George Kerevan: creating fiscal fix just possible


  By George Kerevan
I’M JUST back from Asia where they still make things – mobile phones, computers and all the fashionable clothes you like to wear. Of course, a lot of this fancy stuff is designed in the West. But don’t imagine the Chinese lack either the culture to design entrancingly beautiful things, or the brains to write software.
Arriving back home, I read the papers with my normal dismay. The main headlines were about a prime minister who left office before cellphones were available (read: nostalgia) and the impact of welfare cuts (read: managing decline).

Being a capitalist country that is pretending to be communist, China doesn’t actually have a state welfare system. This is cruel. But it has the result that Chinese folk save for a rainy day. When a young Chinese worker gets their pay cheque the first thing they do is call at the bank. China now has the highest personal savings rate on the planet – 50 per cent of income.

This compares to 2 per cent in the UK in 2008, when the credit crunch hit.

True, household savings in Britain have gone up a bit since the economic crisis began, and are now around 8 per cent. However, that represents folk paying off their accumulated debts. It does not indicate – as it does in China – working age people saving significant capital sums. Capital that can then be mobilised by an old-fashioned banking system to invest in making things.

My obsession with manufacturing has a lot to do with yesterday’s news that Westminster’s latest welfare “reform” will result in more than £1.6bn a year being taken out of the Scottish economy. That’s around £480 a year (and every year) for each adult of working age north of the Border. In Glasgow, where the welfare cuts will be deepest because claims are highest, the per capita loss is £650 per annum. Remember, that’s not the loss in spending per claimant, that’s the equivalent loss in local purchasing power per working age citizen.

Ostensibly, these welfare cuts are the result of the Tory-Lib Dem government’s attempt to curb public borrowing. I have no quarrel with wrestling public debt back under control before interest rates go ballistic. However, the reality is that public spending in Britain is still rising – as is the borrowing to pay for it. This government is like a rabbit caught in headlights: it is too scared to cut enough to eliminate debt instantly and boldly re-ignite economic growth. Yet at the same time it is cutting just enough to undermine consumer confidence and persuade business the economy is going to wallow in stagnation for a decade.

Far from wielding Margaret Thatcher’s handbag at public spending, this government does not have the books under control any more that HBOS did before it went bust. Even to get current public spending (ie: just the wages bit) covered by current tax revenues is going to require another hefty £10bn cut from departmental budgets. The appalling thing is that weakest in society are having their welfare benefits cut not to save the economy but as part of a public relations exercise designed to make an incompetent government look good to its supporters.

Labour need not crow. Under Gordon Brown, manufacturing jobs in Scotland were deliberately allowed to disappear in favour of cultivating the great casino economy in the City of London. To disguise the fact, Mr Brown used his (temporary) increase in tax revenues from the City to boost incapacity benefit. This explains why (when you remove incapacity and other benefits) the fiscal impact falls heaviest in Scotland. Thank you Gordon.

We need a solution to this political quagmire that simultaneously: 1, eliminates an unsustainable public deficit; 2, kick-starts the economy; and 3, does so without bashing the poor and sick.

First, we need to cut income tax significantly to boost domestic consumption and give firms a reason to invest. I’m not talking about Mr Osborne’s tinkering with the higher rate band. I’m talking about deep cuts in the taxes paid by ordinary families. Cutting taxes for the low paid produces a double bonus in stimulating demand and the search for work (especially among women). Sweden applied this strategy in response to the global crisis in 2008 – and had growth of 3.7 per cent in 2011.

The Lib Dems will argue they have persuaded the Chancellor to raise the threshold on paying income tax. But for many low-paid families, any gain disappears because they lose means-tested benefits as a result. Meantime the Chancellor is paying for this “reform” by forgetting to index tax thresholds for middle income-earners – meaning another million more people will be pushed into the 40 per cent band.

How do you fund a major tax cut without borrowing more? The answer is simple though it might frighten the fainthearted. You do it by cutting welfare spending proportionately. But here’s the point: as the Swedish case proves, provided your tax cut boosts employment and hours worked among the low-paid, the latter don’t lose real income as total benefit spending is reduced. This is not an attack on the poor – it is a shift of resources from deadweight taxation to work incentives.

Consider: there are around three and a half million working poor earning around £15,000 per annum. Giving them a tax cut or tax credit boost equivalent to a month’s wages – what the Swedes did – means finding £4.38bn. A cut of that dimension in the Department for Welfare and Pensions budget of £170bn is entirely credible – it’s less than the department’s running costs. And that’s before we factor in the boost to tax revenues from higher growth.

Tax cuts done decisively can be self-financing, especially given the surplus capacity in the economy. But to work they need to be aimed at the poor, not the rich. Of course, for all this to work we would need to start making things again. But that’s another story.

Courtesy of George Kerevan and the Scotsman newspaper