The proposed reduction in tax
credits which are to reportedly negatively affect close to 3 million families has
set off an incredible commotion as the House of Lords rejected the controversial
cuts planned by the current Conservative government earlier this evening. The tax credit reform is
part of a wider reform of the UK’s welfare system coinciding with the
introduction of Universal Credit which seeks to simplify the welfare system by
consolidating a number of benefits.
However, reforming the actual
administration can only go so far in making efficiency savings until serious
cuts need to be made to welfare payments directly. In fact, public spending is
being cut everywhere, defence, healthcare, education, the police and pensions.
The reason for these cuts is principally because of the current government’s approach
to the economy, which is effectively balancing
the books, that is to only spend what you earn. Bear in mind the UK debt
currently stands at over £1.5 trillion and it is growing, we haven’t even been
able to chip away at that amount yet and it’s unlikely that we will be able to
chip into it until we run a budget surplus; that is earn more in revenues than
what we spend.
The debate between the Osbonites
and the Corbynites revolves around how to essentially get the UK economy back
into the budgetary surplus in order to begin to reduce the debt. Now, as the UK
debt is close to 90% of current GDP, we could be debt free in a little less
than a year if we literally stopped funding absolutely everything; that’s no
police, no welfare, no healthcare, no pension payments etc., whilst we continued
to pay our taxes and maintain our current spending patterns. Obviously that’s
not going to happen and even if it did the anarchical effects which would
probably resemble a cross between The Purge and The Great Depression of
essentially no government would outweigh the price of the current debt probably
many times over.
So more reasonable economic
solutions actually stem from two salient economic theories that have survived
the last couple hundred years or so, that is free market capitalism as advocated for by the likes of Adam Smith
and Milton Friedman and a planned economic
system as advocated by the likes of Karl Marx and Maynard Keynes. Though these
days we actually live in a mixed economic system it is important to be aware of
some key principles that could be seen as the driving force behind taxation and
welfare policies.
A free market approach tends to
want less regulation over everything including working conditions, the minimum
working age and the minimum wage as it is more concerned about the supply side of
labour, that is reducing the friction that employers have to face when deciding
who to employ. Now contrast this, with the current government policies towards
the unions, tube drivers, the NHS and more recently medical doctors who are
facing pay cuts or a challenge to their influence over employee labour
conditions. You can also argue that increases in the national minimum wage
whilst appearing to be against free market principles can actually complement
it when you remove the apparent cushion of
tax credits, thus encouraging more parents to commit to longer hours of work
whilst employers actually get a concession in their corporation tax to assist
in paying for the increased wages.
But would a planned economic
approach be any better? In the aforementioned situation you are essentially tightening
the country’s belt, something which
has come to be known as ‘austerity’, but you are dealing with the problem of
government debt head on. Or are you? Especially considering the cost of white
collar crime at £60 billion a year with a detection rate of only 5% coupled
with billions in lost tax revenues by corporate powerhouses such as Google, Amazon
and others for not paying their portion of UK tax. It can appear the poorest
and the least powerful are to pick up the burden of UK debt. Sadly, we live within an economic system that relies on foreign investment that creates jobs
and in turn income tax that the government would not have had otherwise and thus the
reason why the government has always turned a blind eye towards tax avoidance
until it became a public moral issue following investigative journalism.
So, yes, back to whether a
planned economy could be any better. According to Keynesian economists, the
government actually needs to spend more to create more jobs and encourage greater
private sector investment and increasing exports which would yield greater
returns over the medium to long term. This is actually referred to as Aggregate
Demand, that is the demand for the gross domestic product of a country and there’s
actually a really fancy formula which goes something like AD = C + I + G +
(X-M)…forgive me if I don’t explain it in this piece but note it’s not
scientific no matter how much it may look like it is.
Look at it as if you were to take
out a business loan in order to kick start a business and when the business is
in profit it would start to repay the loan. This is effectively what the
Corbynites advocate, potentially sweeter times now funded by debt with the hope
that any national investments work itself out.
So what is the right way forward?
At the time of writing this piece, I truly don’t know, my mind often sways
between two extremes and I simply don’t have enough policy information to make
a judgement. What I do know is that we must put a truer value on the economic
cost of our policies, for instance, if we were to take away tax credits and
force parents to work more hours, or where they literally cannot work more
hours have only to cut back on heating and food for themselves and their children
what would be the human cost be it psychologically and socially that would
affect our communities in years to come as our societies which are already challenged with serious mental
health crises navigate themselves into adulthood and then parenthood.
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