Plucking the goose: how do we ensure we tax and spend fairly in the recovery?
It’s much easier to pay off debt when you have some money coming in. This is the key to understanding the Treasury’s initial strategy at the start of the lockdown: their overriding aim was to prevent temporary disruption from becoming permanent. That way, they hoped, when the health threat passes, the economy would have the best chance of bouncing back pretty much intact, complete with its ability to generate tax revenues to flow into the national coffers.
So allowing businesses to furlough staff on 80 per cent pay was not, as some thought, a type of compensation for the inconvenience of lockdown, nor a concession to the idea of a universal basic income, but rather a mechanism to mothball a company with all its contracts still in place so that it could be started up again – preserving jobs and making nice taxable profits – as easily as possible when conditions allowed.
Seen through this prism, the initial reluctance to extend furlough to the self-employed makes more sense. The cost of that concession, which eventually became politically essential to ensure parliament would pass the required emergency legislation before Easter, is of the same magnitude as the entire emergency cash boost to the NHS and is going to people who wouldn’t have had any contractual barriers to going back to work as soon as their clients wanted them. A similar motivation drove the prohibition on furloughed employees from engaging in new work for someone else (unless already permitted under their original contract) – legally, for them, nothing is supposed to have changed.
However, the world around is changing, and rapidly so. Different groups of people have had hugely differing experiences of the crisis, and this will inform how government policy evolves. As a starting point, all of this has, of course, cost money: the Office of Budget Responsibility’s “baseline estimate” suggests around £42bn on furlough, £10bn each for the NHS and the self-employed schemes, around £30bn in help for small businesses and a huge welfare bill as 1.5 million additional applications are received for universal credit.
These costs are being paid just as revenues into government are falling. Businesses which find their markets have shrunk will have less profits to pay corporation tax, individuals who lose their jobs will no longer be paying income tax, and lower economic activity means less VAT and fuel duty too. Overall, the best estimate we have so far is that revenues will be £130bn lower this year than the figures Mr. Sunak presented to parliament in his Budget on March 11th.
Put all this together, and the OBR suggests that even in five years time, government debt will be £260bn higher than was expected in mid-March and as a proportion of GDP around 10 per cent higher (85%) than previously forecast (75%). The only thing that is sure is that the damage would have been worse if the government had not done anything at all.
Whose bill?
All of which begs the painful and profoundly political question of who is paying the bill for all this. With a fair headwind and a period of stability, one option is to do nothing. If the OBR’s baseline assumptions hold true, the fall in output in March-June will be reversed by the end of the year, meaning that those high levels of government debt will start to return to a slow downward path next year without any further policy changes, as the economy recovers allowing the coffers automatically to start to refill and debts slowly to be paid.
This may be attractive to a government under strain, ever-conscious of the need to maintain public consent for their actions. But there are reasons for doing more. For a start, the current forecasts are highly uncertain and debt levels before the pandemic were still way above what used to be considered prudent: faster action to reduce borrowing is simply sensible. But also, as Louis XIV’s finance minister, Jean-Baptiste Colbert, is reported to have said “the art of taxation consists in so plucking the goose as to extract the greatest amount of feathers with the minimum amount of hissing”. The question that the Treasury will be pondering over the summer is whether today’s goose – the great British public – will hiss differently as a result of its experience of this pandemic.
If the boundary of what is politically possible in terms of taxation has indeed shifted, then that presents two opportunities for government. The immediate one is that of prudence. It is better policy to bolster depleted resources when it is possible to do so. The second, more longer-term, is to use taxation policy to re-engineer Britain’s economic machine, and rebalance between different groups of society, to better fit our new post-pandemic priorities.
A starting point is to consider who, amongst the population, now enjoys such widespread support that it would be impossible to raise their taxes. Lewis Atkinson’s essay touches on the redistribution of esteem towards front-line NHS and other public sector workers but these are joined by low income workers in the food, retail and distribution sectors. They all now have a special status. If they were bankers in a good year, they would receive bonuses; perhaps any emergency budget in the autumn should think about a government equivalent.
Consider the sharp distinction, however, between this group who have never worked harder and furloughed workers who are paid while actively prevented from working. Of course, being furloughed is not without anxiety – job insecurity, overcrowding, home-schooling – but when seen through the eyes of a public sector shift worker it looks like they’ve had an easier few months.
Then compare both groups with the better-off office workers, the zoom conferencers, with their gardens, home offices, and bank accounts that may well be strengthening as the cost of commuting is saved and the cumulatively expensive temptations of sandwiches, lunch-break shopping, and the quick after-work drink are removed. The goose may not hiss much if this group is called on to do their bit by making a greater financial contribution.
Writing in 1940, the economist John Maynard Keynes, proposed a system for financing the Second World War that forced people to surrender some of their income temporarily through a system of “deferred pay”, a type of enforced saving, repaid with interest at a later date. It was designed to reduce demand in the economy allowing greater industrial resources to be available for the production of munitions, and lending to the government in the process. The forced saving that many find themselves undertaking at the moment is different – forced by circumstance rather than design – but the Treasury may find it expedient to draw a parallel between the two to justify government action.
The Conservative manifesto promised not to raise the rate of income tax, VAT or national insurance. However, this could be the moment to abolish the tax-free personal allowance on savings income. While the immediate benefits to the Treasury will be dented by interest rates being at their lowest ever rate, this presumably will not always be the case. And, with the government’s own debt servicing costs rising as interest rates rise, it is an attractive prospect for the Treasury to have a revenue stream that automatically rises at the same time. Reintroducing a tax on savings income would also send an important signal that spending is preferred over saving as the economy gets going again. And the amounts are not insignificant: when the relief was introduced in 2016, it was expected to cost the Treasury around a billion pounds annually.
A new tax-and-spend settlement
Thinking longer term, the government will also want to consider how to raise revenue while simultaneously using tax policy to re-engineer the economy in the way we now realise we want to see. Green taxation is one contender: with the government now controlling the railways and airlines on their knees we could make a policy choice to subsidise the former by taxing the latter. That way, as we start to move around the country again, it becomes a simple economic choice to prefer rail to air.
Similarly, with our domestic car industry struggling, now might be the time to accelerate the transition to clean vehicles through, for example, hiking tax on those old models that have been sitting unused on drives and kerbsides whilst at the same time – in a variant of a policy introduced following the 2008-09 recession – subsidising scrappage schemes that pay out in vouchers towards new UK-built electric vehicles.
Moreover, now that we’ve got more of a taste for supporting local independent shops, a necessity when online delivery slots were hard to come by, it might be the time for a tax on food miles, so that items that have travelled the furthest to reach you become more expensive. This would support local producers, bolster community links, make mass-produced snacks less attractive, encourage local micro farming initiatives and, with shorter supply chains, benefit the environment as well.
In the labour market, those with the lowest skills will, as always, be most at risk of unemployment when the economy is weak. With a large proportion of those furloughed likely to be in the low-paid retail, entertainment and hospitality sectors, it seems unusual that they are not permitted to use this time to engage in a side hustle if the opportunity presents itself. Even with the government’s support, some businesses will, unfortunately, go under in the months ahead. Facing that uncertainty, their current furloughed employees should not be prevented from raising their incomes through other work because of a standard contract term that was not written with this scenario in mind.
An interesting question arises as to whether furloughed workers – who effectively are on the government payroll – can be directed or encouraged to engage in government priorities. Thought is already being given to whether they should be encouraged to form part of the new land army of seasonal farm workers over the summer months, thereby helping our agricultural sector transition to the post-Brexit world less reliant on migrant workers. This idea could be extended, for example to support the roll-out of virus testing centres or create a new army of teaching assistants to support children who have fallen behind as the full horror of the attainment gap between rich and poor becomes apparent when schools return.
In 17th century France, the skill with which Jean-Baptiste Colbert managed to extract feathers from his proverbial goose led to a more efficient and progressive method of taxation and provided finance for Louis XIV to pursue his expansionary wars. Our current battle may be more existential but many of the lessons are the same.