The TaxPayer’s Alliance Bumper Books of Government Waste helped set the national agenda on how Whitehall and local councils spend and sometimes squander our money. I’m hoping my new book on the national debt, just out, will do the same on our deficit. It’s astonishing how commentators defend our being in the red without much of a clue on how we got here this time and what happened to governments who trod this path before.
So how bad is the national debt?
One of the problems facing us is that people find it hard to think in abstract ledger columns, and billions are frankly sums that only Dr Who can imagine. So let’s try to put both the debt and the deficit into terms that readers can better handle, and can also perhaps more easily remember for debates down the pub and when writing letters to the newspaper.
The national debt at the start of this year was a very memorable sum. It ran at £1,111 billion. Expressed slightly differently, that’s £1,111,000 million, or £1,111,000,000,000 – four ones, nine zeros.
That’s a heck of a hangover to wake up to after your New Year’s Eve party.
Actually it was £1111.4 billion but with debt that big, what’s £400 million between friends? The state’s new house building budget since you ask, but we’ll let that pass.
Such was the debt but now let’s turn to the deficit. The Government’s tax take was around £547 billion for that year. The additional level of net borrowing on top of that was about £122 billion more. That meant that not far short of one pound in five being spent by the Government had to be borrowed. So the debt level in the ship of state was getting deeper not through a leak but a full briny breach.
Why is this a concern? We’re living through an age where debt-to-GDP is, very roughly, around 75%. That’s comparing the sum that the Government owes with the total of what all of us churn over in the economy in a year. The Maastricht criteria defined an acceptable limit by the way at 60% (and the figures above exclude the off-the-balance-book fiddles).
But the state doesn’t handle the GDP, just its own budget. The debt-to-Government-income ratio is already past 200%, and getting worse. It’s going to have to find that massive shortfall from somewhere, and with incremental damage.
Now let’s try to put the sums owed into a more visual form. What does that £1.1 trillion mean?
A few years ago, EU regulations on recycling electrical waste led to difficulties in disposals and a spate of illegal dumping going on. It created the infamous ‘fridge mountains’. £1,111 billion could, for example, be spent on some fairly respectable brand new Zanussi fridges. Let’s order them from John Lewis (which is where MPs go).
I estimate you could theoretically buy 3,268,823,529 fridges. Three and a quarter billion. Easily enough to put one in every household in Europe … in every room.
Now let’s apply some geometry and build a fridge homage themed on King Tut. We’ll make a giant pyramid. Let’s consider it a late Jubilee event and place it in front of Buckingham Palace, with its edge running the length of the Mall, and stretching out over the Parks.
On that basis our national debt just as it stood at the New Year could, by my calculations, reach up to form a pyramid 3,548 metres high (2.2 miles). Ben Nevis is only 1,344 metres (4,408 feet). We could guarantee ourselves a Turner Prize and erect a monstrous new Alp.
The local residents might, not unreasonably object, and Heathrow might have issues. So let’s reflect on an alternative spend.
One estimate of the current cost of HS2, the controversial rail link, is £32 billion. Many challenge its viability and value, but let’s take it at face value. Given the length of the project and its cost, we could instead use the £1,111 billion to run a line to beyond Peshawar in Pakistan. In other words, you could build HS2 from London to the Khyber Pass from the national debt as it stood on New Year’s Day 2013. That would make it far easier to commute to take on the Taliban.
Or we can reflect again on our problematic aircraft carrier budget. The bean counters in the Treasury tell us we can only supposedly afford two, and only if they’re empty: not so much aircraft carriers as “air carriers”.
Of course, an aircraft carrier needs planes to go in it, plus a task force to defend it. Let’s say, two submarines, four frigates, two top of the range air defence ships, and four supply ships. We’d thus create a 13 ship battle group to match anything the Americans have, with more firepower than the Falklands task force. I calculate £1,111 billion could build 93 such battle groups. Last time anyone counted, the Americans only have 11 aircraft carriers, so Britannia really would rule the waves.
How about another angle? Tony Blair is a much-in-demand public speaker. He is said to cost £364,000 per hour.
Let’s imagine his mission in life has become to sort out the debt. In turn, we’ll allow him to work for just 8 hours a day as he has to keep his voice. By our reckoning and on those hefty rates, Mr Blair could pay off the national debt (as it stood on 1 January) by endlessly lecturing to the world’s elite – but he’d be at it until the year AD 3047.
Or let’s review another former Prime Minister. Margaret Thatcher’s statue was a bit of a controversy in Grantham. It’s made of Italian marble and is said to weigh two tonnes. What if it were made of gold? Some comparative calculations indicate that it would come in at a little over £48.7 million. Rather than let Grantham decide whether to have the statue or not, you could just smelt 22,821 pure gold Thatcher statues and send them out to towns and villages across the country (possibly excluding Scotland), paid for out of the national debt. It would certainly be a glittering national memorial, though somewhat missing the point about the baroness.
So much for the debt. But what about the cost of servicing it, or what it means in terms of simply paying off the interest?
In 2012 debt servicing took £44.8 bn from the Government’s budget. This was money it was thus unable to spend on other things. Putting to one side the money spent on new credit that year, it means that one pound in thirteen raised by tax was just being eaten up by past debt. This is going to get worse as debt is accelerating far faster than tax revenues. Realistically, we’re looking at an extra £16 billion on debt repayments from where we are already at today.
So, what could be done with that extra lost £16 billion in annual interest payments coming out of your pockets?
Northampton General Hospital had to make £19.1 million savings in 2012 because of our national debt being shared out and passed down locally. The hospital has a budget of £230 million. Since an additional £16 billion has to come out of the budget somewhere, that means the bigger national debt will lead to the equivalent of the loss of 69 hospitals like this one across the country. Generating bigger deficits won’t protect the NHS, which is why Labour’s plan to create an even bigger deficit than the one we’re getting is pure crazy talk.
Or again we could look at how that £16 billion compares to taxes levied elsewhere. There’s understandably been a lot of kerfuffle about Government’s tendency to heavily tax our pints. What could £16 billion get you? It’s more than the pre-tax price of the beer sold in the UK every year, so you could hand it all out as free pints to the nation (though we wouldn’t recommend it). Not everyone of course drinks beer, so as an alternative we could buy up all the vino France exports globally, including all the champagne, and just hand it out in the UK. And since it’s causing the world a bit of a problem right now, based on GDP we can just buy a country like Mali with the remainder.
Our national debt is huge. The consequences of having to manage it are considerable. The impact of running a persistent deficit is painful. That’s what our political leaders need to understand, and the sooner very much the better. I hope the book helps.
Lee Rotherham’s new book, A Fate Worse than Debt: A History of the National Debt from Boadicea to Cameron, is available at bookshops.
Five years on from the start of the recession, with GDP still 2.5 per cent lower than it was then, it speaks volumes about the feebleness of the economy that today’s announcement of meagre growth last quarter was greeted with relief. But it’s not just the overall level of growth which is worrying, the dominance of Government growth is also a major concern.
GDP was up a paltry 0.3 per cent compared to the previous quarter, and up 0.6 per cent on the same quarter last year. Compared to 2008, it was down 0.5 per cent. But Government was up 0.5 per cent on last quarter, up 1.2 per cent on the same quarter last year and up 6.9 per cent on 2008. Our bloated and still growing Government might give the economy some short term relief from adjusting to new circumstances. But five years on, we’re not in the short term anymore.
Instead of a shot of ‘spending hair-of-the-dog’ at every budget, what we needed was a fiscal detox: tougher spending cuts to pay for the targeted tax cuts which would have strengthened the economy by boosting incentives and long term tax reform. The Government chose to allow spending to rise, hiked taxes and put substantial reform on the back burner.
It also failed to take the necessary steps in other areas, too. Instead of getting a third runway, Heathrow gets a report due in 2015. Instead of ending Sunday trading laws, we got a temporary reprieve during the Olympics so we wouldn’t seem so primitive while the world was watching our capital city. Instead of undertaking serious reform to roll back the planning restrictions that are stopping Britain from building the homes we need to end the housing crisis, we are getting a slight relaxation of the rules on single-story home extensions and on converting offices into homes.
But it’s not too late. The TaxPayers’ Alliance constantly identifies wasteful spending, not least in our How to save £50 billion (and still win an election) and our Research Fellow Mike Denham’s book Burning Our Money. We also published The Single Income Tax, which sets out reforms to specific taxes to make the whole system simpler, fairer and more pro-growth.
If The Government wants the the economic numbers to be less awful this time in 2014 and 2015, they need to act now and cut regulation, cut spending and cut taxes.
Last Sunday on BBC One’s The Big Questions, TaxPayers’ Alliance research director John O’Connell faced plenty of wishful thinking from other participants on the programme, not least from author and polemicist Owen Jones:
The real problem we’ve got is lack of demand in the economy. People aren’t spending money because demand has been sucked out. We’re now in the longest economic crisis not since the 80s, not since the 70s, not even since the Great Depression in the 1930s. We’re now in most protracted economic crisis in modern history in Britain.
This is why I think this is a false debate: because the reality is that we all want to bring down welfare spending but the reason it’s so high at the moment is that we’re spending billions of pounds of taxpayers’ money on housing benefit which has lined the pockets of wealthy landlords charging extortionate rent because they know you and I the taxpayer will step in.
Instead we should be building council housing which will create jobs, stimulate the economy and bring down housing benefit.
Another example, tax credits. They’re a lifeline for millions of people in this country but they are a subsidy for low pay because bosses aren’t paying their workers properly. So if we had a living wage we’d bring down spending on tax credits and also on housing benefits because 93% of new claimants are in work.
There is plenty of truth sewn up within Mr Jones’ argument. We are in the most protracted economic crisis in modern history. We do spend far too much on Housing Benefit. It is indeed lining the pockets of wealthy landlords. Rents are extortionate. And if the poor had higher incomes then the need for benefits would be reduced.
He’s right about all that. The problem is that he’s just spectacularly wrong on his analysis of why all these problems exist and what could be done to solve them.
WRONG: “The real problem we’ve got is lack of demand”
This is the opposite of the truth. The problem isn’t that we’re not spending enough money we don’t have. We’ve tried that. The Bank of England has slashed interest rates to 0.5 per cent, below inflation. It’s pumped £375 billion into the economy through ‘quantitative easing’, buying financial assets with newly created money. And of course government spending has soared in recent years, remaining far above tax receipts. This is the third year in a row that the Government plans to spend £120 billion more than it has coming in. So it’s not because the Government hasn’t been desperately inflating demand with hundreds of billions of pounds that we’re in trouble.
The problem is that we’re not making enough money and the reason for that is because we’ve put too many obstacles in front of people. Our infuriatingly complicated tax system is the most obvious area where we sap people’s incentives to get on. But planning restrictions, market regulations and employment rules all serve to make work and entrepreneurship much less attractive than it could be. The real problem is an uncompetitive supply.
WRONG: “we should be building council housing”
The answer to sky-high welfare spending is not to spend even more on a different bit of welfare, this time building council housing. Yes, if more homes were built then rents would come down and Housing Benefit expenditure would fall as a result. But there’s a reason why house-builders aren’t building enough: rules and regulations have made it too expensive so it’s only worth building if the rents that can be achieved can pay for all the expense of the planning restrictions, regulations and taxes. Saying that the public sector is better placed to get on with it and build them anyway, because it doesn’t pay attention to costs and value for money, isn’t the answer. The answer is to strip out unnecessary costs for house builders. Cut taxes, relax planning laws, ditch fiddly rules in towns and on brownfield sites, stop banning taller buildings, scrap silly requirements to build affordable housing that actually mean less of it is built.
WRONG: “council housing which will create jobs”
The Government cannot create jobs. It can reallocate jobs, it can destroy jobs, it can even reduce the number of jobs that it destroys. But it can’t create any. Money spent building council houses will have to come from somewhere else. Either it will come from existing spending, from tax rises or from borrowing money. So that means job cuts in other areas of government spending, jobs cuts as businesses lose sales as a result of tax rises leaving less money in customers’ pockets, or job cuts from lower investment spending as credit is sucked out of the private sector to fund government borrowing.
WRONG: “if we had a living wage we’d bring down spending on tax credits”
Suppose a salesman earns his company £3.10 extra profit for each product that he sells, and he sells two products an hour. He will earn his company £6.20 an hour. If he is willing and able to work for £6.19 (the current National Minimum Wage), the company might hire him, because it will earn one penny an hour more in profit than it costs to hire him. But if the National Minimum Wage was increased to the so-called ‘living wage’ of £7.45 an hour, the employer would lose £1.25 for every hour they paid him. Obviously, it would be great if he could sell three products an hour so that his employer could pay him more and still make money. But just because politicians pass a law to increase the minimum wage does not mean he will sell any more. What it means is that the employer will face the brutal choice: make him redundant or lose money. It shouldn’t take a genius to work out which option employers will chose.
Fortunately, John O’Connell was able to highlight the real problem:
“Look at the harm we’re placing on somebody who wants to create a job. Say they value it at £25,000: they can’t pay that employee £25,000 because of employer’s National Insurance.”
The best way to increase wages is to reform the education system so that the workforce is more skilled, and cut the taxes that reduce the amount employers can pay in wages: Corporation Tax and employer’s National Insurance.
Official statistics released today show that wages have fallen again after accounting for inflation. While consumer prices rose by 2.7 per cent last year, wages were just 1.4 per cent higher in the last quarter of 2012 compared to 2011. This means real wages are down 1.3 per cent. The silver lining to the squeeze on wages is that workers are becoming more financially attractive to employers, who are hiring more. Employment in October-December last year was up 154,000 compared to July-September and up 584,000 compared to 2011.
That is great news. Unemployment levels are shocking and the fact that wage restraint appears to be holding it down means hundreds of thousands of families will not have to suffer the many problems that come with it. But the grim prospects for better wages in future gives no cause for celebration. Less wasteful spending, a simpler, fairer tax system and policies to strengthen market competition are all required to shock the economy back into life and restore growth in living standards.
The TaxPayers’ Alliance constantly identifies wasteful spending, most recently highlighting the rise in the number of town hall middle managers paid over £50,000 a year. And our 2020 Tax Commission’s Single Income Tax has comprehensively set out the case for serious tax reform.
The Centre for Policy Studies yesterday published a report by Dominic Raab MP calling for the Government to phase out subsidies and make it easier for consumers to switch companies in health, water and energy markets. It also recommended allowing for-profit companies to offer academies and free schools to parents who want them.
These are the types of ideas that ministers should be working towards and implementing now if they want to restore underlying productivity growth to the economy so that employment can rise in future not because real wages and living standards are falling but alongside higher wages and better living standards.
The Institute for Fiscal Studies yesterday published their 2013 ‘Green Budget‘, detailing their assessment and predictions of both the public finances and the wider economy. The document makes for depressing reading for the Chancellor, George Osborne. In particular, they noted:
* Borrowing up, not down. Government borrowing this year has a better than 50/50 chance of being higher than last year. Their prediction is for annual borrowing to rise to £125 billion, up from £124 billion last year.
* Taxpayers’ austerity. While 79% of planned tax rises have already been implemented, just 30% of planned cuts to spending have. Meanwhile, private sector earnings have flatlined while earnings in the public sector continued to rise as if we weren’t in an economic crisis.
* Grim prospects for taxpayers. Tax rises in the year following elections have averaged £7.5 billion over the last 30 years. Political pressures may prompt the next Government to delay spending cuts again, with yet more tax rises to plug the shortfall.
However, as well as pouring cold water on the idea of taxing pension contributions more heavily, implementing a wealth tax or raising stamp duty, they have also drawn up some suggestions for cutting spending on social security.
* Freeze all benefits for three years from April 2013. The IFS estimate this will save £7.9 billion a year by 2015-16. Even exempting the State Pension and Pension Credit from this would still save £3.4 billion a year.
* Means-test Winter Fuel Payments and free TV licences by adding them to the Pension Credit. Estimated saving between £1.5 and £2.0 billion a year by 2015-16.
* Integrate Child Benefit within Universal Credit and end additional entitlements after the second child. Estimated saving: £7.6 billion a year by 2015-16.
* Abolish remaining contributory benefits, paving the way for National Insurance to be abolished. Estimated savings: £500 million a year by 2015-16.
There’s plenty here for the Chancellor to think about as he prepares for the Budget in March. Against a backdrop of a spluttering economy that is in urgent need of a tax cutting shock, it’s time for Mr Osborne to start thinking seriously about cutting spending sooner rather than later.
George Osborne made much of the importance of controlling the deficit in the run up to the 2010 general election. There were two key aspects of his approach. He would eliminate “the bulk” of the deficit by the end of this Parliament in 2015 and this reduction would be accounted for primarily by spending cuts rather than tax rises. The mix would be a ratio of 80:20.
By changing the deficit target in the 2011 Autumn Statement, the Chancellor effectively gave up the first of his two planks of his deficit policy, eliminating the bulk of it by 2015. But what about the 80:20 ratio?
The Chancellor understood that excessive government spending kills growth along with the taxes required to pay for it. He knew that above a certain level, debt and borrowing hold back growth. But two and a half years in to the new government, the fiscal consolidation has been disappointingly weak on spending cuts. And instead of cutting the overall growth of current spending, the cuts have come from capital spending. As James Forsyth recently has remarked, George Osborne is becoming the St Augustine Chancellor. Lord, give me austerity but not yet.
Much more of the fiscal tightening has been undertaken by tapping up taxpayers for more. The Treasury are engaged in a concerted large-scale campaign of adjustments to tax rates, thresholds and reliefs right across the tax system aimed at quietly emptying taxpayers’ pockets. Figures we released on Tuesday revealed that the total number of these rises already implemented is 254 with another 45 already planned for before the election, an astonishing 299 in total. In contrast, the number of tax cuts is just 119, leaving a difference of 180.
The changes are yielding results for HMRC, but not without cost. Receipts are projected to rise from £513 billion in 2009-10 to a projected £671 billion in 2015-16. Even after adjusting for inflation that’s an increase of 15 per cent. The continuing economic stagnation with growth figures yo-yoing around zero are the costs of stubbornly high spending on things that don’t create growth and increasing taxes on the things that do. This ‘front loading’ of tax austerity now with spending austerity later is reflected in the number of tax-raising measures.
The graph above illustrates that the majority of the Government’s plans for tax rises have already been implemented, at least according to the assurances of Treasury ministers. From National Insurance to VAT, from headline rate rises to tightening various rules and reliefs, the majority of the Government’s planned tax increases have already been implemented while the bulk of the planned spending cuts have yet to begin.
George Osborne told the Daily Telegraph in 2011,
I’m a Conservative who believes in lower taxes. They lead to a more enterprising economy.
Lower taxes don’t look likely anytime soon. He has another 45 tax hikes planned for before the next election but just 10 cuts. The more enterprising economy will have to wait.
Campaigners for punitive levels of tax often rest their case on the idea that ‘capital flight’, the phenomenon of people moving their money away from high tax areas to low tax areas, doesn’t happen. Taxes might be higher but those taxpayers will benefit from all the extravagant spending that is paid for with that cash, so runs the argument. But capital flight isn’t a ‘myth’ and people do move both themselves and, especially, their money so that they can pay less tax.
Taken together, it is clear that there has been a major loss of confidence and funds have been pulling money out of the country.
A new study from the Cato Institute, released over the Christmas break, looks at a number of reasons why low Capital Gains Tax (CGT) rates are best. They are concerned about a potential increase in the CGT rate in the United States. But here in Britain we are already paying the price for very high taxes on many capital gains. Writing about the new study in the Investor’s Business Daily, the author Chris Edwards sets out six reasons the tax should be kept low – all of which apply in Britain as well:
According to data from Ernst and Young quoted in the Cato Institute study, the top tax rate on capital gains in the United States was 19.1 per cent in 2012. That rate is higher than the 16.4 per cent average across the developed OECD economies and it is set to rise. But it is much lower than the 28 per cent top rate in Britain. After the annual exempt amount – normally £10,600 – our taxes on capital gains are absolutely punishing.
If we want to get our economy growing again, we need to cut CGT. Britain’s high taxes on capital gains are distorting economic activity and undermining economic growth. The right rate for this tax is zero.
Four years after the taxpayer funded bailout of insurance giant AIG, the US Treasury Department has sold off its last shares in the company. Over the last few years, the sale of shares has resulted in a nominal profit of $22 billion. The US government pumped more than $180 billion into the beleaguered firm in 2008 as the financial world was brought to its knees.
Just a few weeks later, RBS and Lloyds received bailout money to the tune of £37 billion, but returns similar to those from the AIG rescue are a distant dream to British taxpayers who are seemingly on the hook indefinitely. The US Treasury and Federal Reserve started reducing their stake fairly rapidly in early 2011 as the firm restructured and returned to profitability. In fact, American taxpayers have largely escaped losses from their politicians’ bailout gambles: the government has already got $449 billion of their $605 billion outlay back.
These numbers don’t however account for risk or inflation and there are still hundreds of billions of dollars of loans to the likes of Fannie Mae and Freddie Mac outstanding. Nevertheless, progress compares very favourably to us.
Credit must be given to Jim Millstein, the former chief restructuring officer at the US Treasury and his team who have overseen a dramatic restructuring of the business which has halved its workforce and wound down poorly performing operations.
Stateside, bosses of bailed out institutions were regularly brought before Congress to explain what was being done to fix the company and how taxpayers’ money was going to be returned. This approach focussed minds and made executives aware that it couldn’t be business as usual with taxpayers’ money at stake.
Contrast this to our no scrutiny, no questions asked approach and it’s easy to see why we’re in such a mess. Politicians this side of the Atlantic should take note and make RBS and Lloyds employees more accountable to the taxpayers who kept them in their jobs. Major tax reform, as set out in the 2020 Tax Commission is needed so that our economy can manage better whatever the conditions in the global economy.
But taxpayers also need protection from the prevailing bailout culture. Matthew Sinclair has discussed proposals from Andrew Lilico which would do just this.
George Osborne will deliver his Autumn Statement to Parliament tomorrow and is expected to bring grim news about his progress towards balancing Britain’s books and getting the economy back on track. So what should he say to bring relief to struggling taxpayers and restore balance to the public finances? He should break with the tradition of an ‘update’ Autumn Statement and announce policy shifts. Instead of nonsense about “shovel ready” projects and shuffling taxpayers’ money from one category to another, he should look to four key themes.
Firstly, tough decisions so the Government gets back to living within its means. Secondly, genuine action to bring back down our soaring cost of living. Thirdly, targeted tax and benefit changes to make work pay and create jobs. Lastly, lasting reform to ensure a competitive economy, a fairer tax system and affordable public spending over the long term.
1. Living within our means
2. Tackling the cost of living
3. Creating jobs and making work pay
4. Delivering lasting reform
Many of us enjoy a drink after work, or on the weekend. But it might soon become a little more expensive to unwind if the Government has its way. The Adam Smith Institute released a report yesterday on the minimum pricing of alcohol. This would mean the introduction of a floor price for alcohol, which will probably be levied at around 50p per unit.
However, the authors of the ASI’s report have highlighted serious problems with the data on which this policy is based. For one, the Sheffield model, which is used to measure the impact of alcohol policies, is wrong to assume that heavy drinkers will reduce their consumption of alcohol as a result of a price rise. What’s more, the minimum pricing of alcohol effectively increases the cost of alcohol for everyone. This hurts moderate drinkers – they are being punished with higher prices without any harmful behaviour on their part. The Telegraph reported today that a minimum price on alcohol could even impact on meal-deals where alcohol is bundled with food and sold on offer.
The policy could also hurt those on lower incomes to a greater extent than any other group. With already tight budgets, increasing alcohol prices could see them reduce their ability to spend elsewhere, lowering their living standards. It may also prove unhealthier – cuts could be made in other areas of family and personal budgets, such as the food bill.
The behaviour that the government wants to change – heavy drinking that is damaging in the long term – is the least likely to change in levels of consumption due to price changes. What is likely to happen is that the behaviour the Government wants to stop barely changes, whilst moderate drinkers and low-income earners are left poorer.
The researchers also found that the Sheffield model ignored the effects of minimum pricing on the illicit trade. This is a growing problem in the UK without introducing damaging policies. Alcohol bought and sold on the black market has the potential to be dangerous and is more likely to harm consumers – the exact opposite the government had hoped for with this measure. Past TPA research showed that £28.5 billion was lost in five years to the illicit trade in a range of products.
The intentions of the government are one thing but what will happen in reality is another. As the ASI’s report shows, the Government mustn’t base policy on a flawed model.
This infographic from our Fiscal Factbook illustrates the growth of government spending on debt interest payments since 2001, compared with Australia and Canada: