The Ed Balls 5-point recovery won’t work without a real jobs & growth strategy
October 2nd, 2011After 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.
October 3rd, 2011 at 11:50 pm
We should also stop funding and subsidizing the financial devices created by the city which divert billions of tax payers’ money. For example subsidizing the development of Carbon Capture and Storage rather than investing in the measures researched by ZeroCarbinBritain 2030 and the New Green deal.
http://think-left.org/2011/10/03/‘clean-coal’-another-financial-device-for-the-city-2/
October 13th, 2011 at 4:21 am
Reversing the January 2.5% VAT rise should increase spending, though it would increase the deficit by £13bn
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Which party instigated the rise to 20% from 17.5%?
Although I agree it had been cut to 15% as a temporary measure, by Labour, it was Labour who put the VAT rise into the governments pipeline. The newly elected LibCon act simply allowed the rise to pass on unhindered… it would have been kudos to them if Labour complained about their own work.
Now that we are in this position, government has put its foot down full and hard on the juggernauts brakes and is going to crimp quite badly.
If VAT is reduced to 17.5% for an interim period, those savings will not be passed on to the consumer. Prices will rise to fill the VAT gap and there will be a loss of revenue without any economic stimulus. If VAT were reduced to 15% there is a chance that such a reduction would be passed on in part to consumers; except a larger revenue deficit would be assured HM Government.
Putting up VAT to 22% would also be a blunder as businesses would add their extra yearly inflation onto the prices. A Vat rate of 22% might produce prices more like 26% and the government blamed by commerce for such a nasty hike.
Quantitative Easing handed to the banks will ensure they bolster themselves with sufficient capital to stay afloat when bad banks fail. There is a great deal of toxic debt still in the banking world and is the main reason that banks do not like lending to one another in case of loses. Thus QE to banks will not move the economy.
Viable businesses going bust because of a cash-flow problem and carefully scrutinised new small business starting up is where money will be immediately spent Buying new goods, hiring new staff or simply keeping their company turning-over. The government will claim back some of this in VAT, NI and Income Tax from employers, and eventually (with wealth production) be given the original investment back.
There are 1,000,000 young people without a job.
I suggest 5 of them could be business people at least. Give them a chance.
October 15th, 2011 at 10:11 pm
My response to this article is noted by its absence.
Perhaps the last VAT rise from 17.5% to 20%, carried forward by the LibCons without opposition, is realised as a Labour mistake.
In the calculations it is omitted that the £2.5 Billion house building process would have beneficial side effects if it were treat as a long term LOAN stimulus and not as a give-away investment.
From the £200 Billion investment VAT (if unchanged) could run up a healthy 20% return provided the cash went to NEW FIRMS (UK resident and taxed). The persons involved in the build would pay Income Tax and NI. as well as VAT on their spending (including fuel to get to/from work). This would also reduce the taxpayers millstone of paying unemployment benefit.
The houses would not be given away; rented out at FAIR RENT or LONG TERM MORTGAGE which would ensure the return of the capital investment.
Past sticking problems were in the land registry.
Freehold or Leasehold. If the land were not sold onto the consumer but kept by HM Government (Council Tax raised slightly to cover charges)with free but flexible bond between both parties.
Homes would still need to be nicely kempt as part of any governmental mortgage release. This is different from a Council House, or normal purchase as it would form the basis of a bond between Government and residences of (semi) private dwellings.
Now all you need do is see how you can kick start the rest of the economy so they can get a job and get onto this wonderful housing ladder.