Posts Tagged ‘debt’

Starve Leviathan

Wednesday, April 7th, 2010

Many theorists believe that the growth of the State is an inevitable feature of governance, curbed only by the occasional revolution. Lord Acton’s famous maxim that power tends to corrupt would lend credence to this fatalistic view.

I disagree. I think that the state can be beaten back, as it was in the 1980s in the West and 1990s in the former Soviet bloc. Let’s discuss a few ways this might be done:

1. A Transparent Tax System

People won’t realise the true costs of the State unless it’s less disguised than it now is. We now have Income Tax, National Insurance (another tax on income), Value Added Tax on consumption, Inheritance Tax, Corporation Tax, et cetera ad nauseam. Under Labour, thousands of stealth taxes and fees add to the price of almost everything. The opacity of the tax system makes us forget that the money Government spends is our money, curbing our outrage at waste.

As an interim measure, I would propose replacing most current taxes with a single Income or Consumption tax in a revenue neutral manner. Suddenly, people would see exactly how much of their money goes to the State, and I doubt many of them would be happy about it. I would expect this to lead to demands for the shrinking of the state and falling tax rates – a good thing.

(I would exclude Pigouvian taxes from this rule, since their purpose is beyond raising revenue)

2. Transparent Spending

The second transparency reform I would enact would be to include an itemised spending overview on tax returns. If someone sees that Government is spending £X,000 of their money on a programme, it is likely to provoke debate as to whether that could be done better on one’s own or, even if Government does do it, whether it could be done less wastefully. Just highlighting the cost of the Welfare State to each of us might revive debate as to whether some aspects could be done better by private charity.

It might also be worth requiring Spending bills to be more detailed about how much is appropriated for particular things. A civil servant might approve tens of thousands of pounds on the Potted Plants budget – an accountable Parliament would not. Similarly, the scandal of over-generous public sector pensions should be admitted by including unfunded liabilities in the National Debt.

On that note -

3. Debt Awareness

The National Debt is far too high. Labour plans to cut the deficit – the rate of increase in debt – but hasn’t got a clue how to deal with the capital.

The first thing we need to do is make it clear what this means to taxpayers. It means that, at some point, the Government will have to take thousands of pounds from you to repay creditors, either in tax or by reducing the value of the pound in your pocket. It means that, no matter how prudent you are with your own finances, you are about £20,000  in the red. I would require HMRC to print the total national debt and each person’s share on tax returns.

The next thing I would do is require that Budgets contain a plan to pay off the National Debt, if only in the extremely long term. We expect that indebted households work out how to get back in the black – why not government?

4. Choice

For Schooling, I would strongly advocate a local pilot scheme whereby the State gives a voucher for a certain amount of funding to each pupil who can then spend it at any school he or she chooses. I would expect that state schools would be forced to improve or lose students. It’s Assisted Places on steroids. I would permit selection on any grounds.

For the NHS, I’d advocate something similar – make it a single payer system with independent hospitals paid per procedure/result. Most of the bureaucracy disappears, and there’s finally competition.

That’s all for now. Feel free to comment on my suggestions or add your own ideas.

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Posted in Politics by Joseph M Sanderson | 5 Comments »

Cuts and Grazes

Friday, September 25th, 2009

It’s pretty much universally accepted that in order to bring down HUGE public sector borrowing (roughly 60% of GDP according to the OECD) the government needs to increase its bank balances, either by spending cuts or by raising taxes, or a combination thereof. I don’t pretend to understand macroeconomics and I’ll leave to to others to explain the risks of a huge national debt.

Yesterday I visited the Freshers’ Fair at the University of Huddersfield (to “help out”), and got into an argument with some malcontenet who accused the Conservatives of raising taxes (apparently ignoring the fact that we weren’t in power yet). Of course, tax rises may be necessary, but only if cuts in public spending have been exhausted – pared to the bone, so to speak. The word “cuts” may conjure up imagery of Mrs Thatcher snatching milk from schoolkids and tipping people out of hospital beds, but it might be better to visualise cuts as a surgical operation to remove a tumour. A tumour, incidentally, becomes malign when it starts invading other tissues and diverting essential blood supply in order to fuel its own growth – a fairly nice anaology of the civil service, I feel.

The TaxPayers’ Alliance (report) identified over £50 billion of savings that would be fairly painless to implement (and in anycase, chemotherapy is particularly harsh but usually better in the long-term). My favourites include: a one year pay freeze on the public sector (exl. servicemen) – saving: £6.2bn; abolishing education maintenance allowance – saving £530 million; slimming down the civil service by 10% - saving £1.2bn; and abolisihing Child Benefits and CTFs - saving £8 447 000 000. (See the tables below)

Admittedly, some of these cuts may seem harsh, and having handouts taken out of people’s hands would be very unpopular for any government. However, if Cameron wins the election and makes these tough decisions within his first year of office, the taxpayer (hopefully) would be weaned off dependency on the welfare state and come to appreciate his own responsibilities by the 2014/15 election. I theorised to myself on the bus yesterday that every £1 spent in the public sector stifles £x in the private sector – so making serious cuts in inefficient/unnecessary areas of spending should seriously stimulate commerce and industry into getting the economy moving again. Crucially, it is businesses that will bring us out of a recession, NOT the public sector.

Secondly, a note on tax rises. It might be tempting to, say, keep universal bus passes for the elderly in exchange for, maybe, another penny on corporation tax or a static NI threshold. Higher taxes stifle the economy, lower spending stimulates growth. The TPA report, for example, includes this factlet –  ”A study of EU15 and OECD countries from 1970 to 2004 by the European Central Bank found that a 1 percentage point increase in the tax/GDP ratio reduces output by 0.12 percentage points for the OECD countries and 0.13 percentage points for the EU countries.”

Lastly, a point of principle: the Government got itself into a mess by spending money it didn’t have. It is only right that the public sector should have the bear the burden of its mistakes, instead of punishing hard-working, over-regulated families and small businesses.

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 Note that none of these cuts involve reducing the numbers of staff in schools, hospitals, etc.

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Posted in Politics by Callum Wood | 1 Comment »

The British state should default on its debt

Friday, March 13th, 2009

The 21st century has already seen the biggest ever transfer of wealth from the poor to the rich. I refer, of course, to various government bailouts. In the US, what started as merely a transfer of wealth from the prudent to the imprudent has turned into a trillion-dollar package of political favours, not even intended to do what they claim, most not even conceivably “stimulating”, yet supported by Legion “useful idiots“.

The Wall Street Journal said “By our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren’t likely to help the economy immediately. The rest is pork.”

Alistair Darling is increasing taxpayer liability for bad loans and investments by £500bn under the Asset Protection Scheme, which could bring total liability up to £1.3tn, after already spending hundreds of billions of pounds. Virtually all this “stimulus” is financed by borrowing. Barack Obama just financed half of his $3.6tn budget with debt, increasing the US deficit by $1.75tn. The UK government debt is now at least 47% of GDP, though if you include liabilities which will require borrowing in the future, such as pensions, the figure is over 100%.

My purpose here is not to argue that governments should stop this futile waste of money, or to go into how governments cause recessions by setting interest rates. Instead I want to argue for something more radical: the UK government should default on its debts.

There is simply no excuse for government borrowing. It used to be claimed to be necessary for “investment”, though the vast majority of it was used to fund ordinary government expenditure. Now it’s claimed to be necessary to “spend against the economic cycle”, based on the mistaken belief that the economy is driven by consumption rather than production. (This “counter-cyclical” spending has never worked, anywhere, ever.) But we all know the real reason: governments that borrow can spend more than they tax, and thus remain relatively popular.

The problem is, things which are financed by borrowing have to be paid for eventually. In the mean-time, there are interest payments. So the total cost will always be higher. If the government always runs a deficit, the debts will never be paid off, and we’ll continue paying interest forever. This year, the government will spend £30bn on interest payments (5% of its budget). Think what that money could buy. (A much needed tax cut!) Without government debt we would be richer in the long run.

Some might say it would be impractical for the government to default on its debts, because it would destroy confidence in the UK government’s ability to pay its debts, and then no one would lend to the government again. But that’s the whole point. Since we wouldn’t intend for the government to borrow again, it wouldn’t matter, and loss of foreign confidence would hinder other future governments doing it as well. It shouldn’t have an effect on private borrowing.

More important than the practical argument, though, are the moral arguments. People should never be forced to pay debts that they never agreed to take on. Why should those born in 2050 be forced to pay for debts racked up today? Why should one government pay for debts racked up by a previous, irresponsible government? Why, indeed, should people be forced to pay for debts racked up by the state? States cannot legitimately have debt, so those people, companies, banks, sovereign wealth funds and other states who lend to states cannot legitimately expect their money back. Indeed, if we spread this meme, hopefully they won’t lend to the British state in the first place. Caveat mutuor.

The government of Ecuador defaulted on its debts in December 2008. “The Confederation of Ecuadorian Kichwas (ECUARUNARI), the powerful Andean branch of the country’s indigenous peoples movement, has long called the foreign debt illegal and illegitimate. ‘We have not acquired any debt. The so-called public debt really belongs to the oligarchy. We the peoples have not acquired anything or been benefited, and thus we owe nothing.’”

“The real issue is justice, not charity… When ‘Progressive’ outfits like Make Poverty History have noticed the problems that government debts create, their response has been, mainly, to beg ‘rich’ governments to ‘cancel’ the existing debts of ‘poor’ governments, as a sort of charitable hand-out…

In fact, discussions of government debt should not focus on mediated settlements or ‘relief’ from creditor governments, but rather on unilateral repudiation of so-called ‘public debt’ by debtor governments. Not because enforcing the collection of these debts is scroogish or because it ought to be tempered by considerations of charity, but rather because the debts themselves are completely illegitimate and enforcing the collection of these debts is absolutely unjust.”

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Posted in Politics by Hugo Hadlow | 7 Comments »

The European Union

Thursday, January 3rd, 2008

With the recent European Reform Treaty, it is topical to consider the nature of, and the justification for the European Union. The central point to make here is that whatever justification for the EU that is given, it is either false or not worth it. Indeed, the EU is detrimental to the prosperity of many countries in the world.

The primary reason for the creation of a pan-European economic and, subsequently political, organisation was to ensure greater integration, especially between France and Germany, in order to ensure that war would never again divide the continent. In this respect, if the EU has done anything at all to help, it has been entirely successful. However, would anyone argue that there is still work to be done? Are the Gauls and Aryans primed and ready to battle it out for supremacy as soon as the mystical shroud of political federation, as provided by the EU, is lifted? This may seem trite, but there is a serious point: since even before the creation of a European Community, its work has been done. War between France and Germany was not made obsolete by a form of coalition in the 1950s, but by the destruction and inhumanity of World War Two. As such, Europhiles have always sought new and elaborate justifications for the EU, almost all of which are false.

Rather than repeat thousands of other articles on the same subject and list the different justifications propounded in support of the EU only to refute them, I shall look at one function of the EU and the associated argument in favour of its existence. This is to re-distribute wealth through development aid from wealthier European nations to those that are less developed and to open up their trade markets in order to raise their GDP and living standards. One can argue that Britain itself benefited from this very principle when it was the sick man of Europe before the economic reforms of Margaret Thatcher. However, this great benefit of the EU is undermined by the nature of the Union itself, thereby eradicating any intrinsic benefit derived from redistribution. These problems are: global issues, immigration, and centralisation.

Through the EU, we deal only with the problems on our small continent. In contrast, it is beyond our Eurocentric world that the majority of unacceptable crises can be found. Of course, one can argue that the EU can function as an effective aid organisation to the world. However, this is not possible when the EU implements protectionist economic sanctions. The EU is an oppressive economic bloc, limiting free trade (as well as the scope for fair trade) in order to maintain its economic dominance at the expense of developing world economies. For example, every year the EU destroys tonnes of food in order to keep prices high. Moreover, market competition from outside the EU is restricted. It is only through trade (be it free, fair or otherwise) that individual producers and countries can hope to gain the wealth necessary to prosper.

What is more, when we look at the free movement of people within Europe, we see that aid within the EU is similarly undermined. This is because immigration within the EU removes the population needed for economic growth from the countries that seek development. Those in favour of immigration in Britain tend to point to the (supposed) vast economic benefit migrants bring to our shores. However, paradoxically, are we not being selfish when we call for more immigrants? This is because it impedes growth in the countries these people are leaving. Instead, we privilege our own prosperity above that of other people in the world. As such, those left behind are also left behind in terms of living standards and the opportunity in order to improve their quality of life compared with those living in Britain.

The centralised and authoritarian nature of the EU also undermines the development aid given to less economically developed member states. This is because the terms of this aid is dictated by the western European countries that dominate the EU through majority voting. In this way, the historical and cultural development of the country receiving aid is neglected, and, effectively, suppressed. As such, the benefit of that development aid is undermined. For example, a policy that suits the British economy, dominated by the private sector, may not be suitably implemented on the continent where the social economy is more prevalent. The best initiatives have to take the historical and cultural milieu of a nation into account. This cannot be achieved at a pan-European level.

In conclusion, the European Union’s aim to help development in less economically developed member states is admirable and justifiable. However, the framework within which it is conducted does not work. First, it undermines global development through economic restrictions. Second, development within the EU is undermined by free immigration. And third, derived from its centralised and authoritarian nature, the terms of aid to other countries is dictated by the major European powers, which may not suit the historical and cultural development of the recipient country. As such, one may wonder whether this noble aim of the EU is worth it considering the adverse consequences.

Of course, there are many other arguments in favour of the EU. Examples include better trade between European countries, regulatory consistency, and a political power to counteract the hegemony of the United States of America. However, these arguments seem to suffer from the same problem as that given above: they fail to justify the creation of an additional and cripplingly expensive layer of bureaucracy, whose aims are undermined by its very nature. However, that is for another article to discuss.

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Posted in Politics by James Arthur Sharpe | No Comments »

Why do people run up debt? Why has it become socially acceptable? What is the solution?

Sunday, September 30th, 2007

The nature of debt, and our attitude to it, has changed significantly since the nineteenth century. While the debtors’ prison used to spark fear into people’s minds, we are now, in Britain, living with a £1.3 trillion debt mountain. The cause of this change to the perception of debt can be traced to growing affluence allowing people to have mortgages, and the creation of the Welfare State leading to the entitlement mentality.

To assess the modern debt culture, it is necessary to consider how people’s attitudes to debt have changed. In the late-seventeenth and eighteenth centuries when banking and credit systems developed most people were too poor to gain credit. As such, there grew a popular image that only dishonest businessmen and the feckless upper classes were able to fall into debt.
This attitude toward debt changed in the late twentieth century as more people were able to gain credit. With growing affluence and the desire to own one’s own home, mortgage debt became more common. Thus, debt lost its association with the greedy and frivolous as it became just as common among hard working families. However, because debt was no longer stigmatised, people were able to abuse credit systems for their own self-indulgence.

The idea of using credit to support a lifestyle beyond one’s means is derived from the culture of entitlement that began with the creation of the Welfare State. The Welfare State is based on the idea that everyone has an equal entitlement to certain things, most notably, education and health care. However, this precedent has led some people to believe that they are ‘entitled’ to a standard of living that is beyond their means. Thus, credit is seen as a right because it liberates people from the limits their income places on their lifestyle. The most common example of this is mortgages. Although house prices have outstripped the increase in real wages, people remain unwilling to accept that they cannot afford the same quality of house as they may have done ten years ago. The result is more excessive debt.

Of course, this is not the only reason. In addition, the credit card has transformed the way people view money. Instead of conducting transactions directly with real currency, people are now paying virtually. The result is that people’s perception of their wealth and their spending is reduced. Moreover, it can be argued that banks and loan companies have accentuated the problem of debt by offering larger loans to those who cannot afford the repayments. Nevertheless, this must not distract us from the central fact that excessive debt and its social acceptance is a manifestation of the modern culture of entitlement.

On one level, the process of changing people’s attitude to excessive debt and its acceptability has already begun. There are increasing signs that the economic climate is changing for the worse. In structural terms, a debt-based economy relies on liquidity in order to pay off, and take out, loans quickly and efficiently. Thus, the recent ‘credit crunch’ and its adverse effects, most notably on Northern Rock, demonstrates the flaws of a debt-based economy. Moreover, the Citizen Advice Bureau has pointed out that the number of people making debt enquiries has doubled in ten years to 6,600 every day. In all, people are increasingly aware that excessive debt breeds instability and cannot be supported in a period of economic turmoil.

Nevertheless, it must be appreciated that changing the mentality of entitlement is key. This is a long process with no certain means of implementation. However, in general, people need to be instilled with a sense of social responsibility. This can only be achieved by making people realise that they cannot rely on the government to solve all of their problems, but that sometimes they need to use their own initiative. We need to do away with the ‘people dreaming of systems so perfect that no one will need to be good’ as described by T.S. Eliot.

In conclusion, as mortgage debt became more common, debt in general lost its stigma. Some people were then able to abuse this liberal attitude to debt by borrowing money to live the lifestyle to which they thought themselves entitled; a mentality derived from the Welfare State. The solution is to make people appreciate that they cannot support excessive debt in a period of economic instability, of which it itself is a cause. Moreover, more generally, it is necessary to combat the mentality of entitlement by instilling a concept of social responsibility.

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Posted in Politics by James Arthur Sharpe | 1 Comment »