Written by Robert Lee
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This article was first published in Briefings for Britain and we republish it with their kind permission
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(You can read Part 1 here)
The Treasury seems to envisage a funding crisis akin to 1976 when the UK was forced to go to the IMF for a “rescue” loan. This is a fantasy scenario. The UK entered the Covid-19 crisis with a deficit of around 2% of GDP. The UK government debt ratio was just over 80%, lower than the equivalent level in the Euro area (84%), well below the USA (107%) and many individual EU countries (France 98%, Italy 135%) and positively tiny compared to the Japanese outlier of 238%.The average maturity of UK debt is also high by international standards – some 15 years compared to around 10 years in the EU and only 5.75 years in the USA. All of these countries have taken strong fiscal measures to counteract the crisis and all will see big increases on deficits and debt levels. There seems no reason why UK’s fiscal position and outlook should worsen relative to international norms – it is more likely to improve its standing.
The biggest negative for the UK’s international credit rating is large and sustained current account deficits – averaging 3.9% of GDP over the last ten years. One beneficial consequence of the crisis is likely to be a marked fall in the current account deficit. The crisis is causing a marked fall in world trade. Since the UK is a large net importer of goods, as a matter of simple maths an equivalent % fall in UK exports and imports would result in a lower deficit. The shutdown in international tourism will also cut the deficit as the UK normally spends more than it receives. The very large falls in oil and gas prices will also improve the trade account as the UK is a large net importer of oil and gas.
The UK is therefore unlikely to struggle to sell its bonds to international investors. Furthermore, the BoE will be a massive buyer of UK bonds while the crisis lasts. The new BoE Governor has also made it clear that he does not foresee the need for new austerity measures. From what we know of the new Chancellor he also seems likely to resist these policy proposals. He is however young and only five months in the job, so may find it difficult to overrule his advisers. The role of the PM is therefore crucial. Fortunately, everything we know about the PM tells us that renewed austerity in these circumstances will be complete anathema to him. Such measures not only go against all his instincts but would drive a coach and horses through the Conservative Party manifesto upon which he was decisively elected.
With the PM’s backing the Chancellor should tell his senior officials to scrap these ideas – though there is a strong case for changing the pension triple lock given the lockdown’s impact on inflation and wages – and instead work on finding supply side initiatives to boost the sustainable growth rate. The government already has an agenda which aims to boost productivity and growth – a large investment programme in transport, housing, and 5G broadband, promotion of science and research and of SME’s, the introduction of free ports – and these have become even more important. In selected areas the crisis has stimulated accelerated cooperation between the private and public sectors, and rapid and effective deregulation, with some spectacular results. These can provide templates for future policy. The Covid-19 crisis has also greatly accelerated some pre-existing trends – such as increased digitalisation, home working, online retailing – which may materially raise future productivity levels.
Rather than raising taxes the Chancellor should make tax reform a new centrepiece of the growth agenda. The UK has one of the longest tax codes in the world, a dense thicket of allowances, exemptions, deductions, loopholes, incomprehensible rules, and a myriad of small and counter-productive tax wheezes. In spite of occasional good intentions every Chancellor since the radical tax reformer Nigel Lawson has added significantly to the tax code mountain. I am no tax expert but the outlines of such a programme are clear. First, stipulate that the initial objective of the reforms is not a reduction in the tax burden but to make the tax system much simpler and more efficient. Second, eliminate or reduce the majority of deductions, allowances, exemptions, and minor taxes. Lastly, set the remaining tax rates at the lowest level possible while keeping the package revenue neutral.
A number of policy research bodies have published detailed tax reform programmes along these lines which can form an initial template. The problem has never been devising a tax reform package, but having the political will to implement it. Although the whole economy will benefit from a more efficient tax system, the gains are widely diffused but the losses are highly specific. Every change will be noisily opposed by highly organised lobbies. Many officials (especially in the Treasury) and politicians will oppose such reforms because it removes power from them (a major benefit of the reforms!).
It will never happen without the PM and Chancellor backing it to the hilt. However, the opportunity to do it is more promising than for many years. The government has a large majority. It has a strong mandate to oppose tax increases. The Covid-19 crisis has created a sense of urgency that is making the previously impossible seem doable. The Treasury itself has created large new programmes to assist the economy at a speed unthinkable a few months ago. And the prize is great, because tax reforms along these lines could markedly raise productivity and the sustainable growth rate. The additional deficits and debt caused by the Covid-19 recession could then be brought under control without tax rises or spending cuts. In the longer term tax cuts would become possible. How about it Chancellor?
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Robert Lee is the Former Chief Economist, Board of Executors (South Africa), Economic Consultant (UK), and private investor.
I fancy the abandoning the EU/Common Market imposition of VAT, without being informed on the subject, I have always thought, even if it hasn’t caused much actual economic damage it has always engendered intense resentment in those required to operate the tortuous system and the public who are unable to avoid a costly addition to the price of what are general necessities and not luxury goods for which there was the old system of purchase tax
I believe the presence of a whole system within this nations bounds and which is so detested destroys initiative and enterprise in those required to practice it and additional cost to those whose pockets can least sustain it (probably the “legendary” disadvantaged)
Brexit was supposed to bring a bonfire of regulation – VAT should be the first on it!
There is the added advantage of its loss is that should “wee Burnie” succeeded in dragging an unwilling Scotland into independence, they would surely be required to reimpose it on re-entry to the EU that would please (not) the Scots who had just been liberated from the curse.
Roger, definitely VAT on domestic fuel should be abolished. That, together with abolishing all the ‘Green energy’ nonsense would free the poorest, including elderly, from having to choose between hypothermia or starvation! Food has no Vat because it is essential. Where is the sense in having Vat on cooking and keeping warm? Banning log burners was adding insult to injury!
Undoubtedly taking it off fuel in general would make sense to encourage what manufacturing industries we have left, (if any).
I did a L.O.L. at your dig at Scottish Independence. Make them join the Euro as well!
Thanks Pauline how do I L.O.L. you back?
I agree with you no VAT on fuel, but it is really the whole imposition of VAT, which I understand is an European (EU) concept in the first place and I have always considered it as a giant black impenetrable cloud hanging over the whole business effort of this nation (never mind the effect on the payee peasants).
It not only gums up the works and conduct of business, but puts every business fully in the hands of often a malignant government and can cause horror in small businesses particularly when they are in a young and tender state (I think it`s something to do with income when VAT isn`t income and yet it gets involved with the provision of day to day working capital – it`s nasty when you are at the limit of your overdraft and you have to choose between paying some suppliers or the VATman or else!)
I am a bit baffled. The reforms you suggest are certainly needed to improve efficiency of the Civil service. This is of no interest to me. It’s just scrabbling around in whitehall. And we know where that gets you. OK VAT is a blank power play to get a VATman into every department and every function and every curiosity suspected or ferreted out of all except favoured industries. Which is an expensive for everybody way of snooping.
To me the whole problem of tax is THE TAX BURDEN.
I have counted some 50+ seperate taxes and there are many more.. ..Tax amounts to 70% of the cost of everything in the UK. This money wasted is needed for investment in our strength and well being as a country. We help ourselves and our people by not wasting like foolish virgins.
To generate wealth requires more cash then Britain can nowadays find. Politics should not waste.
Reform without Tax cuts is pointless.. Just another example of going for process instead of outcome.
A simplified tax system is overdue by many decades. – The possibility is quite high with today’s head men. – But then we have the Treasury heads who will oppose anything of this ilk ! – Do we have a PM and Chancellor that are up to this clash ? – Only time will tell ! – Two guys with the right ideas, but do they have the will to make it happen ? – Simplification is not popular with the Treasury, and the more complex taxation becomes will add to their size and strength. – Saving time and money has not been their guiding rule, ever !
That’s right Mike. My reaction was ‘I hope Robert Lee’s optimism is well placed’.
“Every change will be noisily opposed by highly organised lobbies. Many officials (especially in the Treasury) and politicians will oppose such reforms because it removes power from them (a major benefit of the reforms!).”
There you have it. In a nut shell.