briefing cuts:the callous con trick

Briefing

Cuts:thecallous

con trick

June 2010

Finance for the Future

Cuts: the callous con trick 2


Summary

“There isnoelectoralmandate forany partyto imposecuts of thescale andtype nowproposed”

“Agovernmentreally canspend tosave whenin arecession”

“The way topay for thelegacy ofdeficit thebankscreated isby raisingfairertaxes”

This report has one simple message to convey –that the coalition’s cuts aren’t needed and thatfairer taxes and the Green New Deal are.

The implication of the Office for BudgetResponsibility report issued on 14 June 2010 isthat over the next five years the government’sshare of GDP in the UK economy will fall from 24%of all economic activity to 21%. That’s a cut of12.5%.If true the total fall in governmentspending would amount to £100 billion a year bythe end of that period.

The Institute for Fiscal Studies has suggestedimmediate cuts of £34 billion in spending areneeded if this programme of cuts is to get underway and achieve its aim by the end of the plannedparliament.

But as this report argues, none of this isnecessary. There are two reasons for this. First,as Lord Keynes once predicted, and as theeconomies of the USA and UK when facing recessionin the 1930s proved, a government really canspend to save the economy when in a recession.The evidence of this is already clear during thisrecession: borrowing is smaller and unemploymentis lower than forecast because of the measurestaken by the last government to stimulate theeconomy. This report argues that a Green New Dealshould be the basis for continuing that programmeof support for our economy to make sure we comeout of the recession better equipped for thefuture we’re going to face.

And it argues that the way to pay for the legacyof deficit, most created by the banks because wehad to bail them out, is by raising taxes on thebest off in society and on companies, not bycutting spending.

That’s not to say there are no cuts and noefficiencies to be had in government spending. Ofcourse there are. But it wasn’t governmentspending that caused this crisis: it was financethat caused this crisis. And there is noelectoral mandate for any party to impose cuts ofthe scale and type now proposed.



The evidence to support these arguments is, weargue, very strong. The case for investment inthe Green New Deal and the evidence todemonstrate how it will repay its own cost duringa recession has already been made in the reportsthat the Green New Deal group has producedi.

This report concentrates on how to pay for thedeficit. And as a result this is a report abouttax – and how it can get us out of the deficitwe’re in.

Caroline Lucas MPLeader of the Green Party

Richard Murphy FCAFinance for the Future LLP

Colin HinesFinance for the Future LLP



Background to a crisis

“Cuts willbe viewedaspunishmentof theinnocentfor thesins notjust of theguilty, butof therescued andnow bonus-receivingguilty”

The UK faces a financial crisis.

We have been in recession. It seems very likelywe will shortly be in recession again. Theexpected round of government spending cuts willensure this is the case.

In our opinion cutting now will make thingsworse; fairer taxes are the alternative wepropose.

There is good reason for choosing tax to dealwith the deficit. As the Financial Times’ MartinWolf has pointed out, cuts ‘will be viewed aspunishment of the innocent for the sins not justof the guilty, but of the rescued and now bonus-receiving guilty’ii. Tax can do the exactopposite: those who created the crisis can bemade to pay for it. That is what we propose.

That is vital because it is not just a case ofthe guilty getting off scot free: as the GreenNew Deal group has shown the ‘innocent’ will paynot just by suffering worsening public services

but also via a rise in unemploymentiii.

The Chartered Institute of Personnel andDevelopment warned in June 2010 of 750,000 publicsector job losses over the next five years and ofan unemployment level of close to 3 millionduring this Parliament. What they failed to takeinto account was the private sector consequencesof such job losses, which will, we think push thetotal unemployed to nearer 4 millioniv.

This is the result of the Coalition’s eventualdesire to cut government spending by at least £60billion a year. The plan is that cuts in publicexpenditure will provide 80% of the deficitreduction, and higher taxes a mere 20%.

Our argument is that this is misguided: all thisdeficit reduction could be achieved by tacklingthe more than £100 billion of taxes lost eachyear because of abuse of loopholes in the taxsystem, tax bills remaining unpaid and fromillegal non-payment of tax.

We are not alone in thinking this. Professor John

mailto:http://www2.lse.ac.uk/researchAndExpertise/Experts/[email protected]



Hills of the London School of Economics and Chairof the National Equality Panel, has used thelatest figures from the Office for NationalStatistics on the effects of taxes and benefitson household income to consider the tax risesneed to halve or completely eradicate thedeficit, rather than putting in place theproposed level of cuts in welfare and services.

He has calculated that to raise half theCoalition’s desired cuts of £30bn from across alltaxes, VAT would go up from 17.5% to 19%, andincome tax up from 20% to 21.7% whilst NationalInsurance, tobacco duties, car taxes andeverything else would need to increase by thesame proportion. To raise the full £60bn pledgedby the Coalition over the parliament would costtwice as much, so basic income tax would go backup to 23% – the same rate it was the last timethe Tories were in power.

Clearly, different mixes of different taxes arepossible. We would prefer not to raise VAT, forexample, because of its regressive effect.However, the point is this: paying for thedeficit out of taxes is possible.

However, the question of fair tax rises ratherthan cuts was never put to the electorate. Giventhat the Liberal Democrats have now joined theTories as ardent proponents of cuts being thesource of 80% of all deficit reductions, it isnow for all in political opposition in the UK tosay where they stand in the cuts versus fairertaxes debate.

As Polly Toynbee has perceptively pointed out,once people have felt the cuts biting deeply bynext year, then ‘a wide consultation might wellreveal people would rather pay more taxes, spreadfairly, than see this slash and burn. But no onehas put the case.’v

That then is exactly what we seek to do in thisreport.

In doing so we throw down a challenge to Labour’saspiring new leaders to come clean on their viewson this utterly crucial choice.

This is the question of our time. It defineswhere people stand. Let the debate begin.

mailto:http://www2.lse.ac.uk/researchAndExpertise/Experts/[email protected]

http://www.statistics.gov.uk/STATBASE/Product.asp?vlnk=10336

http://www.statistics.gov.uk/STATBASE/Product.asp?vlnk=10336



The Coalition’s soothing lies“DespitetheCoalition’sclaim thatthere willbe no frontline cutsto servicesit israpidlybecomingclear thata greatmany suchservicesare alreadyfacing theaxe.”

The Liberal Democrats, in playing the role ofapologists for the Cameron / Osborne pain machinehave asserted that the Coalition’s cuts will notbe as destructive as those in the Thatcher era.It is difficult to see how this could be. Hercuts, starting in 1981 were set against a verydifferent background. As Larry Eliot of theGuardian newspaper, and a member of the Green NewDeal group has said:

“The budget hawks like to cite Geoffrey Howe'sdraconian 1981 budget as evidence that fiscaltightening is perfectly consistent with economicgrowth. So it is, providing there is scope for anover-valued pound to depreciate and forexcessively high interest rates to be cut. So itis, provided that tumbling oil prices raise thereal incomes of consumers and cut costs forbusinesses. All these things happened in theearly 1980s; none of them are likely to occurnow. The pound has already fallen by 25%,interest rates are at 0.5% and oil prices show nosign of falling much below $70 (£48) a barrel.”vi

The reality is that beyond cutting some flagshiphigh cost projects like Trident and ID cardsthere are no soft cuts to be had now: they’ll allcause pain.

And despite the Coalition’s claim that there willbe no front line cuts to services it is rapidlybecoming clear that a great many such servicesare already facing the axe. The TUC in itsCutsWatch programmevii has already identified cutsto housing, transport, road safety, help for theunemployed seeking to find work, help for regionswith high unemployment, free school meals, policerecruiting, crime prevention, care services,adult education, help for children with learningdifficulties, school building, and many more.

The focus of the cuts is clear: Michael Gove, theEducation Secretary, has stated that he isscrapping plans by Ed Balls, his predecessor, toextend free school meals from next term to500,000 of the very lowest paid. The ChildPoverty Action Group said that it was “stunned”by the move, which would have lifted 50,000children out of poverty at a strokeviii.



“Those ingreatestneedultimatelybear theburden ofpaying offthe debt…”

CoalitionministerBob NeillMP

And, even more starkly, the Communities MinisterBob Neill was drowned out by uproar from Labourbenches in the House of Commons when he said“Those in greatest need ultimately bear theburden of paying off the debt…”ix. The sad truthis, this was not a mistake, he was replying to aclaim from Labour MP David Blunkett who had said“those in greatest need will inevitably take thebiggest cuts” and Bob Neill confirmed that was,indeed, the Coalition government’s intention.

It is clear that the Coalition Government isunderpinned by the mutual desire of theConservatives and Liberal Democrats for a Planfor Pain.

Our claim is that this should not and need not bethe case.



The Green New Deal- the real wayout of the crisis

“The GreenNew Dealprogrammeproposesmassive andsustainedinvestmentin energyconservat-ion andrenewableenergygeneration”

Drawing inspiration from Franklin D. Roosevelt'sNew Deal launched in the wake of the Great Crashof 1929, the Green New Deal programme proposesmassive and sustained investment in energyconservation and renewable energy generation.

This, we argue, is the only way to provide hugenumbers of jobs in the places where peopleactually live in the UK whilst in the processcountering the deflationary and job cuttingpolicies increasingly being introduced throughoutEurope by governments obsessed with returning usto an age of austerity.

In contrast with the Coalition government’s Planfor Pain The Green New Deal’s first step will beto train a vast “carbon workforce” to tackleevery building in the UK making them energyefficient as well as fitting renewables such assolar photovoltaics, where appropriate. The aimis fourfold.

First, we want jobs in the UK, now.

Second we want to secure our future energy supply– and if we are to have any hope of shifting to amore sustainable economy, it cannot be carbonbased.

Third, we want to make the UK a leading exponentof green energy – and create a vital new sourceof exports in the process.

Fourth we want to clear the deficit – and thiscan only happen without pain, indignity, povertyand suffering if there is investment in the Greeninfrastructure our country so desperately needs.That is what the Green New Deal seeks to deliver.

To achieve this programme will require theallocation of public and private funds to fostereconomic activity that protects the environment.We think this is investment in our present andour future. But not just our energy future: oureconomic future too. By saving on future energycosts, and the import of oil, gas and coal, theGreen New Deal protects the value of the pound.



“The GreenNew Dealgeneratesjobs andbusinessopportune-ities – andwe wouldwant peopleto grabthese withopen arms.”

And, by building opportunities for exports, itsustains us into the future – a future it seemsthat no one else is planning for.

In the process the Green New Deal generates jobs,but a lot more besides. It creates businessopportunities – and we would want people to grabthose opportunities with open arms.

It also creates new opportunities for saferhavens for savings. The Green New Deal could beunderpinned by “Green Bonds” issued to pensionfunds and private investors, the return on thembeing paid for from energy savings. These bondscould then provide the basis for our futurepensions – at a time when there is doubt abouthow these can be funded.

And it also brings centre stage a fairer taxsystem to reverse current inequalities byconcentrating on tackling tax evasion andavoidance and making the rich pay their fairshare towards the cost of the social glue thatmakes for a civilised society.

The Green New Deal approach provides an economicsystem that ensures both a secure future for ourcitizen’s and environmental sustainability.



Why The Coalition’s Cuts Won’tWork

“Theproposedcutsprogrammeof theCoalitiongovernmentwill tipthe nationinto a deeprecession”

Look after the unemployment, and the budget willlook after itself.

John Maynard Keynes, January 1933

When Japan – or Canada or Sweden – tightened inthe 1990s, a buoyant world economy could absorbexcess domestic supply. There is no world economybig enough to offset renewed contraction inEurope and the US. Concerted fiscal tighteningcould, in current circumstances, fail: largercyclical deficits, as economies weaken, couldoffset attempts at structural fiscal tightening.

Martin Wolf Financial Times June 8 2010

The proposed cuts programme of the coalitiongovernment will tip the nation into a deeprecession by increasing unemployment, reducingtax receipts as a consequence (which of coursereduces the capacity to clear the deficit) and bylimiting government investment. This isparticularly true when the whole of Europe- theUK’s biggest export markets is engaged in similardemand reducing ‘age of austerity’ cuts.

We must learn from the lessons of the 1930s.Following the success of the New Deal in theearly 1930s Roosevelt was wrongly persuaded in1936 that the US economy was strong enough towithstand cuts in public spending.

The budget for 1937 was slashed and the USeconomy promptly went back into recession.At the end of 1937, the New York Stock Exchangesuffered its worst day since 1929. The Dow Jonesdropped 40 per cent between August and October,and industrial activity fell more sharply than atany time in US history. In the last four monthsof 1937, more than two million people lost theirjobs, followed by a further two million in thefirst three months of 1938. If unemployment hadcontinued to rise at thatrate throughout the year, the country could havelost almost two-thirds of the jobs created by theNew Deal’s work programmes since 1933.

http://www.guardian.co.uk/business/useconomy

http://www.guardian.co.uk/business/useconomy



The wider population was left in no doubt of thebrutal consequences of cutsin public expenditure. As a result on 14 April1938, Roosevelt submitted a large spending andlending programme to Congress amounting toUS$3.75 billion, as well as measures to expandcredit. The result was dramatic: by the end ofthat year, employment had risen by two million,factory jobs by 26 per cent and steel productionby 127 per cent. And the deficit fell as aresultx.

Today these lessons from Keynes and Roosevelt arebeing drawn upon by economic commentators rangingfrom the Financial Times’ Martin Wolf through tothe 2008 Nobel prize winner for economics, PaulKrugman. As he has said this month, the onlyexplanation for the current demand for cuts ispolitical. It cannot be otherwise for as he says:

In short: the demand for immediate austerity isbased on the assertion that markets will demandsuch austerity in the future, even though theyshouldn’t, and show no sign of making any suchdemand now; and that if markets do lose faith inus, self-flagellation would restore that faith,even though that hasn’t actually worked anywhereelse.

And this, ladies and gentlemen, is what passesfor respectable policy analysis.

Paul Krugman, New York Times, June 2010xi



Public Sector Cuts Won’t Even SaveThat Much

“If the UKgovernmentcuts thejob of anemployeeearning£25,000 ayear itmay, aftertaxrevenueslost andbenefitspaid aretaken intoaccount,save under£2,000 ayear”

A significant part of all public services aresupplied by UK resident people working to supplyUK based services to UK based people for thebenefit of the UK as a whole. This is animportant point from an economic perspective: ifthere’s one sector of the economy where jobsaren’t exported it’s the public sector.

It’s important from another perspective too: inthat case putting these public sector employeesout of work does little or nothing to reduceoverall government spending. These people do notgo away if they are sacked in which case whenthere are very few private sector jobs for peoplemade redundant (as at present) the onlyconsequence of making UK based people redundantis to increase public spending on benefits whilstlosing the tax these people pay. At the same timewe lose the benefit of their productive capacitywhilst they suffer all the social ills associatedwith unemployment. That makes about as mucheconomic sense as shooting one’s self in thefoot.

Without denying the need for the government toreview the need for efficiencies and to setappropriate priorities – something allgovernments should do continually – the realityis that if the UK government cuts the job of anemployee earning £25,000 a year it may, after taxrevenues lost and benefits paid are taken intoaccount, save under £2,000 a year, whilst riskinga loss in spending that could tip another personin the private sector into unemployment aswellxii.

The reality is that if the government seeks tocut about £60 billion of spending per annum bythe end of the parliament then up to 65% of thiswill be lost to labour, because that is the shareof total GDP that goes to pay wages. That meansmore than £37bn of labour costs will be cut inthat case somewhere in the economy. With UKaverage wages being less than £25,000 per annumthat’s at least 1.5 million people who have tolose their jobs to make this equation work.



And the stark reality is that there will be nogrowth in the private sector to make good thedeficit. There are three reasons for that: firstevery other government is going to be pursuingthe same policy so the opportunity for exportgrowth is virtually non-existent: all marketswill be shrinking.

Second, as governments cut spending people willsave more: indeed the latest Office for BudgetResponsibility report on the economic prospectsfor the next five years suggests this willhappen. This is because as safety nets areremoved by government, on pensions, onunemployment, on health and incapacity peoplehave to provide their own funds to self insureagainst these risks. There is nothing wrong withsaving, but these savings are likely to be keptas cash in the bank, and not be redirected intoproductive activity. That is both inefficient andreduces spending, considerably, at the same time.

Third, the government is the biggest singlecustomer for the private sector. It has to be:according to the Office for Budget Responsibilitythe government is responsible for about 24% ofGDPxiii. When it is cutting spending the chance ofthe private sector growing is very small indeed.

In which case substantial increases inunemployment, significant increases in benefitpayments, large losses in taxation income andalmost no fall in deficits will result from theCoalition Government’s Plan for Pain.



There’s no North Sea to bail usout this time

“in the1980’s theThatchergovernmentwas able tooffset cutsin publicexpenditurewith risingrevenuesfrom NorthSea Oil andGas”

There is another difference between thisrecession and the last significant recession, inthe early 1980s.

The Deputy Prime Minister’s assurance that thecuts this time won’t be like Thatcher’s in the80s ignores the fact that as unemployment rosein the 1980’s the Thatcher government was ableto offset cuts in public expenditure with risingrevenues from North Sea Oil and Gas.

North Sea revenues reached their apex duringthe Thatcher Government from 1981 to 1986.This coincided with the 1981 recession whenunemployment rose to unprecedented officiallevels of 3 million, and remained stubbornlyhigh until 1986, well into the economicrecovery.

In paying the benefits for the unemployed

and economically inactive during this period, theThatcher government was helped enormously byNorth Sea Revenues for 1981 to 1986 inclusive ofover £112 billion.

Now the opposite is true. As North Sea oil andgas supplies decline, present and futuregovernments will experience declining revenues.

But that adds another pressing reason forinvestment in a Green New Deal now.



Debt is not the huge issue it’sclaimed to be“The UKgovernmenthas almostalways beenin debt.There isnothing newin that”

It is very important at this point to note threethings.

The first is that the government being in debt isnot the huge issue that it is now claimed to be.The UK government has almost always been in debt.There is nothing new in that. It has also beenproportionately much more in debt that it is now,as this graph of net debt (that is, afterallowing for the value of assets owned such as,for example, nationalised banks) shows:

Source:http://www.ukpublicspending.co.uk/uk_national_debt_chart.html

It is also really important to note that even ifthis sum increases as the deficit accumulatesduring the current financial crisis no oneforecasts it reaching levels seen as recently asthe 1960s – when we were still paying for the warand the cold war that followed it – and when theUK was generally considered to be prospering,despite the debt.

And it is also important to note that the UK isselling all the debt it offers to the market atpresent without problem and that a wide range ofeconomists suggest that will always be the case.This is because, as some economists point out, solong as a government has control of its owncurrency then it need never default: it controlsthe means to create the mechanism for paymentxiv.

http://www.ukpublicspending.co.uk/uk_national_debt_chart.html

http://www.ukpublicspending.co.uk/uk_national_debt_chart.html



“the realissue ofconcern isnot theabsoluteamount ofthe debt:the issueis one ofthe cost ofthe debt –that is howmuch thegovernmenthas to payeach yearin intereston thisdebt”

Put simply, if the government really does have torepay the debt it can, in extremis, print themoney to do so. The reality is that is unlikelyto happen – given the apparent appetite of themarkets for UK government debt any such situationwhere pressure to repay exceeded apparentgovernment capacity to do so is highly unlikelyto occur. As such the risk of inflation arisingfrom this debt is also very low.

It s also true that this debt is long dated – theaverage period for repayment of UK governmentdebt is currently fourteen years, whilst 90% ofit is owned in the UKxv – meaning that the vastmajority of those to whom it will be repaid, ifand when it is, will want sterling when repaymentoccurs, reiterating the point that the governmentreally cannot default as a result.

In that case the real issue of concern is not theabsolute amount of the debt: that can be dealtwith over time when debt repayments fall due ifthe UK economy has been returned to its customarystrength by that time – as a Green New Deal wouldhelp to ensure. Rather the issue is one of thecost of the debt – that is how much thegovernment has to pay each year in interest onthis debt.

Annual debt payments (actual data to 2009 from HMTreasury and forecasts thereafter from the Officefor Budget Responsibility) have been and arepredicted to be as follows:

The payments from now on look as though they skyrocket. This is the message the coalition



“as aproportionof GDP thisinterestcost isentirelymanageable– as pastdata shows”

“Thereality isthereforethat debtis an issueofimportance– butnothinglike thebiggestissue ofimportancethat weface”

government want people to hear.

This, however, is not the whole story. If theinterest payments are compared with UK GDP – ourtotal national income which shows our capacity topay them - a very different picture emerges:

The percentage of national income that interestpayments represents is now rising, certainly, butin no small part because by 2015 the Office forBudget Responsibility believe that interest rateswill have risen, so fuelling the cost. And as aproportion of GDP this interest cost is entirelymanageable – as past data shows. Indeed, in 2015it will be lower as a proportion of GDP than itwas during the entire time that Margaret Thatcherwas prime minster.

The reality is therefore that debt is an issue ofimportance – but nothing like the biggest issueof importance that we face.

The real issues that we face are threefold. Thefirst is the lack of demand in the economy. TheGreen New Deal would substantially address thatissue, and pay for itself from the employment andbusiness revenues generated and from the longterm savings in energy costs. The second issue isthe collapse in government revenues that is notedabove. And the third issue is the demand for cutsin government spending now.

As this analysis shows there is no need for suchcuts. The deficit is affordable, both now and in



the long term. Indeed, trying to get rid of it isthe one unaffordable option we have.



Rebalancing the books – tax orcuts?

“Onceunemploy-ment fallsaction willbe requiredto beginrebalancingthe govern-ment’sbooks”

“Ourresponse isunambiguous: any movetowards re-balancingthe govern-ment’sbooks mustnot be doneby cuttingspending;it must bedone byrestoringtaxrevenues”

In the short term, we believe the mostimportant thing is to tackle unemployment, andthis is best addressed by new investment in aGreen New Deal. In times of unemployment suchinvestment pays for itself.

Once unemployment falls, however, action will berequired to begin rebalancing the government’sbooks.

There are two options for rebalancing governmentincome and spending. The first is that governmentspending can be cut and the second is that taxescan be raised. Of course, a mix is possible, butthe policy choice that has to be made is which ofthese should be utilised or if both in whatcombination and when. That is the whole currenteconomic debate in a nutshell.

Our response is unambiguous: any move towards re-balancing the government’s books must not be doneby cutting spending; it must be done by restoringtax revenues.

There is good reason for this: the currentdeficit in government spending did not arisebecause spending was out of control. It arosebecause government income collapsed, as thisgraph shows:



“It is thecollapse ingovernmentincome dueto theeconomicslowdownthat hascreated thegovernmentdebtproblem onthe scalethat nowfaces us”

“It is therecession,and therecessionalone thathas createdthe debtcrisis”

Source: HM Treasury web sites for planned incomeand expenditure from the budget for each yearnoted.

Modest, wholly manageable deficits (a deficitsimply being an excess of expenditure overincome) were run until 2007, which were wellwithin EU guidelines for borrowing. Thereafter itis the collapse in government income due to theeconomic slowdown that has created the governmentdebt problem on the scale that now faces us.

It is therefore, the recession, and the recessionalone that has created the debt crisis: all debtarising prior to that point being the consequenceof growth in the economy.

This finding is reiterated when the recordedannual debt patterns are plotted (debt being thecumulative amount borrowed to fund governmentdeficits) as a proportion of GDP to remove thedistorting effect this otherwise has. Thefollowing graph shows that government borrowinggrew only slightly as a proportion of GDP – thetotal income of the country – until 2007:



Source: Office for National Statisticshttp://www.statistics.gov.uk/pdfdir/psf0510.pdf

That growth in borrowing was, again, well withinall recognised reasonable and manageable limitsrecognised worldwide. It is the recession, andthe recession alone, that has boosted the ratiosby causing income to crash – and GDP to crash too– which does, of course, automatically inflatethe ratio of borrowing to GDP and make thingslook worse than they might actually be. For therecord, the impact of the recession on GDP hasbeen as follows:

http://www.statistics.gov.uk/pdfdir/psf0510.pdf



“At themoment thegap betweenincome andspending ismore than£150bn ayear”

Source:http://www.statistics.gov.uk/cci/nugget.asp?id=192

The record is therefore clear: it is the crash inincome that is the problem that has to be tacklednow, not an excess of spending. That though isnot to deny that there is a deficit, and that itwill grow for the time being and that at sometime, when unemployment falls, steps towardsrebalancing government income will be necessary.At the moment the gap between income and spendingis more than £150bn a year. The challenge will beto ultimately reduce that gap.

And that’s where the choice between tax and cutsis crucial.

http://www.statistics.gov.uk/cci/nugget.asp?id=192

http://www.statistics.gov.uk/cci/nugget.asp?id=192



Fair taxes – the solution to allour problems

“more than£100billion ayear islostbecause ofabuse ofloopholesin the taxsystem, taxbillsremainingunpaid andfromillegalnon-paymentof tax”

“InNovember2009 HMRevenue &Customsestimatedthat therewere £28billion of

We repeat that we are unambiguous: we are surethe UK can still afford the level of publicservices it enjoyed until 2007 but that thecondition for doing so is that, bar inevitableand ongoing reviews of government policies toensure they are appropriate and efficient, thenecessary steps to rebalancing the government’sincome must be met by increased, but fairertaxes.

There are two parts to this process – and westress they are complementary, but different.

Tackling tax abuse

Taken together, more than £100 billion a year islost because of abuse of loopholes in the taxsystem, tax bills remaining unpaid and fromillegal non-payment of tax.

Of course not all these abuses can be stopped. Notax system is perfect. But, while some of thisrevenue would be absorbed by the modestadditional resources needed to implement themeasures required to collect these taxes, bytaking action on these issues we believe thatsubstantial additional tax revenues could be madeavailable to the public purse, whilstsimultaneously achieving greater social justice.

There are three steps required to tackle thisproblem.

The first is to collect the taxes that areactually due to the government. In November 2009HM Revenue & Customs estimated that there were£28 billion of outstanding taxes owing to it, ofwhich at last £11 billion were unlikely to everbe paid. Greater efforts in tax collection could,as a result, pay rich dividends.

We do not for a moment suggest that this willraise revenue by £28 billion a year: it won’t.The figure quotes is a cumulative failure tocollect tax on time – but that figure doesrepresent a component in the overall deficit thathas to be borrowed from the market instead as a



outstandingtaxes owingto it”

“Action ontaxavoidance,collectionand evasionis, wesuggest,neededimmediatelyin theinterestsof socialjustice”

“aprogrammethat couldgeneratemore than£60bn ayear couldbe createdfor the UK”

consequence. If a one off effort to collect taxnow could raise £10 billion of the £28 billiontax now outstanding and continued efforts couldbring in £3 billion of tax each year that mightotherwise either not be paid at all or be paidseriously late then we believe that over 5 yearstackling this issue could contribute £25bn to thedeficit reduction programme – and that is asignificant sum.

The second step in this programme is to takeaction to close down tax avoidance that exploitsloopholes in our tax system. In 2008 the TUCestimated that there was £25 billion of taxavoidance per annum in the UK. The figure hasbeen disputed – most recently by a coalitiongovernment minister who on one hand claimed thissum represented legitimate use of loopholes andwas not, therefore, avoidance and who then on theother hand said the government was determined tostamp out tax avoidance, leading to serious doubtif he really understood what he was talkingaboutxvi. It has also been challenged by a Big 4firm of accountants – but only because they saidthat there really was no such thing as taxavoidance at allxvii. We accept the TUC view thatthere is serious tax avoidance in the tax system– and that this is particularly problematic inbig corporate businesses. That is why many of thelegislative proposals to raise more tax notedbelow are aimed at these issues.

The third step in the process of collecting taxdue is to tackle tax evasion. In March 2010 oneof the authors of this report estimated that taxevasion – the illegal non-declaration of taxesdue to HM Revenue & Customs – cost the UK £70billion a year.xviii Again this figure has beenchallenged by ministersxix but the number appearsconsiderably more credible than HM Revenue &Customs’ own estimate that whilst £11.5 billionof undetected VAT is evaded – out of totalrevenues arising of around £80 billion each year– just £3.1 billion of undetected direct taxessuch as income tax, corporation tax and nationalinsurance are evaded each year out of totalrevenues of over £300 billion a year.

Of course, the precise amount of tax evasion willnever be known – by its very nature it will neverbe recorded properly – but this report suggeststhat tax evasion must be the target of serious



effort by HM Revenue & Customs now as part of thedeficit recovery programme. If, as detailed inthe appendix to this report the 20,000 taxofficers who have been made redundant by HMRevenue & Customs were re-recruited to tacklethis issue and that of debt recovery noted abovethe real costs would be modest because this wouldaffectively take 20,000 out of unemployment butthe next tax yield could be considerable. Wecautiously estimate £12 billion a year of taxrevenue could be raised in this way – or £60billion in all over five years, making a massivecontribution to deficit reduction.

Progressive tax reform

Finally, as detailed in the appendix to thisreport, there is an enormous range of additionaltaxes available that would make the UK’s taxsystem fairer. We believe that making the systemfairer is essential whatever happens in theeconomy. The tax system we have is unjust andneeds reform.

The tax changes we propose would ensure thosewith the greatest capacity to pay tax could carrymore of the burden of addressing the economiccrisis the UK faces whilst the taxes of those whosimply cannot afford to pay more could be eased.Such an approach also stands to reduce the highsocial costs of inequality borne by the taxpayer.

We have identified the additional taxes thatcould be raised into three groups – takingaccount of their ease of introduction.

The first group could be introduced at any timewith little or no consultation needed and all aretechnically easy to deliver. These might, evenafter granting additional tax reliefs to those onlowest income in the UK, raise more than £26billion per annum. All could be in operation from2011 onwards.

The second group of tax changes would take timeto introduce and would take time to reapbenefits, but all can be costed as they nowstand. This group is especially targeted at taxavoidance and it is suggested they might raisemore than £21 billion if individuallyimplemented, but since some complement andoverlap each other a more cautious total of £15



billion per annum is suggested here as a likelytax recovery.

Finally, a range of options requiring furtherresearch is suggested and these would, inevitablytake at least three years to introduce. It issuggested these taxes could raise at least £15billion in extra tax revenue.

Taken together then potential additional revenuesare:

Measure Revenue raised(average, per year byend of five yearperiod)

Tackling non-paymentof tax

3

Tackling tax evasion 12New taxes that couldbe introduced now

26

New taxes to beintroduced within 3years

15

New taxes to beintroduced by the endof a five yearparliament

15

Total 71

What is clear is that if the aim were to clearthe deficit by the end of this parliament thenthis could be entirely achieved by progressivetax changes.



Conclusion

“£60bn isenough torebalancethegovernment’s incomeequation.

And thiscan be donewithout anycuts atall”

What is clear is that there is an alternative tocuts in public spending.

£60bn is, by most estimates, sufficientadditional revenue, once the economy has beenstabilised, to rebalance the government’s incomeequation.

And all this can be done without any cuts at all,as we have shown.



Appendix – how to raise more tax

1. Tackling tax evasion and non-payment of tax.There are five ways of tackling tax evasion and non-payment oftax. They are:

Policy proposal Time scale forimplementation

Likely revenue impact

Stop HMRC redundancyprogramme

Immediate Immediate cost less than £10million a year at marginalcost to HM Treasury ofkeeping staff. Revenueraised included in estimatefor tax evasion and enhancedtax collection noted below.

Keep all local officesthreatened withclosure open

Immediate Minimal – most of theoffices are on non-cancellable PFI rentagreements so cost savingsfor closure are minimal.

Revenue raised impact willbe seen in enhanced localdebt recovery and improvedtax compliance.

Aggressively collecttax due.

Immediate Tax is not an afterthought.Nor is tax an optionalpayment. Paying tax is acore obligation of allindividuals and allbusinesses. Collecting taxdue is vital if the taxsystem is to be credible. Weestimate an initial targetfor tax to be recoveredshould be £10 billion of the£28 billion now overdue,followed by £3 billion ofextra recovery each yearthereafter or £25 billionover a five year period.

Recruit 20,000 newstaff at HMRC to:

Train as taxinspectors totackle taxavoidance andevasion

Over the nextthree years

Marginal cost of eachadditional employee whilstthere isn’t full employmentis unlikely to exceed£5,000, when their pensioncosts per annum , their taxpaid and net benefits saved



To enhance serviceto taxpayers

Reduce fraudulentclaims for paymentmade to HMRC

Recover debt owing

are taken into account[vi].

Benefits estimated to be £12

billion of additional taxcollected by preventing taxevasion each year. That is atotal from tackling taxevasion of £60 billion overfive years.

Reopen local taxoffices

The next threeyears

Small cost – many officesare already available toHMRC under PFI schemes andare currently vacant.

The benefit will arise fromplacing tax at the heart ofthe community – based on themessage that paying tax isthe right thing to do if weare to build the society weall need and want.

More details on these proposals and why they have been costed as theyhave been are available in the report, Tax Justice and Jobs (seebibliography).

2.Tackling tax avoidance and raising additionalrevenues

Suggestions about how to tackle tax avoidance and raise additionalrevenue split into three groups. These are:

1. Implementable straight away with no consultation required, notleast because this will prevent tax avoidance taking place;

2. Implementable after a reasonable consultation period to ensurethat the policy is as effective as possible

3. Implementable after further research is undertaken on thenecessary mechanisms to create the tax.

Grouping the possible changes under the above headings results in therecommendations in the following table. In each case a link isprovided to the course of further information on the proposal.

Implementable straight away with no consultation required

Recommendation Approximate Source of further



Impact information

50 per cent tax on all incomeover £100,000

£2.3billion

Compass, In Place ofCuts

Taxing all capital gains at ataxpayers highest marginalincome tax rate

£2 billion Compass, In Place ofCuts

Prevent anyone earning morethan £100,000 a year claimingmore than £5,000 a year intax reliefs above theirpersonal allowance

£14.9billion

Compass, In Place ofCutsTUC, A Socially JustPath to EconomicRecoveryGreen New Deal Group,The Cuts Won’t Work(variations on the themeavailable in each)

End tax relief for employerson all salaries and benefitsprovided in kind thatresults in an employeehaving total income fromrelated employments exceedingten times median UK earningsin a year (about £220,000 atpresent)

£2.4billion

TUC et al – Taxing Banks

Limit the time period for thecarry forward of bank losses

£5 billion TUC et al – TaxingBanks[vii]

Reintroduce 10 per cent taxband to help those on lowestincomes

£11.5billion ofrefunds


Uncap national insurancecontributions and make thempayable on investment income

£9.1billion


Additional 10 per cent tax onbank profits

£2.2billion

Tax Research LLP[viii]

Limit ISA tax relief to fundsinvested in new Greenprojects alone

Neutral Green New Deal Group,The Cuts Won’t Work

Net Total after cots ofreintroducing 10p tax band

£26.4billion

Implementable after a reasonable consultation period

Introduce a General Anti-Avoidance Provision

Up to £5billionpa

Association of Accountancyand Business Affairs’ Codeof Conduct on Taxation

Change the legislative basisfor interpreting UK tax law soany action contrary to thespirit rather than the letterof tax legislation can bechallenged in court

Includedin aboveestimate

AABA Code of Conduct onTaxation



Introduce a mandatory Code ofConduct on Taxation


AABA Code of Conduct onTaxation

Abolish the UK’s domicile rule £3billion

TUC, A Socially Just Pathto Economic Recovery

Introduce higher council taxbands

£1.7billion

Compass, In place of Cuts

Introduce a ‘Robin Hood Tax’on all foreign exchangedealing in sterling

£3.2billionin theUK

Robin Hood tax campaignBudget Submission 2010

Reform rules on companyresidence so that companiescannot claim they’ve left theUK simply by holding theirboard meetings in anothercountry

£1billionatpresent,maybemore[ix]

TUC Pre-Budget reportsubmission

Enhance the rules oncontrolled foreign companiesso that intellectual propertyrights cannot be easilytransferred to tax havenswithout tax being due

£1billionatpresent,maybemore


Restrict the offset ofinterest against taxableincome both for companies toreduce the incentive tooverload companies with debt.

£1billionatpresent,maybemore


Restrict the tax reliefavailable to those borrowingto finance buy to letproperties to create a levelplaying field between newowner occupiers and newlandlords

£2billion,cautiousestimate

Tax Research LLP[x]

Demand that all tax havens inthe world enter into TaxInformation ExchangeAgreements with the UK;

Up to £4billion

Tax Research LLP, Thedirect tax cost of taxhavens to the UK[xi]

Promote the use of newmechanisms for AutomaticInformation Exchange betweenall tax jurisdictions exceptthose where human rightsabuses are commonplace.


Tax Research LLP

Possible total £21.9billion

Implementable after a period of further research*



Reform the basis of taxresidence in the UK so that aperson with a UK passport isliable for tax on their worldwide income unless they livein a state with a tax systembroadly equivalent to theUK’s.

Not yetclear, butmaybeseveralbillion ayear

Radically reform the way inwhich small companies aretaxed to both simplify currentarrangements and preventabuse. This would require theincome of such companies to betreated as belonging to theirshareholders, unless thoseshareholders are not residentin the UK, so preventing taxdeferral by use of corporatestructures.

£1.2billion

Tax Research LLP, SmallCompany Taxation in theUK:A review in theaftermath of the ‘ArcticSystems’ Ruling

Green New Deal Group,The Cuts Won’t Work

Introduce a ‘Robin Hood Tax’on all derivate, swap, bondand over the counter tradingin the UK

£5bn, maybemuch more

Robin Hood tax campaign,Budget Submission 2010

Reforming the tax relief forcharities to stop abuse,increase the income ofcharities and to cut theiradministrative burden;

Neutral butsignificantadminsavings

TUC, The MissingBillions

A ‘bank debit tax’ chargingall payments from a UK bankaccount to tax at a tiny rate,and in the process replacingVAT, at last in part, with amore progressive tax based ona broader and therefore moreprogressive tax base

£4.2billion

Compass, In place ofCuts

Introduce country-by-countryreporting for allmultinational corporationsbased in the UK, and demand itbe introduced internationallyby the InternationalAccounting Standards Board andEuropean Union so thatmultinational corporationswill be required to accountpublicly for where theydeclare their profits andwhere they pay taxes,

Not yetknown

Green New Deal Group,The Cuts Won’t Work



including full disclosure withregard to tax havens andsecrecy jurisdictions.

Introduce an empty propertytax

£5 billion TUC, A Socially JustPath to EconomicRecovery

Possible total In excessof £15billion

*Because additional research would be needed to estimate thecumulative impact of these measures (since implementation of one setof policies would impact on both the scale of the total tax take, andsome degree of continued avoidance would be inevitable) a total forthese measures is not given here.

Links, References and BibliographyThe following documents are referenced in this report:

A Green New Deal, The Green New Deal group, New

Economics Foundation, London, 2008http://www.neweconomics.org/sites/neweconomics.org/files/A_Green_New_Deal_1.pdf

The Cuts Won’t Work, The Green New Deal group, New

Economics Foundation, London, 2009http://www.neweconomics.org/sites/neweconomics.org/files/The_Cuts_Wont_Work.pdf

A Socially Just Path to Economic Recovery: TUCSubmission to 2009 Pre Budget Report, Trade Union

Congress, London, 2009http://www.tuc.org.uk/extras/pbrsubmission2009.pdf

A Code of Conduct for Taxation Richard Murphy,

Association for Accountancy and Business Affairs andTax Justice Network, London, 2007http://www.taxresearch.org.uk/Documents/TaxCodeofConductFinal.pdf

Country-by-Country Reporting: Holding MultinationalCorporations to Account Wherever They Are, Richard

Murphy, Task Force on Financial Integrity and EconomicDevelopment, Washington, 2009http://www.financialtaskforce.org/wp-content/uploads/2009/06/Final_CbyC_Report_Published.pdf

In Place of Cuts, George Irvin, Dave Byrne, Richard

Murphy, Howard Reed and Sally Ruane, Compass, London,2009http://clients.squareeye.com/uploads/compass/documents/Compass%20in%20place%20of%20cuts%20WEB.pdf

http://www.neweconomics.org/sites/neweconomics.org/files/A_Green_New_Deal_1.pdf

http://www.neweconomics.org/sites/neweconomics.org/files/A_Green_New_Deal_1.pdf

http://www.neweconomics.org/sites/neweconomics.org/files/The_Cuts_Wont_Work.pdf

http://www.neweconomics.org/sites/neweconomics.org/files/The_Cuts_Wont_Work.pdf

http://www.tuc.org.uk/extras/pbrsubmission2009.pdf

http://www.taxresearch.org.uk/Documents/TaxCodeofConductFinal.pdf

http://www.taxresearch.org.uk/Documents/TaxCodeofConductFinal.pdf

http://www.financialtaskforce.org/wp-content/uploads/2009/06/Final_CbyC_Report_Published.pdf



http://clients.squareeye.com/uploads/compass/documents/Compass in place of cuts WEB.pdf

http://clients.squareeye.com/uploads/compass/documents/Compass in place of cuts WEB.pdf



Information Exchange: what would help developingcountries now? Richard Murphy, Tax Research LLP,

London, 2009http://www.taxresearch.org.uk/Documents/InfoEx0609.pdf

Small Company Taxation in the UK: A review in theaftermath of the ‘Arctic Systems’ Ruling, Richard

Murphy, Tax Research LLP, London, 2007http://www.taxresearch.org.uk/Documents/TRLLPSmallBusinessTax8-08.pdf

Stemming the Flood, Richard Murphy, Trade Union

Congress, London, 2009http://www.tuc.org.uk/extras/stemmingtheflood.pdf

Taxing Banks: A joint submission to the InternationalMonetary Fund, Richard Murphy, The Tax Justice

Network and others, London and Washington, 2010http://www.taxresearch.org.uk/Documents/IMFTaxingBanks.pdf

Tax Justice and Jobs: The business case for investingin staff at HM Revenue & Customs

Richard Murphy , Tax Research LLP for PCS, London,2010http://www.taxresearch.org.uk/Documents/PCSTaxGap.pdf

The direct tax cost of tax havens to the UK Richard

Murphy , Tax Research LLP, London, 2009http://www.taxresearch.org.uk/Documents/TaxHavenCostTRLLP.pdf

The Missing Billions, Richard Murphy, Trade Union

Congress, London, 2008http://www.tuc.org.uk/touchstone/Missingbillions/1missingbillions.pdf

The Robin Hood Tax, London, 2010

http://robinhoodtax.org.uk/how-it-works/the-big-idea/

Endnotes

i See endnotes for references

ii http://www.ft.com/cms/s/0/31d8576e-74c6-11df-aed7-00144feabdc0.html

iii http://www.neweconomics.org/publications/cuts-wont-work

iv See http://www.taxresearch.org.uk/Blog/2010/06/18/4-million-unemployed-

inevitable-say-tax-research-uk/ for more information and calculations

v http://www.guardian.co.uk/commentisfree/2010/jun/12/cuts-hit-poor-tax-

rises-fairer

vi http://www.guardian.co.uk/business/2010/jun/14/lunatics-economy-cuts-frankin-roosevelt

http://www.taxresearch.org.uk/Documents/InfoEx0609.pdf

http://www.taxresearch.org.uk/Documents/TRLLPSmallBusinessTax8-08.pdf

http://www.taxresearch.org.uk/Documents/TRLLPSmallBusinessTax8-08.pdf

http://www.tuc.org.uk/extras/stemmingtheflood.pdf

http://www.taxresearch.org.uk/Documents/IMFTaxingBanks.pdf

http://www.taxresearch.org.uk/Documents/IMFTaxingBanks.pdf

http://www.taxresearch.org.uk/Documents/PCSTaxGap.pdf

http://www.taxresearch.org.uk/Documents/TaxHavenCostTRLLP.pdf

http://www.taxresearch.org.uk/Documents/TaxHavenCostTRLLP.pdf

http://www.tuc.org.uk/touchstone/Missingbillions/1missingbillions.pdf

http://www.tuc.org.uk/touchstone/Missingbillions/1missingbillions.pdf

http://robinhoodtax.org.uk/how-it-works/the-big-idea/

http://www.ft.com/cms/s/0/31d8576e-74c6-11df-aed7-00144feabdc0.html

http://www.taxresearch.org.uk/Blog/2010/06/18/4-million-unemployed-inevitable-say-tax-research-uk/

http://www.taxresearch.org.uk/Blog/2010/06/18/4-million-unemployed-inevitable-say-tax-research-uk/

http://www.guardian.co.uk/commentisfree/2010/jun/12/cuts-hit-poor-tax-rises-fairer

http://www.guardian.co.uk/commentisfree/2010/jun/12/cuts-hit-poor-tax-rises-fairer

http://www.guardian.co.uk/business/2010/jun/14/lunatics-economy-cuts-frankin-roosevelt




vii http://www.touchstoneblog.org.uk/category/cuts-watch/

viii http://www.timesonline.co.uk/tol/news/politics/article7146447.ece

ix http://www.24dash.com/news/local_government/2010-06-10-John-Denham-Huge-cuts-to-CLG-budget-will-hit-the-poor-hardest

x http://www.guardian.co.uk/business/2010/jun/14/lunatics-economy-cuts-frankin-roosevelt

xi http://krugman.blogs.nytimes.com/2010/06/14/the-bad-logic-of-fiscal-austerity/?src=twt&twt=NytimesKrugman

xii The full workings of this argument are to be found herehttp://www.taxresearch.org.uk/Blog/2010/05/17/the-only-way-to-cut-

government-debt-is-to-increase-government-spending-2/

xiii

http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.

pdf

xiv http://www.levyinstitute.org/pubs/ppb_111.pdf

xv http://www.ft.com/cms/s/0/6bc012d6-733c-11df-ae73-00144feabdc0.html

xvi

http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm100616/halltext

/100616h0008.htm

xvii http://webarchive.nationalarchives.gov.uk/+/http://www.hm-

treasury.gov.uk/d/foot_review_deloitte.pdf

xviii References to the sources for all these estimates are to be found herehttp://www.neweconomics.org/sites/neweconomics.org/files/The_Great_Tax_Parac

hute.pdf

With regard to the appendix:

xix

http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm100616/halltext

/100616h0008.htm

[vi] For details refer to Tax Justice and Jobs - see bibliography[vii] The estimate is made here. UK companies reduced their total deferred taxliabilities in 2008 by £17 billion according to international accountantsDeloitte. Not all of this would relate to banks and some losses will havebeen sued against profits in 2009, but the estimate is considered reasonablein the light of losses sustained by Lloyds, RBS, Northern Rock and othersthat were covered by tax bail outs and do not need to be relieved again.[viii] http://www.taxresearch.org.uk/Blog/2007/09/18/banks-must-pay-for-giving-up-their-risk/[ix] These estimates are provisional[x] Currently unpublished research[xi] Based on total estimated loss of £8.5 billion less estimate for that partattributable to non-domiciled people that cannot be double counted

http://www.touchstoneblog.org.uk/category/cuts-watch/

http://www.24dash.com/news/local_government/2010-06-10-John-Denham-Huge-cuts-to-CLG-budget-will-hit-the-poor-hardest

http://www.24dash.com/news/local_government/2010-06-10-John-Denham-Huge-cuts-to-CLG-budget-will-hit-the-poor-hardest



http://krugman.blogs.nytimes.com/2010/06/14/the-bad-logic-of-fiscal-austerity/?src=twt&twt=NytimesKrugman

http://krugman.blogs.nytimes.com/2010/06/14/the-bad-logic-of-fiscal-austerity/?src=twt&twt=NytimesKrugman

http://www.taxresearch.org.uk/Blog/2010/05/17/the-only-way-to-cut-government-debt-is-to-increase-government-spending-2/

http://www.taxresearch.org.uk/Blog/2010/05/17/the-only-way-to-cut-government-debt-is-to-increase-government-spending-2/

http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.pdf

http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.pdf

http://www.levyinstitute.org/pubs/ppb_111.pdf

http://www.ft.com/cms/s/0/6bc012d6-733c-11df-ae73-00144feabdc0.html

http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm100616/halltext/100616h0008.htm


http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/d/foot_review_deloitte.pdf

http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/d/foot_review_deloitte.pdf

http://www.neweconomics.org/sites/neweconomics.org/files/The_Great_Tax_Parachute.pdf

http://www.neweconomics.org/sites/neweconomics.org/files/The_Great_Tax_Parachute.pdf



http://www.taxresearch.org.uk/Blog/2007/09/18/banks-must-pay-for-giving-up-their-risk/

http://www.taxresearch.org.uk/Blog/2007/09/18/banks-must-pay-for-giving-up-their-risk/