Tuesday, 13 October 2015

‘Living within our means’ makes no economic sense. Labour is right to oppose it

Ha Joon Chang in The Guardian

Some have called it a U-turn; others have described it as a shambles. But John McDonnell’s volte face was the right thing to do, even though it meant losing face, big time.

On the eve of the Labour party conference, McDonnell surprised detractors and supporters alike by saying that Labour should vote for George Osborne’s new fiscal charter, which requires the country to run budget surplus in “normal times”. Now McDonnell says his party should vote against it.

Admittedly, even when proposing to vote in favour of Osborne’s charter, McDonnell advocated a different vision of fiscal responsibility from what the chancellor was proposing. McDonnell pointed out that running a budget surplus means taking demand out of the economy, so there is an economic illiteracy in wanting to run one more or less permanently. He also argued that surplus should be run only on the current (consumption) component of the budget, and that deficit could – and should – be run on the capital (investment) component of it. His view was that if you borrow to invest, the debt will more than pay for itself in the long run as the investment matures and raises the economy’s output, and thus tax revenue.

The shadow chancellor was also insistent that, even while reducing the deficit, he would do it in a more equitable way. Rather than mainly squeezing the most vulnerable groups, as the Conservatives have been doing, the fiscal gap would be closed by raising taxes on the top earners and, especially, being much tougher on tax avoidance and tax evasion.

However, these are all part of the fine print. Once you accept that you have to run a budget surplus in order to be “responsible”, you have, as an anti-austerity politician, already lost the debate. You win a political debate by making people accept your vision, not by pointing out that you offer them better terms in the fine print – which they are unlikely to read anyway.

So if McDonnell is going to win the economic debate, he needs to change its terms. He has to start by doing another U-turn on the statement: “We accept we are going to have to live within our means, and we always will do – full stop.”Because this is simply wrong. This view assumes that our means are given, and we cannot spend beyond them. However, our means in the future are partly determined by what we do today. And if our means are not fixed, then the very idea of living within them loses its meaning.

For example, if you borrow money to do a degree or get a technical qualification, you will be spending beyond your means today. But your new qualification will increase your future earning power. Your future means will be greater than they would have been if you hadn’t taken out the loan. In this case, living beyond your means is the right thing to do.

Now: if you are a government, your means are even more flexible.

Like individuals, of course, a government can increase its means in the long run by borrowing to invest in things that will make the economy more productive, and thus increase the tax revenue. If a government invests in improving the transport system, it will make the country’s logistics industry more efficient. Or if it invests in healthcare and education, that will make the workers more productive.

More importantly, unlike individuals, a government has the ability to spend “money it does not have”, only to find later that it had the money after all. The point is that deficit spending in a stagnant economy will increase demand in the economy, stimulating business and making consumers more optimistic.

If enough businesses and consumers form positive expectations as a result, they will invest and spend more. Increased investment and consumption then generate higher incomes and higher tax revenues. If the tax take increases sufficiently, the government deficit may be eliminated, which means that the government had the money that it spent after all.

If Labour wants to re-establish its credentials for economic management, it needs to start by rejecting the “living within our means” mantra. The idea may have as much obvious appeal as other examples of homespun philosophy, but it is one that is more fitting for 18th-century household management than for the management of a complex 21st-century economy.

Unless the Labour party changes its foundational belief in the virtue of the government living within its means, British voters will never be convinced of the finer points of Keynesian economics, or of the ethics of inequality, that John McDonnell is trying to make.

Now the Tories are allowing big business to design their own tax loopholes

Matt Kenyon illustration
 Illustration by Matt Kenyon
Aditya Chakrabortty in The Guardian

Last Monday, as the prime minister rehearsed his Manchester conference speech, a story appeared in this newspaper that showed you who really runs this country – and how. It revealed that one of Britain’s largest companies, AstraZeneca, paid absolutely no corporation tax here in both 2013 and 2014, despite racking up global profits in those years of £2.9bn.

Revealed: how AstraZeneca avoids paying UK corporation tax

At first glance this sounded like an everyday tale of Mega-Business Making a Mockery of Our Tax Laws, to be filed alongside Google, Starbucks – or this weekend’s disclosure that Facebook paid less to the exchequer last year than you probably did. But this story is bigger. It’s less about accountancy than where power lies in 21st-century Britain.

Astra’s tax maestro is called Ian Brimicombe, and he is more than well-known at the Treasury: he is a trusted adviser. Shortly after George Osborne took over as chancellor in 2010, his team began rewriting the rules on how big businesses are taxed. To help, the government appointed senior executives from some of Britain’s giant companies to a “liaison committee”, comprising Astra’s Brimicombe, representatives from Tesco, Santander, BP and others.

Although the group was not widely reported, there was no disguising its purpose. In the Treasury’s own blunt words, the businesspeople were providing “strategic oversight of the development of corporate tax policy”.

Corporation tax alone is one of the biggest earners for the government, worth over £50bn a year – and now companies with millions, even billions of pounds at stake were to be given direct say on how they should be taxed.

The Treasury set up working groups specifically to advise on taxing multinational business – fitted out with directors from 40 multinationals, all with extensive networks of offshore subsidiaries. In his book The Great Tax Robbery, the former tax inspector Richard Brooks records that a Vodafone representative was put on the group “deciding how to tax offshore financing of exactly the sort his company was running through Luxembourg and Switzerland for hundreds of millions of pounds in tax saving every year”.

The new regime for multinationals began in 2013. Within five months,AstraZeneca had set up an unusual and intricate Dutch tax avoidance structure that would enable it to take full advantage of the new loopholes it had so helpfully advised on. To call this a conflict of interests is to miss the point – it’s far too brazen for that. Osborne’s Treasury blithely invited in some of the country’s biggest businesses and asked them to help design their own tax regimes. It’s like trawlermen asking fish to design their nets, or the Highways Agency allowing Jeremy Clarkson to set his own speed limit.

It might even be funny – if all these giveaways didn’t cost hundreds of millions amid a decade of belt-tightening. In their original assessment, Treasury officials calculated that the relaxation of the controlled foreign company rules would cost the public around £840m by this tax year. That’s getting on for the equivalent of three brand-new, fully staffed hospitals. The year 2013 also marked the start of the most severe cuts to social security, including the introduction of the bedroom tax. That particular cut has inflicted panic and upheaval on some of the poorest households in Britain, yet going by academic research it raises less half the amount given away to multinationals by the new controlled foreign company rules.

I write this – but we’re not even allowed to know how much money we’re giving away to Astra, Tesco and the rest. The Treasury’s initial assessment of the new rules came with a vital postscript: “The government would welcome evidence from business to help it refine the estimates of the elements of cost of the CFC reform.” Or, translated from the mandarin: this is guesswork.

When the tax-justice campaigner George Turner submitted a freedom of information request last month to find out how much the new system was costing taxpayers, Osborne’s department told him it would take too much time to find out. Turner persisted: what about the new patent box tax break, originally set to cost the public £900m? No luck there either. So ordinary taxpayers may have kissed goodbye to £1.8bn in school places and Sure Start schemes – or they may have lost a lot more. We won’t be told what’s happened to our own money.

These tax breaks aren’t in aid of struggling small businesses or innovative new tech firms: they are going into the coffers of the biggest companies in Britain, with their platoons of lobbyists and tax advisers and their web of connections into Whitehall.

The year before the government brought in these new tax breaks, AstraZeneca was granted £5m to encourage it to expand its research site at Alderley Park in Cheshire – money that the local MP (one G Osborne of Tatton) played a key role in securing. Just five months later, the drugs giant announced it was closing the centre, with the immediate loss of 550 jobs. From 2007-14, calculates York University’s Kevin Farnsworth, AstraZeneca took £91.3m in joint public funding from the government’s Innovate UK research group.

Britain is in the middle of a cold, austere decade. Ordinary taxpayers are having to tighten their belts – even while multinationals are being lavished with public cash. Osborne and Cameron tell tax-avoiding companies to “wake up and smell the coffee”, yet undercut the rest of Europe on taxes so as to lure Starbucks to put their offices in the UK. Tax avoidance is normally painted as big businesses finding and exploiting loopholes; but the Conservatives are now allowing those same outfits to design their own loopholes.

“Upwards redistribution” is how the Berkeley academic Gabriel Zucman describes it: taking from ordinary taxpayers and giving to the very richest. Zucman is a sometime co-author with Thomas Piketty and his new book The Hidden Wealth of Nations is set to do for tax havens what his colleague’s did for wealth inequality: define and popularise the problem.

“Britain is now engaged in the most extreme form of tax competition anywhere in Europe,” he told me this weekend. “It’s trying to become a tax haven.” This is what economic competence now looks like in the UK: an officially driven attempt to turn a developed country into a competitor to the Cayman Islands, with lavish handouts for those who can afford it, and cuts for those who can’t.

Monday, 12 October 2015

A New Dream of Politics

Ben Okri in The Guardian

They say there is only one way for politics.
That it looks with hard eyes at the hard world
And shapes it with a ruler’s edge,
Measuring what is possible against
Acclaim, support, and votes.

They say there is only one way to dream
For the people, to give them not what they need
But food for their fears.
We measure the deeds of politicians
By their time in power.

But in ancient times they had another way.
They measured greatness by the gold
Of contentment, by the enduring arts,
The laughter at the hearths,
The length of silence when the bards
Told of what was done by those who
Had the courage to make their lands
Happy, away from war, spreading justice
And fostering health,
The most precious of the arts
Of governance.

But we live in times that have lost
This tough art of dreaming
The best for its people,
Or so we are told by cynics
And doomsayers who see the end
Of time in blood-red moons.

Always when least expected an unexpected
Figure rises when dreams here have
Become like ashes. But when the light
Is woken in our hearts after the long
Sleep, they wonder if it is a fable.

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Can we still seek the lost angels
Of our better natures?
Can we still wish and will
For poverty’s death and a newer way
To undo war, and find peace in the labyrinth
Of the Middle East, and prosperity
In Africa as the true way
To end the feared tide of immigration?

We dream of a new politics
That will renew the world
Under their weary suspicious gaze.
There’s always a new way,
A better way that’s not been tried before.

End the Sena’s veto power

Editorial in The Hindu

What the Shiv Sena could earlier do only with threats of violence, it can now do with a mere letter or an appeal. The organisers of concerts planned in Mumbai and Pune by Pakistani ghazal singer Ghulam Ali were quick to cancel the programmes after the Shiv Sena asked them not to host a singer belonging to a “country which is firing bullets at Indians”. A meeting with Sena supremo Uddhav Thackeray must have convinced the organisers that the letter of request to cancel the show had the sanction of those at the very top of the Sena leadership, and that the “request” was no less than a threat in disguise. Now that it is in power, the Sena can effectively veto any cultural programme without even organising a public protest. The lesson that the organisers would have taken from the Sena’s missive is that no help would be forthcoming from officialdom in a State where a party that draws support from lumpen elements is in power. From digging up the cricket pitch and forming balidani jathas to stop matches between India and Pakistan, the Sena is known to oppose any kind of cultural or sporting interaction between India and Pakistan. Now that it is in power, the Sena seems intent on its agenda of imposing a boycott on all things Pakistani without resorting to open threats or violence.

The irrationality seems to have struck all but the most ardent of the Sena’s supporters. While Delhi Chief Minister Arvind Kejriwal spoke to Ghulam Ali and persuaded him to agree to come to Delhi for a concert in December, West Bengal Chief Minister Mamata Banerjee offered to host him in Kolkata. But the issue is far more important than Ghulam Ali being able to perform in India. This is not on whether art, culture and sport can bring people together or worsen relations between nations. Whether they do one or the other depends on the peoples involved, and not on some intrinsic quality of these forms. The issue actually relates to the unbridled political power that the Sena wields in Maharashtra, a power that is not drawn from any electoral mandate, a power that is not accountable to any democratic institution. The Sena quite arrogantly assumes it can speak for all people when it asks for a show to be cancelled “considering the emotions of the citizens”. If the Sena was so offended by a Pakistani artiste performing in Maharashtra, it could have asked its supporters to stay away from it. The Sena’s senior ally in government, the BJP, and Chief Minister Devendra Fadnavis, need to guard against a repeat of such incidents. What is at stake is not the right of a Pakistani artiste to perform in India, but the right of Indians to decide who they can listen to or watch in India.