Wed. Oct 27th, 2021


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“Low-tax conservatism has been dumped, but fiscal conservatism is living well.” This indicates the Resolution Foundation, what is happening with British fiscal policy. This is right. The Treasury is the most powerful government department. With Rishi Sunak as chancellor, it also has a politically effective spokesperson. One can not be surprised that it wins. But one should also not be completely satisfied.

The treasury is capable, but it is also defensive and defeat. Nicholas Macpherson, a former permanent secretary, captured it perfectly in a recent article: the treasury is defensive because the control of public finances is a ‘Sisyphean task’; and it is defeat because “No chancellor has received tax receipts above 34.1 percent of national income for the past 50 years”. The defeat of the treasury is indeed even deeper. It is institutionally skeptical about anything that comes from spending departments, and is particularly skeptical about schemes for economic improvement.

It takes a strong and determined government or a colossal crisis, like Covid-19, to dominate these tendencies. The skepticism of the Treasury is likely to make the ‘leveling’ ambition given to Michael Gove unattainable. This will require significant spending and delegation of fiscal and other powers to local governments. Such things will only happen on the corpse of the treasury.

Equalization is not the only source of fiscal pressure. The British electorate wants a European welfare state, but does not want to pay the tax. The decision to use national insurance, a levy on employees, to finance expenditure intended to finance the national health service (used mainly by the old), as well as to protect legacies of homes, emphasizes the unwillingness to to correct loopholes in the tax system or to raise new taxes in a fair way. It also justifies the Treasury’s skepticism about the UK’s ability to raise taxes.

This is why the Treasury insists on fiscal consolidation, percentage of GDP, net debt of the public sector, total managed expenditure, current receipts in the public sector

It also has major implications for public spending: health and social care will shell out the extra money, leaving little for other departments. So, say the Resolution Foundation, the share of “core” daily spending on health and social care will increase from 28 percent of all these expenditures in 2008-09 to 40 percent by 2024-25. This pressure will not be as severe as that of the 2010s. But the impact of the latter will not be reversed. Many services will feel terribly underfunded. The spending plans that will be announced soon will prove it.

Another paper from the Resolution Foundation indicates a ‘huge pressure’ on the income of people with low to middle incomes due to higher inflation, especially higher energy bills. For 4 million families with universal credit, it will be exacerbated this month with a £ 20 a week rebate. In April next year comes the higher national insurance levies.

More generally, according to the OECD, real gross domestic product in 2022 will be only 1 percent higher than in 2019. Indeed, the economy will never return to the levels suggested by the trend before the crisis.

Public expenditure is increasingly dominated by expenditure on health and social care, the daily core expenditure of the Department of Health and Social Care, as a percentage of all core daily expenditure

Brexit has temporarily allowed the country to transfer anger and disappointment to a nationalist cause. Then came the overwhelming shock of Covid-19, which drew attention to something even more urgent and opened the fiscal floodgates. Now we return to normal. The problem, as the Office for Budget Responsibility will make clear, is that it will be an unpleasant normal, despite an unexpectedly strong economic recovery. This will be made even more difficult by the significant cost to individual households and businesses of reducing their carbon emissions.

The treasury regards the management of such an unpleasant normality as its task. But both people and politicians can consider alternatives. The one would be to recognize that a European welfare state requires European taxes.

There is no correlation between lower average tax and higher average wealth, GDP per capita in 2019 (international $ s) v Average revenue share of GDP, 1990-2019 (%)

It is possible. According to IMF data, Germany’s taxes averaged 45 percent of GDP from 1991 to 2019, compared to 35 percent in the United Kingdom. Yet, despite unification, Germany’s real GDP in Germany was 16 percent higher than the United Kingdom’s in 2019. It is therefore entirely possible that a country can be rich while having a larger state. But if that were a convincing argument, we would need a much better condition.

This in turn requires politicians who are willing to adopt more radical policies, including more spending on research, education and training, regional development and the energy transition. They must combat the negative presuppositions in the British policy debate, so deeply embedded in the country’s most politically powerful institution. Yes, macroeconomic stability is important. But there must also be confidence that governments can bring about improvement.

martin.wolf@ft.com



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