Comment: How to stop an economic armageddon
As sure as night follows day an economic calamity will follow the coronavirus crisis.
The signs are already there. Unemployment is rising exponentially. A tsunami of redundancies will erupt as the government’s furlough scheme ends. Business bankruptcies, liquidations and closures are happening on a daily basis. Swathes of industrial disasters are destroying whole sectors of the economy, including aviation, tourism and hospitality, retail, engineering sectors, oil and gas, and many more besides. Even the Chancellor of the Exchequer is predicting a recession on an unprecedented scale, which could last years if we don’t take action now to prevent it.
Economic life won’t get back to anything like normal until lockdowns and social distancing can be dispended with. That won’t happen until either there is an effective and safe vaccine or treatment for COVID-19 or it dies a natural death. None of these things is likely to happen any time soon.
So how do we stop the economic rot meantime?
Another bout of austerity would be even more disastrous than the 10 years of misery inflicted upon us by George Osborne, for which our economy and society is still paying a heavy price. Instead, we need a strategy for growing the economy as fast as humanly possible.
Already the UK government has had to increase public spending by £124bn more than what was planned in Rishi Sunak’s March budget whilst tax revenues are falling off a cliff because of the lockdown.
The Bank of England has rightly stepped in to lend the government all the money it needs to deal with the immediate crisis. This policy has to continue to fund the recovery for as long as it takes, which probably means for at least two to three years.
It would be crazy to cut public spending or increase the total tax take at a time like this. Printing money through borrowing from the Bank of England at very low or even negative interest rates is a far superior weapon to that of deflating the economy when it’s already on its knees, as prematurely increasing taxes overall and cutting essential public spending would do. This is especially the case when there is little or no prospect of a spike in inflation. It is especially attractive as the government can take as long as it wants to repay the loans, if it ever does, with no detriment to the economy.
This strategy would allow the government to continue with its increased investment in infrastructure and scientific research and development announced in the March budget. Where possible this investment should be both increased and fast-tracked to help generate new jobs and industry with priority given to those areas of the country worst hit by the economic fallout from the pandemic.
The UK government should also allow the three devolved national governments to borrow directly from the Bank of England whatever money they need to stimulate their economies. Such lending should be on very favourable terms and be on top of and not instead of existing funding from Westminster.
As well as investing heavily in housing, superfast broadband, transport infrastructure, science and technology, all four governments in the UK must use a slice of their borrowed funds to help boost business resilience and investment. Maintaining our productive capacity until the economy gets back on to an even keel is essential. A massive training programme is also required to tackle the widespread and deep-rooted skills shortages, which have severely hampered growth in many sectors of the economy for a long time.
Another key strand of economic recovery will be starting to repair the social damage exposed by the coronavirus crisis.
Low pay amongst our key workers will no longer be acceptable. The underfunding of the National Health Service will need to be rectified. Social care will need to be overhauled. A serious assault on poverty and inequality in all their forms will need to be mounted. Investment in education will need to increase significantly. Benefits for the sick, disabled, unemployed and people living in poverty have to be increased.
There cannot just be a return to the economic status quo pre-COVID-19. There has to be fundamental reform to prepare for the future and these changes have to start now, as part of any economic recovery programme.
Although increasing the overall tax take in our current situation wouldn’t be sensible, there is nevertheless an urgent need for tax reform, to help bring about a fairer distribution of income and wealth, which is itself another way of increasing economic growth.
Putting more money into the hands of the least well off helps boost the economy locally and nationally in two ways. Firstly, poorer people spend a far higher proportion of their income than better off people, who tend to save and invest much more. The really well off tend to invest in assets like overseas property, which don’t help create jobs and wealth at home.
Secondly, people on low incomes spend most of their money locally, helping expand local economies.
As well as increasing wages and benefits, removing the unfair tax breaks that the wealthier sections of society benefit from should be a central feature of any economic recovery programme.
I suggest a number of reforms, which are long overdue.
Firstly, impose a tax on the UK turnover of all companies registered in one of the world’s tax havens and exclude such companies from receiving any taxpayer-funded assistance or being able to tender for public sector procurement contracts. Ban them from owning land and property in the UK.
Secondly, it would be obscene to abolish the triple lock for state pensions to save an estimated £8bn a year whilst nearly £40bn a year is spent on pension tax reliefs, two-thirds of which goes to higher rate taxpayers. Reform the latter to make it much fairer and keep the former.
Thirdly, for hundreds of years there has been much talk about introducing a wealth tax in this country. The Labour Governments of the forties and the sixties introduced a “capital charge” which was a form of wealth tax. On both occasions, the tax was temporary and didn’t become a permanent feature of the tax code.
Given the unhealthy and unfair over-concentration of wealth in the hands of too few people in the UK, the time has come to tackle wealth inequality. Impose a modern version of the capital charge and equalise the tax treatment of capital gains with that of earned income.
Fourthly, Employee National Insurance Contributions (NIC’s) is one of the most unfair taxes in the UK. For example, a worker earning up to £11,500 a year pays 12 per cent of their taxable income in NIC’s whereas someone earning £111,500 a year pays only 3 per cent of their salary in NIC’s.
This is redistributing income in the wrong direction and is crying out for fundamental reform as a matter of urgency.
Finally, the two main local government taxes are unfair. Council tax proportionately taxes the income of the poorest householders at a much higher rate than those of higher income earners. Business rates relate to the value of property, not on the profits or income of businesses. Many companies, including some who sell their goods and services via the internet, pay no or very low business rates even although their turnover and profits are far in excess of many of the firms who pay business rates.
It makes sense to replace both council tax and business rates with a land value tax.
Not only would all these tax changes make our country fairer, they would also greatly assist our economic recovery.
The tragedy is that the Scottish Government doesn’t have the power to deliver these reforms and there is no chance a Tory Government will do so. To avoid economic Armageddon, Scotland needs total control over its own destiny.
Alex Neil is the MSP for Airdrie and Shotts. He was the cabinet secretary for infrastructure and capital investment 2011-2012.