Yahoo Finance While Hammond looks for a magic money tree, Labour has found one | Larry Elliott
For Spreadsheet Phil, the numbers look bad. Growth is weakening. Higher inflation means debt interest payments are rising. The recent election showed a nation heartily sick of austerity. There are pressures for higher public-sector pay.
The one big initiative announced by Philip Hammond in his year or so as chancellor was to move the annual budget from the spring to the autumn. Preparatory work for the first of those will begin in earnest over the summer, and nothing so far has suggested that Hammond will be in a generous mood. Quite the contrary, in fact.
The chancellor’s thinking is clear enough. Ten years ago, when the financial crisis broke, the UK was running an annual budget deficit – the shortfall between what the state raises in revenue and what it spends – of around 2.5% of gross domestic product. As a result of the subsequent deep recession, the deficit ballooned to a peacetime record of 10% of GDP. Since then, tax increases, spending curbs and modest growth have combined to narrow the deficit, but nowhere near as fast as envisaged.
Hammond is worried about the economic implications of Brexit but he also knows that Britain faces challenges from a growing, elderly population. The demographic time bomb is ticking loudly: hence last week’s announcement to raise the pension age for those born in the 1970s, and the disastrous decision to include plans for a “dementia” tax in the Conservative party manifesto.
Had the Conservatives won a healthy overall majority in last month’s election, Spreadsheet Phil would be out of a job. As it is, his position has strengthened as the authority of the prime minister has weakened. Theresa May would like a generous autumn budget but, as far as the chancellor is concerned, she can – to coin a phrase – go whistle for it. The first budget of a parliament tends to be a sombre affair, because governments like to get the bad news out of the way early. If taxes are to be raised and spending cut, the thinking is better to do it early than when an election is looming. Despite the government’s need for the support of the Democratic Unionist party to stay in office, this pattern is likely to persist.
Hammond’s argument goes like this. There has been an easing of the government’s stance towards the deficit since he took over as chancellor, with the date for running a budget surplus put back by five years to fund some extra spending on public infrastructure and a slightly less draconian approach to welfare cuts.
Both the deficit and the national debt are higher than he would like. The Brexit process mean these are uncertain times for the economy. Abandoning the path of fiscal rectitude would risk losing the confidence of international investors, who would respond to higher spending and higher borrowing by taking their money out of Britain. Higher interest rates would be necessary to prevent capital flight, and this would nullify the effect of the fiscal boost. All that Britain would have to show for it would be a bigger debt tab that would be picked up by future generations.
Critics of austerity say the government has got it wrong from the start. The order of priorities should have been “growth first, deficit reduction second”, and not the other way round. Fiscal policy – tax and spending – is a more powerful weapon when interest rates are at rock-bottom levels and should have been used more aggressively. Cutting back on public investment was a mistake that has only partly been rectified.
All this is true, but slightly beside the point, since the chances of the government admitting that austerity has been a failure are precisely zero. That would mean telling voters that all the sacrifices since 2010 had been in vain, which would be a hard sell.
On the other hand, voters seem to want more police to fight crime, more money for the emergency services after their heroics this summer, extra investment in the NHS and no cuts in funding for schools. If Hammond is to find money for higher public spending without increasing borrowing, he will either have to ditch government plans to reduce personal and corporate taxes or find new sources of revenue.
One option would be for the government to embrace the idea of a financial transaction tax, AKA the Robin Hood tax. This idea, fleshed out in detail last week by Prof Avinash Persaud at an event in London, ticks all the right boxes.
Persaud’s starting point is that Britain already has a financial transaction tax, and has had one for more than 300 years. It is called stamp duty, which is levied on the purchase of shares issued by British companies, and raises just over £3bn a year, half of it from citizens of other countries. Some trading activities are exempt from stamp duty and Persaud believes these exemptions should be restricted. He also proposes that the tax should be broadened to cover transactions in corporate bonds and cash flows arising from equity and derivative transactions. He estimates that this would raise £4.7bn a year.
One argument against a financial transaction tax is that it would lead to fewer transactions and so would not raise any money. Persaud said he accepted that the tax would change behaviour (indeed, that is part of the reason for having one), but that he had already made allowances for the reduction in activity in his calculations. If there was no change in behaviour, the tax would raise £13bn a year.
Nor does he accept that a tougher stamp duty regime would lead to a relocation of business. Liability for the tax would depend on where the financial instruments were issued and who owned them. A US investor, for example, would pay the tax on shares issued in the UK, but not on securities traded in the UK but not issued there. Likewise, a British investor would pay the tax on securities wherever they were issued and traded.
Persaud, himself a former banker, thinks big finance is a bit of a racket. If a company wants to raise money in the City, the charges amount to 2% of the trade – a rate unchanged in more than 100 years. Put another way, all the efficiency gains since the late 19th century have been captured by those who run the industry rather than shared with the customers. It is hard to think of any other sector where this is true.
The Treasury has always been opposed to a financial transaction tax, in large part due to its institutional capture by the City. Official attitudes would change, though, with a Labour government. Why? Because Persaud’s presentation was organised by the Labour party and he was introduced by the shadow chancellor. While Spreadsheet Phil is looking for a magic money tree, John McDonnell has already found one.
