UK deficit and protest

The large peaceful protests on Saturday were a success. Clearly Cameron and Osborne (and the little work experience boy standing closely behind them) did not come out and announce an immediate reversal of policy. But the need to think about what these cuts are doing to jobs, living standards and essentially services hopefully will be strong in the mind. Few politicians, no matter how ideological, want to ignore the views of a decent proportion of the public. And while U-turns are unlikely, the knowledge the further cuts announcements will lead to even stronger anger will be hopefully reduced the gun-ho spirit that the Tories have gone about them so far.

It made me think quite a lot about where I stood on it all. From everything I have read, the UK is in a dire situation, by a number of metrics we are (and were) in a worse situation than Greece and Ireland. It is only that the worlds banks have not panicked over lending to us, which more of less was the catalyst of the final nail to requiring international intervention and aid, that has avoided it so far. To an extent this is partly because the UK is seen as a stronger and more resilient economy, but it also has to be said that Osborne’s strong (perhaps too strong) actions last year (especially during the budget) reassured the financial markets (no matter how right or wrong those measures were over all).

It’s worth remembering that there are two key issues: our total debt (how much we owe overall) and the annual deficit (how much our spending is more than our income). Economists tend to break up deficit in to two types: Cyclical and Structural. Cyclical: when we have an annual deficit because the economy has taken a turn for the worst, which means we have less tax money (because of less jobs, less spending, etc) and at the same time our running costs are higher due to increases in things like unemployment pay. Structural: where our spending outstrips our income in both the good and bad years, which is a much more serious and needs addressing. It seems to be the general consensus that the UK has a Structural Deficit.

But is there a problem? As I was interested in the goals of the Saturday march and had a look at their website. Clearly they were against cuts, but what were they advocating instead.

While looking I came across a page called ‘How big is the problem?’. This page does them a disservice as it focuses purely on debt (and debt as a % of GDP) not deficit. It’s my understanding that debt is not seen as such a big issues as deficit, you might have a lot of debt to pay off but it’s quite possible to pay this off over time, especially if a country has an annual surplus (i.e. opposite to a deficit) or small deficit. They point out that the UK has a smaller debt as a percentage of GDP compared to many other countries, including Japan and Germany (their point being our situation isn’t too bad). True, but ask a group of financial experts which countries they are concerned about and they will almost certainly mention the UK, but less likely to mention Japan and Germany.

Talking about the deficit may not help the anti-cuts cause, as it clearly shows the UK is in a worse situation to many (and hence action is needed) but by selectively choosing facts to make an argument does no good. Better to be upfront and explain that while action is needed, the current action is not the right way to go about it. (much of the rest of the site is very good and informative I should add, and the previous page on the site does talk about the Deficit).

So how does our deficit compare:

Screen shot 2011-03-27 at 14.41.44.png

[image source: http://www.guardian.co.uk/world/interactive/2011/mar/14/new-europe-statistics-interactive ]

So it’s a problem. More so for us than for others. What can we do? three options:

  1. Cut spending, as the Government currently is.
  2. Cut spending but over a longer period than currently planned
  3. no cuts

Along with these options we have other options that can be implemented in tandem to help the problem:

  • Increase taxes and other Government income
  • Decrease tax avoidance and loop holes
  • Expand and grow the economy

The Government is going for ‘option 1’ above, and to some extent is trying all the options in the second list for increasing revenue.

It would be wrong to say that everyone on the anti-cuts march were all of exactly the same views. But that is to be expected, the point was a broad dissatisfaction about the level, speed and direction of the cuts. It’s articulated quite well here.

I saw some were against any cuts at all. I think this is silly. The deficit needs addressing, and simply hoping that higher tax income and a growing economy will solve it all is wishful thinking. Especially as economies often grow faster due to tax cuts, so one revenue raising option puts the dampers on the other one.

I’m not normally in agreement with Ed Balls, but what he says here I broadly agree with.

My main criticism is the speed of the cuts, and where they have been targeted. For example hearing of community workers in deprived London suburbs being laid off and the funding for such work being cut is not good. They can be the only lifeline stopping people spending a life with no education or skills being unemployed, causing trouble and crime. They give people a chance of a much better life, and, to be blunt to avoid being a burden on the state.

Cuts are hard. For example, national quangos and organisations are easy targets, such as the BECTA, the MLA, and the Film Council. But they can often bring more savings (and growth) than they cost. It might be hard to quantity all the work the Film Council did, but if they managed to persuade large films to be filmed in the UK, perhaps by advocating to the Government to provide incentives and getting councils to allow filming at locations even when it will cause disruption, it can create a whole ecosystem of small companies which support the industry. My own area of work (Libraries) could well do with national provision of back room technical provision and licence negotiation, rather than each Library providing it in house (essentially duplicating the same job all across the UK). At the same time, there are national services/organisations I can think which I would miss if they were gone, but not THAT much.

Cuts are, again, hard. Think of the UK Government departments. Where should the cuts fall? Education, Health, International aid? I think not! Business, skills, transport? Essential for long term growth of the country. Social Services/Welfare? Already over stretched in many parts. Higher Education, the Arts? Already cut to the bone.

So where: Defence: we are the third biggest spender on defence in the world, I think we could be sixth or seventh and be ok, we’re not a super power. EU: While most sections of Government were facing cuts (like most countries), the EU budget contribution actually went up, I would have thought it would be a prime candidate for a decent cut (I’m not against the EU, but it’s not a front line service, and plenty of fat that could be trimmed). The Welfare system provides essential support to many who need it for a variety of reasons. The minority who abuse the system need to be cracked down on without affecting honest claimants.

I digress, this article is not here to provide a full list of where the cuts should be. The point is that while any sort of cut is a hard pill to swallow, the cuts currently sometimes feel like they are aimed at those who most need support. Raising HE fees is one (not good) thing, abolishing the organisation that works with young people who would not normally go to University from poorer backgrounds and would be best place to show that University is still an option (especially with the ‘only pay back once earning a certain amount’ and bursaries) is just cruel and badly thought-out.

In terms of speed, cutting too fast will slow the economy. While there are some who feel that every penny spent on public services is dead money, public organisations do spend that money on staff and many third party services (just look at council spending above £500 on most council websites). This all adds to the economy, and I’ve recently heard small businesses say that the cuts to public services have a direct knock-on affect to their business.

However, we can not forget the situation we are in, and we are already talking about four years, if we are not careful we will be entering the next downturn before we even get out of the current one. Furthermore, if the financial markets think we are not doing enough our credit rating could be downgraded, we could even need a bail out.

Finally, Tax. Of course tax avoidance should be reduced, loop holes cut, if someone lives or works in the UK, or a company does business in the UK, they should be contributing a fair amount to the Government. Having the right rules and enforcing it can be difficult in this globalised world, but we need a system that ensures everyone involved in the UK pays their bit. the 20% VAT hits us all, the downside it includes those who can least afford it, but the upside it’s almost impossible to dodge, if your living in the UK, you’re going to pay it.

Listening to the comments on the Telegraph website you’d think the 50% tax rate for those earning over £150,000 has lead to the end of the world. They claim it means anyone with a brain or a business will leave the country and there’s no reason to try and create wealth. This is crap. They pay a little extra tax on some of their earnings, I don’t believe for a second that people decide not to start a business or take a high paid job as a result. It’s not about penalising the rich, it is about us as a whole needing to pay for the essential services for our society and it is right to ask people who can afford it to pay a little more. Suggesting that a person on a low wage, with kids, a mortgage and very little cash, should pay more tax so that high earners don’t have too is frankly shocking.

So that’s me. I guess I broadly agree with the aims of the march on Saturday. Not all perhaps, but most. And the Tories, for all their many (many) faults are tackling a serious problem. Taking measures to try and kick start the economy with lower corporation tax and other incentives is a right move, but one can not help think that in the short run, much of the money going in to the public sector was finding it’s way to UK businesses before it was cut.

Let’s hope we can get out of this rut. History suggests that will come, but how quickly. And let’s hope whoever is in Government when that comes will ensure we continue to offer good education, health and support to those who need it, while making this a country where small businesses and new ideas can flourish.

One thought on “UK deficit and protest”

  1. Great article Chris!

    Few things to add – the Revenue are already pretty tight on tax evasion where it’s profitable for them to do so (proving offences can be hard – it’s not worth spending 6 months prosecuting some cleaner who’s bringing in a few thousand a year cash in hand; when it comes to dodgy oligarch types, their affairs can be so complicated that just bringing the court case costs $millions and takes armies of highly trained & expensive accountants and lawyers). However, evasion is particularly a sore point at the moment from a moral point of view (in that, anybody who’s dodging tax is not “in this together” with the rest of society). The question is – should the Revenue pursue cases where they are likely to lose money, for the importance of a sense of fair play? Especially bearing in mind that’s money that could be spent on frontline services.. not an easy one to answer.

    Other point is – there aren’t that many people making much over £150k, so even if you tax them heavily, it doesn’t bring in that much additional money (bearing in mind they’re already taxed at 40%). Also.. just as “debt” and “deficit” are two different things, so are “wealth” and “income”. A DJ or footballer might make £200k/yr, but they’re not necessarily rich in the way we might normally understand it. Even though in any given year, quite a few people might make that kind of money, most people don’t do so for more than a few years (in their 20s for DJs & footballers, in their late 50s for County Council chief execs etc). So any extra tax on the rich is more about a sense of fairness than actually raising revenue (unless we were to implement Asset Tax like they do some places in continental Europe, but good luck getting that one past the electorate)

    Defence, sure, we need to stop pretending to be a superpower, get rid Trident, our joke of an “independent” nuclear “deterrent” & the carriers, but in that case somebody will need to come up with a pretty convincing “plan B” for the communities in Scotland especially that depend on those projects.

    Tories aren’t doing much better, mind you – cutting Corporation Tax is all very well for companies that are profitable, but as they went ahead and implemented the Jobs Tax anyway (aka 1p on Employers’ NIC stealth tax), fewer companies will be profitable in the first place. Would be much better IMO to slash employers’ NICs, give companies scope to hire more people or give their existing staff better pay rises, and tax them a bit more if they make a profit at the end the year. However, because it’s a stealth tax (mostly invisible to both shareholders & employees) it tends to go up rather than down.

    As for cutting the tax on petrol – that’s just straight up Full Retard, but that’s one for another day :o)

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