National Unity Government Needed

It's admitedly an exaggeration to say that the UK is only a failed bond auction and a couple of breaths of the animal spirits away from a death-spiral. But its not much of an exaggeration - we are way, way, too close for comfort. We need a massive shift in the government's fiscal position, while not making the recession worse. In the election it seemed that none of the parties could face being honest with the electorate -- to make vividly real, what they proposed in order to improve the public finances. So now, they should all get together to implement the nasty medicine:
  • Across-the-board 10% cut in all public sector workers' salaries -- with a 20% cut for MPs.
  • Increase in consumption taxes, specifically a GBP100/tCO2 carbon tax.
  • Simplify the income tax system with a flat rate of (say) 40%, with no income below (say) 10,000 taxed.
That lot wouldn't be popular - indeed it would bring people onto the streets.
Britain last faced this sort of deficit in wartime. We need a national government to sort it out. There should be a coalition of all the main parties for the 5 years needed to sort this out.


TCP said...

There are some more comments here

Adrian Wrigley said...

You have bold plans! Unfortunately, I fear they are deeply misguided.

A (upstream) Carbon Tax is a Good Idea. And the level you suggest is substantial. Other "consumption taxes", such as VAT are not so smart, and should be reduced, not increased. The 15% rate should have been kept, and lost revenue replaced by (for example) removing the reduced rate on domestic fuel.

But the other ideas in your prescription are part of the problem, not the solution. The share of income due to wage earners and entrepreneurs has been in chronic decline. The income share of land owners (including minerals and fuels) has risen, as has the income share taken by money producers (banks). The economic response has been for production and capital investment to decline far below the replacement rate - imports and private sector debts have filled the gap. The time structure of interest rates has been distorted, inducing short-termism, malinvestment and speculation.

To put it bluntly, we have become a nation of housing speculators, bankers, accountants, tax lawyers and welfare bureaucrats. Our biggest export has become debt and gambling (aka "financial services").

Reducing the public budget deficit will result in reduced private sector surpluses, and the usual problems with deflation (rising real debt, failing businesses). Increasing the deficit will continue malinvestment, inflation and financial instability. So you can't win either way. That's because you're playing the wrong game. Change the rules! (oops. ran out of words...)

Adrian Wrigley said...

The economy is structured to serve the interests of those in control over money issue. They're doing very nicely at the moment. They have expanded their industry many-fold over the past three decades. The Big Four Wall Street banks all made money every day in the past quarter. Astonishing! The industry is the beneficiary of the money cartel - the government (via tax), the Central Bank, the banking businesses and the bankers/traders. This is where the cuts are most urgent.

The second tier of beneficiary is the landowners. Tax revenue is collected from economic producers and paid to public sector staff to service landowners - provision of schools, hospitals, roads, police, flood prevention and so on. It seems irrational to perpetuate this subsidy, since the damage caused by production taxes (Income Tax, VAT, Corporation Tax, Capital Gains Tax) translates into lower returns even to landowners themselves as well as the wider economy.

So the solution lies in a systemic reform - changing the money, taxation and land subsidy system. Pay cuts and increases in production taxes you propose will provoke economic disaster and risk social collapse. Just like the 1930s.

The most urgent and profound systemic reform is the conversion of mortgage payments (essentially now for private purposes of bankers) into corresponding payments to government (for public purposes serving home owners). You might call this a "debt for tax" switch. The mortgages are bought by the government for newly issued paper money (which backs the deposits and represents regulatory capital). The capital requirements are increased to block expansion of deposits. The economic burden of the "financial services" sector is thus relieved allowing private sector growth in production and maintenance of public services.

Also urgent is the transition to unconditional welfare (from means tests and joblessness criteria) and the abolition of minimum wage. By rewarding joblessness and setting a minimum price for labour, we have achieved a paradox - a high labour cost, low wage economy. Expect a surge in entrepreneurial activity from those previously caught in the poverty trap.

So rather than a 10% cut in public sector pay, simply cut subsidies to landowners, bankers and the jobless. Pay out the financial surpluses to citizens as Universal Welfare (aka Citizens' Income, Basic Income Grant). Problem solved.

It shouldn't take a five year coalition to do this. But it does take leadership. The economic recovery would be swift, sound and equitable.

TCP said...

Glad you agree on Carbon taxes. This is such a good idea partly because it will cause spending to be brought forward onto capital infrastructure from future fuel imports, repairing balance sheets while stimulating the economy. But nobody (much) is saying this! An opportunity to write letters to the MPs??

While the case for the other ideas is less strong and also less clear cut I would defend them.

It is admittedly difficult to cut government wages without reducing demand, but public sector wages are now probably too high on average - they are substantially higher than the private sector. This is the quickest way to cut public spending, especially when the public and private sectors have got out of kilter (because public wages have grown while the private sectors)

Taxing the working poor is a bad idea. Reducing taxes on them is likely to slightly stimulate demand since they tend to spend income.

The rich are more likely to respond less to tax changes because they can smooth using savings. Over time (10 years) it's a good idea to reduce this 40% flat rate, taking people out of income tax. So increasing taxes on the rich, while simplifying the system and reducing marginal rates, and tell them that you will reduce them in the future.

Taxing land and property is not smart at present, because of the direct effect on reducing capital values directly impairs the loans of the banks. But the government should gradually ensure that taxpayers get the benefit of economic growth, and not the owners of a few scarce assets. Some sort of tax treatment of private property such as capital gains tax on first homes should be considered.

Reducing the leverage of banks over the course of the next 10 years would be also a good idea. They could be asked to retain their earnings in government-printed cash. (A gradual version of ideas that you have also suggested.)

TCP said...

A public sector wage cut is certainly dangerous, but I think the cabinet decision is encouraging because it makes it equal for everyone. Countries need to learn how to reduce wages across the board if they are to live in the Eurozone (admitedly this isn't a problem with the UK, but the experiment would be instructive and effective at reducing the deficit).

I suggest explicit asset (land) price targetting, with taxes as the instrument to achieve.

We need to reduce the leverage of the financial system.

I think the mortgage ideas you outline are important and worthy of being discussed as much as possible and at the highest levels.

TCP said...

P.S. One of the most important points is the carbon tax, which can revolutionize the tax base in this country and promote investment over future consumption AND solve climate change AND rebalance exports!

Yes the financial profits are sickening. They should be entirely retained in cash printed by the government and not paid as bonuses. The financial system should be slowly, deleveraged by a factor of 4 or more.

Adrian Wrigley said...

TCP wrote : "Taxing land and property is not smart at present,"

Changing land and property taxes is never smart. You create windfall gains and/or losses. You destabilise the finances of households, government and banks. The losers vote you out of office. California, Denmark, Ireland, UK all show this. The smart solution is to declare land and property taxes as obsolescent, and transition to a market-based system of paying for housing where the economic rents are used for public purposes

What I called for is the reform of existing housing finance agreements so people can pay the government instead of the banks. The new terms and conditions can be offered to existing and new home owners as an alternative. Bank leverage is immediately reduced.

Propping up the FIRE Economy as it devours the real economy appears to be governments' goals (in US, UK, EU, China). Action is needed ASAP.

Amazingly, neither money reform nor land reform is on the agenda of governments - illustrating the absolute power the beneficiaries hold over the political process.

I don't think there is any "middle ground" on these issues. The "rules" are driving economies (and ecosystems) into collapse. Your original post doesn't acknowledge the need to change the rules. You now seem to accept that reforms are needed, but still cling to your old medicine. You can't have it both ways!

TCP said...

I think you make a strong case. I'd encourage the other excellent readers of this blog - see also facebook thread above- to critique your ideas. The more testing new policy ideas get the better.