It is not all bad news. There is a significant shift of jobs from the public to the private sector and the economy is just growing, but only just. Whatever the spin, things have not gone according to Plan A. Unfortunately only Ed Balls has undiminished confidence that Plan B would have fared better. The truth is neither can work sufficiently well for the scale of the financial calamity, which ended the West’s boom with the biggest bust in history, well outside the experience of officials and politicians and beyond an agreed analysis by economists. Nevertheless experience teaches, and over the last five years since the first warnings of the credit crunch in 2007, we should have been able to learn quite a bit. This blog certainly has.
The first thing we have learned is that the crisis was a debt crisis, but not only a debt crisis. It was also a crisis of cash. The West had none left; it was all in the East. Within the debt crisis is the need to stop debt rising by keeping expenditures and revenues in balance. The second is to grow the economy to pay off the debts. If the problem had been understood when it was still of manageable proportions, this would have been straightforward. It was not understood until the whole financial system was on the brink of implosion. Something much more dramatic is required. Both the bank of England, The US Federal Reserve and the Treasury now understand this, and have cautiously used QE to boost the money supply; in the case of the Fed, now on a regular monthly basis.
Essentially two things have to be done before any recovery can be orchestrated. The first is to buy back government debt with new money, so as to reduce the national debt burden. This has happened in the UK. The second is to use new money to kick start the economy with massive investment in new house building, to the tune of a million units in three years, and other shovel ready infrastructure and construction projects. The effect on the government’s revenue stream of all the new jobs would be dramatic. Unfortunately this has not happened. Yet.
When it does taxation re-structuring will be the third element requiring Whitehall thinking caps, currently moth eaten and fusty, to be dusted down and donned. With a surging economy there is a risk of ample money fuelling inflation. Taxation is the method by which the supply is choked off, if needed. To be effective the taxation system has to be unambiguous, simple and cheap to collect. The present arrangements are none of these things.
Nobody should pay income tax below the national average earnings currently a shade over £25000 per year. Above that there should be one single rate of about 35%, payable by everyone with no allowances at all. Corporation tax should be abolished and replaced with a tax on turnover paid by every company regardless of profits, tax domicile, nationality, location of head office or whatever. If the money is taken in the UK, UK tax is paid. This could be a very small percentage, because very large volumes would be involved, but the concept of profit having to do with taxation would be ended. Capital gains would be taxed as income in the year in which they occurred, divided by the years over which the asset had been held prior to sale, for individuals, and as revenue for businesses.
As part of the mopping up operation, a career counselling and retraining programme could be offered to the multitude of accountants and lawyers engaged in the tax avoidance industry, since their dark arts would become redundant and to practice them a crime.
Whether you call this a plan A, B, or C matters not. The key point is, it is a Plan. And it would work.