After unveiling his five-point recovery plan at the Labour conference in Liverpool, Shadow Chancellor Ed Balls concluded with a flourish: “I don’t care what they call it, Britain just needs a plan that works”. Assuming the aim is to turn around 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 (£2.5 billion) 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 young people (although his £100,000 seems on the high side). Bringing forward long-term investment projects is worthwhile, although without the volume and timescale proposed, it’s difficult to estimate how much.
Reversing the January 2.5 per cent VAT rise should increase spending, although it would also increase the deficit by £13 billion (unless this was compensated for by an equivalent rise in tax from other sources). Further, many poor families might decide to use most of the rise in disposable income to cut their debts rather than increase their spending. A VAT cut to 5 per cent on home improvements and repairs would be welcome, but would not provide many jobs.
A one-year National Insurance tax break for small firms which take on extra workers would not create many jobs while demand is still falling. Something is missing.
What is wrong with this package is that it accepts George Osborne’s position that recovery must come from the private sector and that the public sector has no direct role in creating
jobs. Yet for every 2.4 jobs lost in the public sector over the past year, only one 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 will not invest because there’s not enough demand for its 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 Shadow Chancellor’s package. Without it, merely tweaking the tax breaks won’t achieve the turnaround on anything like the scale required.
The usual objection (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), even at a very low rate of 0.05 per cent, would raise more than £10 billion a year.
Second, pension tax reliefs now cost the taxpayer £38 billion 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 per cent would yield £25 billion a year for serious job creation (for example, 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 – in other words, 40 per cent or 50 per cent and not the current 28 per cent loophole which opens the way to so much tax avoidance by the rich.
Fourth, a mansion tax above £1 million valuation (and, in the medium term, a land value tax to replace the council tax) would obtain a public dividend from high-value property that would redistribute inert wealth into active job creation.
And fifth, pension funds which receive £80 billion a year in contributions should be required to invest a fair share of this in new jobs and improved technology and infrastructure.
To put these revenue proposals into perspective, it costs £7 billion a year to keep a million people on the dole. For the same amount of money, 400,000 jobs could be created.
And the country would get a double benefit. Jobs would be created where they’re urgently needed: in house-building, improving transport and energy supply, and creating the new green digital economy. In addition, the deficit would be cut faster as growth slowly but steadily began to take off again through the impact of the multiplier effect on
the level of demand and further job creation.
Even if it were necessary to borrow temporarily to kick-start the economy, which is questionable, Britain is in a strong position to do so. Our debt-to-gross domestic product ratio is modest: slightly higher than Germany’s, but lower than in France and the United States, and far lower than in Italy or Japan. Even the International Monetary Fund is now swinging in favour of public intervention, rather than driving the economy Osborne-style into the buffers.
A public sector-driven jobs and growth strategy should be Labour’s alternative to the cuts – our answer to the banker-caused recession, and to the Tories using it to make ordinary people pay and to shrink the state.
