After unveiling his 5 point recovery plan in Liverpool, Ed Balls concluded with a flourish: I don’t care what they call it, Britain just needs a plan that works”. I agree. Assuming the aim is to turnaround the slide into stagnation by generating sustainable growth which will steadily reduce unemployment, it is worth asking how far the Balls plan will achieve this. Repeating the bank bonus tax this year (£2.5bn) could, as he says, be used to build 25,000 affordable homes (if they cost no more than 100,000 apiece) and will certainly provide jobs for some youg people (though his 100,000 seems on the high side). Bringing forward long-term investment projects is worthwhile , though without the volume and timescale proposed it’s difficult to estimate how much. Reversing the January 2.5% VAT rise should increase spending, though it would increase the deficit by £13bn (unless compensated by an equivalent rise in tax for the rich) and most poor families may decide to use most of the rise in disposable income to cut their debts rather than increase their spending. A VAT cut to 5% on home improvements and repairs is welcome, but won’t provide many jobs. A 1-year NIC tax break for small firms that take on extra workers won’t create many jobs while demand is still falling. Something is missing.
What is wrong with this package is that it accepts the Osborne position that recovery must come from the private sector and that the public sector has no role. In fact for every 2.4 jobs lost in the public sector over this last year, only 1 job has been created in the private sector. The truth is the opposite, that when aggregate demand has been and still is falling so sharply the private sector won’t invest because there’s not enough demand for their products or services, and only the public sector has the capacity to take up the slack and generate sufficient economic activity to reverse unemployment decisively. This is the missing component in the Balls package. Without it merely tweaking the tax breaks won’t achieve the turnaround on anything like the scale required.
The usual objection of course (certainly from Osborne) is how can it be funded? We should answer that. First, a Financial Activities Tax (with the useful acronym, a FAT cats tax). Second, pension tax reliefs now cost the taxpayer £38bn a year, two-thirds of which goes to those with incomes over £100,000 a year; ending this unjustified tax break for the richest 2% would thus yield £25bn a year for serious job creation (e.g. a quarter of a million affordable houses to be built a year). Third, the tax on bonuses, capital gains and dividends should be applied at the marginal rate (i.e. 40% or 50%, not the current 28% loophole which opens the way to so much tax avoidance by the rich). Fourth, a mansion tax above £1m valuation (and in the medium term a land value tax to replace Countil Tax). Amd fifth, pension funds which received £80bn a year in contributions should be required to invest a fair share of this in new jobs and improved technology and infrastructure.