| A balancing act: fair solutions to a modern debt crisis |
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“Consumption and property taxes should rise to restore fiscal balance.” Britain's finances are in a mess, and its political leaders locked in a bitter dispute about public spending cuts. But CentreForum argues that even eight years of spending restraint from 2010/11 will not get the UK out of the fiscal hole it is now in. The report argues that since it is actually a collapse in revenues that is primarily responsible for the soaring deficit, taxes will have to rise, alongside the necessary spending cuts. But this must be done fairly, and in such a way as not to endanger the economic recovery. The paper looks at the current debt crisis in an historical context. By contrasting it with previous fiscal crises, it shows why a return to 'fiscal activism' was needed to stave off a depression. It also points out that while Gordon Brown's debt is far higher than anything Margaret Thatcher had to deal with, today's much lower interest rates make the cost of servicing that debt manageable. However the situation is precarious, and could change quickly if a credible strategy for debt repayment is not put in place. Such a strategy should include:
Explaining, the author of the report Giles Wilkes said: “Low interest rates and the threat of deflation make this crisis different to any since the War. The Labour government has been right to ignore panicked calls for fiscal restraint in a downturn. By allowing debt to expand, the government has prevented a spiralling Depression, which would have damaged every household, rich and poor. So it is right that every household should help pay it back. There has been much debate in recent weeks about the need for spending restraint, but almost no discussion of the fact that alongside this, taxes will have to rise. This is a shame. The next government will have a rare opportunity to put the nation's finances on a more stable footing and to deal with the unfairness of the current tax system. Unfortunately, neither the government nor the official opposition are willing to discuss how this could be done. Conservative plans to cut taxes on savings and large inheritances will do nothing to boost the economy, while potentially doing a lot to exacerbate social inequalities. And Labour's clumsy attempts to extract more money from the rich will do little or nothing to increase revenues, while potentially doing a lot to drive away wealth creators. Neither plan deserves to be implemented. Instead the next government should phase out the exemption of primary residences from capital gains tax, allow councils to raise more money from higher value homes and increase the rate of VAT once the economy is recovering.” Press reaction to 'A balancing act'"Giles Wilkes, chief economist of the Liberal Democrat-leaning thinktank CentreForum, writes in an excellent overview of the current crisis ("A Balancing Act: Fair Solutions to a Modern Debt crisis") that, while it was right to be tough on public spending and public deficits in 1979, it would be disastrous today. He argues that an economy beset by large private debt, low inflation, negligible private sector demand, collapsing asset prices and a broken banking system faces very different problems to the British economy of 1979. The growth in public debt that the Tories decry has been essential to heading off a full-blown depression." Will Hutton - 26th July, 2009 "By far the best analysis I have seen is in a paper by Giles Wilkes – A Balancing Act: Fair Solutions to a Modern Debt Crisis. It is published by Centre Forum, a Liberal Democrat-leaning think-tank, but the analysis is non-partisan. It has so far attracted attention because of its proposals for a flat rate to supplement council tax on high-value residences and for imposing capital gains tax on primary residences." Samuel Brittan - 23rd July, 2009 "Three things have combined to postpone widespread recognition of the task: first, the government that was in charge when exaggerated optimism became rife is still in power; second, nobody can be sure how mediocre the country’s longer-term circumstances are going to be; and, finally, as Giles Wilkes points out in an excellent new paper for the Liberal Democrat think tank, CentreForum, with modest initial levels of public debt and low nominal and real interest rates, the UK government was right to let its borrowing take the strain. Martin Wolf - 16th July, 2009 |
Giles Wilkes