Tuesday, August 31, 2010

Dealing with the Deficit

Alan Beattie, the Financial Times' International Economy editor has challenged me to put forward a set of proposals to plug the budget deficit. Since he seems like a decent enough chap, I thought I'd oblige. It's a bit rough and ready but should hopefully do the trick.

Some Initial Notes
Firstly, I'm going to look to target the structural deficit, a large part of the deficit will disappear as the economy recovers, what we're concerent with is the bit that will still be there. I've set a target figure
of 4% of GDP, this is on the optimistic side but even if it's not the whole deficit it's enough to eliminate most of it.

For I'm using 2009 GDP of £1.392 trillion and applying the OBR figures of 1.2% and 2.3% to arrive at a working higure of £1.442 trillion for 2011. This gives us a target of £57.7 billion in cuts and tax rises. As a final note, I've not gone as far as taking into account dynamic effects from taxes and cuts. I've picked 2011 because the HMRC cheat sheet figures (see below) for 2010 look like they have been adversely affected by the recession, 2011 should (hopefully) represent a more typical year.

Getting On With It
I'm going for a 50/50 split of cuts and taxes so that means finding around £28.8bn of each. For tax rises, I'm using this HMRC Cheat Sheet. For cuts I'm using the BBC's cuts calculator

Taxes
The heavy lifting here is done by income tax, the basic rate has been given most of the work, it's an unfortunate truth that there is only so much that can be raised by taxing the rich. I've steered clear of VAT and where possible looked at taxes that will have the smallest impact on consumption.
  • Basic Rate Up By 3p in the UK and Scotland (£15.45bn)
  • Higher Rate Up By 4p (3.12bn)
  • Freeze Allowances for 1 year (Assume 3% inflation) (£2.55bn)
  • Increase Small Companies Corporation Tax Rate by 1% (£390 million)
  • Increase Corporation Tax by 4% (£3bn)
  • Increase Capital Gains Tax to 45% (£2.97bn)
  • Stamp Duty to 5% on properties over £500K (£750 million)
  • Increase IPT by 1% (£430 million)
  • 4p on a pint of Beer or Cider (£436 million)
  • 17p on a bottle of wine (£303 million)
  • 44p on a bottle of spirits (£136 million)
  • 24p on a packet of cigarettes (£135 million)
  • 2p on a litre of Petrol (£420 million)
  • 1p on a litre of Diesel (£238 million)

Total £30.33bn

Cuts
I've gone in to less detail on cuts, mainly because as one person I just don't have the knowledge of where the cuts could be made for the least pain, I have however put a cap on cuts at 5%, with slightly lower cuts to Welfare and Health and no cuts to Housing.

  • Welfare 3% cuts (£5.88bn)
  • Health 5% cuts £6.10bn)
  • Education 5% (£4.45bn)
  • Defence 5% (£2.00bn)
  • Public Order & Safety 5% (£1.80bn)
  • Personal Social Services 3% (£0.99bn)
  • Housing No Cuts
  • Transport 5% (£1.10bn)
  • Other 5% (£4.7bn)

Total £27.02bn

The total is £57.3billion, a little short of our target but close enough.

A Few Closing Thoughts
It's worth noting that foe Labour to spell out a plan in detail like this would be very politically dangerous, I've tried as much as possible to avoid upsetting anyone too much, but in the end there are some pretty unpopular taxes in the list. I don't mthink all is lost though.

First, the figures above are to deal with the majority of the structural deficit, if we follow Labour's half the deficit plan, we would only need to do half of the above in the course of a parliament, if we were to take a more relaxed approach to the deficit (as Ed Balls proposes) we need to do even less. The second point is that the popularity of certain tax rises/falls is highly dependent on media coverage. The cut iun income tax from 22% to 20% did little for Labour's popularity, the 10p tax was hugely unpopular and a 2007 change to NI that raised nearly £12bn went completely unnoticed. A lot depends on the way the changes are handled politically.

As a final note, there are a few options I've not used here, transaction taxes and land value taxes, for example. I've left these off mainly because I'm not sure of the costings. Finally, there is the option of monetising part of the deficit, it's a radical option but definitely one that should at least get some consideration.

Wednesday, August 04, 2010

A Long Boring Post on Economic Coordination

This post is intended as a bit of a reference point more than anything else, I've long been meaning to write a post like this as a reference to use in future posts.

The best way to consider the concept of economic coordination is to consider the economy as a network of interconnected economic relationships between economic actors. Some will be of a permanent nature (employment contracts, long term contracts and working relationships between firms), others can be implied from patterns of individual transactions (for example, a newsagent might sell around 10 newspapers a day, the individuals buying the newspapers may be different but the volume and nature of the transactions will fit a generalised pattern).

There are two points to make about this coordinated network that it is this coordinated network of economic relationships that provides both the supply and the demand in the economy, disruption of the network destroys productive economic capacity, it can often have knock on effects through the network.

The second point leads on from the first and this is that some destruction of capacity in the economy is both expected and indeed desirable. The network is not static but constantly adapting and changing, new businesses are created as old ones are destroyed. If a firm develops a new method of producing a good, it's likely that the old producers of this good will go out of business. However the labour used in the old processes is now free to be put to alternative uses, this means that new businesses will spring up using this excess labour. This process was originally described by Joseph Schumpeter who coined the term creative destruction.

Some on the right will follow this with the idea that all recessions are adjustments and that the destruction that occurs in recessions leads to new economic activity to replace that which was lost. This is not necessarily the case, the creation of new economic activity is a slow process dependent on the presence of entepreneurial talent to make use of the available resources. The creation of new jobs is a slow and uncertain process.

My final note on coordination is that the ultimate danger of any economic threat, be it inflation, recession or some other shock is that the coordinated network of the economy unravels. This leads to the destruction of economic capacity with it's accompanying decline in standard of living as well as the social problems of unemployment. The ultimate aim of economic policy should be to prevent this occurence.

A Quick Note on Big Society

There are some who say that David Cameron's Big Society is a tremendous opportunity for Labour, that we can't afford to simply dismiss it. Personally I have a big concern that Cameron wan't society to pick up the government's slack out of necessity. I think it might look a little something like this (with thanks to Shuggy)
And if it's too small? America I have been to. The reverse is the case: private opulence, public squalor. My sister lived in California for five years. America's richest state had the parents of publicly educated children exerting themselves in various fund-raising activities because their local schools couldn't afford to employ PE teachers.
I just don't like the idea of society taking up the slack in this way, some might think like the idea of parent's participating in this way, personally I think it should be an option, not a necessity.