Yet a knock at the door poses a threat to Marie’s long-term finances, and worse, poses a serious risk to her health.

Across the country, many thousands of people are in a similar situation. Debt advice agencies report that three million people face the threat of bailiff action on missed council tax, while according to StepChange, around a million people are in council tax difficulties directly attributable to Covid-19.

In this environment, pulling the trigger on a wave of high-risk bailiff visits is not a decision that should be taken lightly. While it’s right for councils to seek to recoup their losses to fund essential services, there remain huge questions over the efficacy of bailiffs and whether they are genuinely always used as a last resort.

When I was Chair of the Treasury Select Committee, we reported in 2018 on how local authorities have come to use bailiffs almost by default, with public sector debt collection regarded as ‘worst in class’. With this in mind, what lessons should the Government learn before it allows bailiff visits to resume?

Lesson one: Despite glimmers of progress, council tax debt collection is in need of major reform.

The law governing local authority debt collection means that small debts quickly escalate. Non-binding guidance has failed to stop councils from sending in the bailiffs, with referrals totalling more than 2.6 million last year. That’s despite only 27p of every £1 of debt referred being recovered. Meanwhile, councils can be penalised for trying to offer more sustainable payment plans.

By contrast, household debt problems are dealt with far more sustainably in other sectors. Among mortgage lenders and consumer credit providers, forbearance and debt advice referrals are more widely used. Regulated sectors have seen the benefit of more holistic measures which have resulted in better collection rates and fewer defaults, whilst also crucially giving people mired in debt a sustainable way out.

Support for household finances during the crisis should now be twinned with reform of council tax collection and additional hardship funds. The Government’s initial £500 milion Hardship Fund has offered welcome respite for many, but with increased funding and wider eligibility criteria it could achieve even more. Ministers should also look to introduce a statutory pre-action protocol for debts owed to government. This would help reduce court-based enforcement and enable those most at risk from bailiff visits to set up an affordable repayment plan.

Lesson two: Independent regulation is needed to control the behaviour of bailiffs and bailiff companies.

Aggressive and intimidating bailiff enforcement plagued our system long before Coronavirus: now is not the time to cross our fingers and hope that this might change.

For too long, bailiff self-regulation has failed to protect people in financial hardship from widespread poor practice. Independent polling by YouGov conducted before lockdown for StepChange and Citizens Advice showed one person every minute experiencing a rule-breaking bailiff.

The Government has recognised the case for strengthening regulation,and started a review on this matter back in 2018. However, despite repeated calls from the Justice Select Committee, which ran a parallel inquiry to encourage Government action, the Ministry of Justice has so far failed to report back.

The case for independent regulation has never been stronger. The Government should now commit to plans for bailiffs to follow the rules and ensure the industry is held to account.

Lesson three: The basis for the temporary ban on bailiff visits has not gone away.

The Government’s decision to outlaw bailiff visits in April was welcome. In explaining the ban, the Ministry of Justice correctly identified that incentives in the industry and “financial pressures [from firms and creditors]” would create the risk of poor practice and unnecessary visits “which could endanger the health of both enforcement agents and debtors”.

In the context of an ongoing global pandemic, the nature of bailiff visits – going between people’s homes without knowledge of underlying health conditions – still presents a high risk to public health.

The use of virtual compliance methods is growing and from next week it has been agreed that any enforcement visits will not seek access to premises and will be contactless. But the visits will still happen.

Ministers could give further direction on how bailiffs can operate in a Covid-secure way. That means at the very least, guidance and oversight on test-and-trace, treatment of people in Covid-related difficulties, and suspension of visits during local lockdown.

Without the introduction of new safeguards, strong Government initiatives to help people recover from financial difficulty, such as next year’s Breathing Space scheme, are in danger of being undermined. Far better to change course now than risk a public health disaster and financial catastrophe for millions of people in financial difficulty, people like Marie.

While the original factors that prompted the ban are still in play, the solution is within our grasp. This is an area for Government rather than individual local authorities to take the lead,.  National Government must learn from these three lessons in order to reverse the tide of harmful and unnecessary bailiff visits, and ensure people are protected, as far as possible, when bailiffs return. If the ban on bailiff visits is not to be extended then these changes must be made urgently. In the absence of these modest safeguards, the return of bailiffs is something we can ill afford.

Sunak’s measures: What do they look like, where’s the money coming from and how do they compare to other countries’?

9 Jul

The public has fast become used to radical economic announcements from Rishi Sunak, starting with his budget in March, and yesterday was no different in terms of shock factor. Standing in the House of Commons, he laid out how the Government will further try to ease the economic damage from Coronavirus, in a £30 billion plan. “We need to be creative”, he said, and he did not disappoint.

In the immediate, Sunak wants to stop a wave of mass unemployment. To do this, the Government will incentivise firms to hang onto their employees – paying them a £1,000 bonus for every staff member kept on for three months after the furlough scheme ends (as long as they are paid a minimum of £520 on average each month between November and January).

Sunak’s employment measures are especially geared towards the young, who have already been badly affected by the Covid-19 fall out. The Government will spend £2 billion on a “kickstart” work placement scheme, to get up to 300,000 16 to 24-year-olds into employment, as well as paying firms a £2,000 apprenticeship bonus for each new apprenticeship they create over the next six months.

Sunak is also keen to breathe life into the hardest-hit sectors. To boost the hospitality industry, he has cut VAT on food, accommodation and attractions from 20 to five per cent from next Wednesday. The measure will remain in place for six months, will benefit an estimated 150,000 businesses and is said to cost about £4 billion

Perhaps the most memorable announcement from his budget is the “Eat Out to Help Out” scheme. It means that anyone visiting a restaurant or pub between Monday and Wednesday in August can get up to 50 per cent off their bill, with a maximum of £10 per customer. Businesses can then claim the money back from the Government.

How much will it cost?

None of this is cheap, of course. The Institute of Fiscal Studies (IFS) suggests that borrowing will exceed £350 billion as a combined result of previously-announced policies and the recession. The FT estimates that the deficit will reach 18 per cent of national income, and will be almost twice the size of the deficit at its peak in the 2008-09 global financial crisis.

Aside from borrowing, many details remain unknown as to how this will be paid back, and where Sunak’s plans are ultimately leading us. John O’Connell, Chief Executive of the TaxPayers’ Alliance, told ConservativeHome today: “Tax receipts have absolutely plummeted since the arrival of coronavirus. Total HMRC receipts in April and May 2020 were £45.2 billion lower than the previous year.

“At the same time, the OBR estimates that the total cost of the job retention scheme could exceed £50 billion by the time it ends in October. To pay for these massive shortfalls the Debt Management Office revealed that Britain is set to sell a record £275 billion of government debt in just five months between April and August. Incredibly, this is more than two and a half times the gilt sales for the previous financial year.”

He added: “As usual there have been calls for taxes to rise to balance the books but this isn’t sensible or feasible when the tax burden is already at a 50-year high. The last thing we need is to inflict austerity on taxpayers. It would be far better to eradicate wasteful spending and grow the economy by slashing taxes and cutting red tape.”

As ConservativeHome reported yesterday, centre-right think tanks have generally been concerned about the tax burden. Following yesterday’s announcement, Sunak was quizzed on LBC about whether there would be tax rises, which he did not rule out.

What do economic measures look like elsewhere?

While there are concerns about how enormous Britain’s payments will be, the UK’s stimulus actually puts the country “in the middle of the pack” of spending when compared to others across the world. Data from the Resolution Foundation measuring countries on the size of their fiscal response to coronavirus as a proportion of GDP (as of June 2020) puts the UK behind the US, Germany, Japan and Australia, but above Canada, France, the Netherlands and Italy.

Other data from Bruegel Datasets is around ‘discretionary fiscal measures adopted in response to coronavirus’ by June 15 2020, as a percentage of 2019 GDP, with UK standing at 4.8 per cent; the US at 9.1 per cent and Hungary at 0.4 per cent, alongside other countries.

So while Sunak’s measures look drastic, it’s worth remembering that the UK’s economic snapshot cannot be taken as a standalone, as others are taking serious action too. The eventual cost for the UK, and what happens next in the pandemic, is anyone’s guess.