TO fund public services we must forget debt finance and put the glut of cash in the banking system to use, writes George Kerevan.
TAXEs are back on the agenda. David Cameron has put the Tories ahead of Labour by promising to cut them (he’s fibbing). John Swinney gets his hands on landfill tax and stamp duty this Thursday, while Nicola Sturgeon will inherit new income tax powers in 2016. So far, she’s not said whether she’s a tax cutter or a tax raiser.
The truth is that neither the right nor the left of the political spectrum – in Scotland or elsewhere – have had anything new to say about tax policy for 30 years. The Right wants to cut, with no regard for necessary public services. Which is why some streets in New York remind you of rural Africa. The Left wants to soak the rich, forgetting that London’s oligarchs will decamp for Switzerland if you tax their mansions.
But how do you pay for decent social services without chasing away the investment that creates jobs? Equally, how do you stop an ever-expanding state from squashing freedom? Can’t we agree to confront both dilemmas head-on rather than hide in our mutual ideological cloud cuckoo nests?
Today the intellectual stasis of the two big ideological camps threatens catastrophe in the light of ballooning public debt. In America and Britain, the Right keeps promising to slash taxes but hasn’t the power base to cut real spending levels in compensation, as this might threaten civil strife. At the same time, the Left keeps spending but lacks the courage to raise tax levels to pay for it, partly because it needs middle-class votes, and partly because it fears the “markets”. Result: insane levels of public debt, no matter who is in power, much of it hidden in unfunded liabilities.
In 2008, the state had to step in and “rescue” the banks (ie their private shareholders). That only added to the scale of public debt – again, much of it hidden off the balance sheet. But with the entire western financial system in meltdown, how could American and British governments get anyone to lend to them, and at an interest rate that would not necessitate massive cuts to the health service or pensions?
The answer was a giant fiscal confidence trick – a state-sanctioned Ponzi scheme that could collapse at any time. The central banks of America and Britain printed unprecedented amounts of currency and used it to “fund” their near bankrupt governments. Over one-third of Britain’s national debt is now “owned” by the Bank of England. In other words, the government’s own bank is printing pound notes and effectively lending the money to the Treasury to pay public sector wages.
Because the Bank of England is funding the government, it can keep the cost of borrowing artificially low. Better still, any interest the Treasury pays to the Bank of England is then paid back to … the Treasury! So Chancellor George Osborne can claim he is “balancing the books” and David Cameron can tell the Tory Party conference it is now possible to cut income tax.
But Mr Cameron is telling porkies. In reality he is only offering to stop more middle-income earners being swept into the 40p tax bracket, as a result of frozen thresholds – so-called fiscal drag. Mr Osborne has been happy to turn a blind eye to this robbery as long as there wasn’t an election in the offing. But Mr Cameron has no intention of reducing the real burden of taxation on the middle class. How can he, given the scale of public debt?
On the Left, fiscal promises have become equally illusory. Labour’s ever-more modest spending promises come wrapped in political cotton wool, lest the markets panic. Shadow chancellor Ed Balls has committed Labour to freezing the welfare budget.
In Scotland, birthplace of Adam Smith, the fiscal fog is just as thick. Johann Lamont opposed the SNP’s surcharge on supermarkets, presumably because she worried that Tesco wouldn’t be able to afford another corporate jet. John Swinney scrapped said surcharge just before the referendum, presumably to curry favour with the business community – which promptly bit the hand trying to feed it. I detect a whiff of opportunism all round.
On the radical Left, the answers so far are less than satisfying. The effervescent Robin McAlpine (of Common Weal) proposes a wealth tax on the London super-rich, to eliminate the UK national debt and with it the need for austerity. He wants to forge an anti-Labour electoral alliance (including the SNP) aimed at winning 30 Scottish seats at the general election, and holding the balance of power in a hung Westminster. Intoxicating as this vision is, raising £1.4 trillion from a confiscatory wealth tax is a mite utopian, even if kleptomaniac oligarchs deserve it.
Where I agree with Robin is that any new political economy requires a shift away from debt finance and the introduction of some kind of wealth tax. There is now a surfeit of capital in the global banking system – a quarter of world Gross Domestic Product and rising – much of it there because central banks are printing money. With more capital than industry to invest in, this glut of cash ends up in speculation and dangerous asset bubbles. The result will be another financial crash unless we tax away this excess capital and put it to social use. (A wealth tax will kill investment? Ask the wily Dutch, who have a very successful one.)
The neo-liberal experiment may be over but this does not let the Left off the hook. Habitually, governments of the Left have failed to address the issues of maintaining economic efficiency and protecting freedom from bureaucratic interference. The Left is going to have to learn that consumer choice in free markets is not the same as domination of investment by greedy finance capital. If so, Home Rule Scotland could prove an interesting fiscal laboratory.