Within a democratic market economy, poverty and gross inequality are not a result of the economic principles but of political failure. To claim that Britain performs worse than other Western European countries because of a tax and spending system that favours the better off is to put the horse before the cart. Simply expanding welfare is not a sustainable strategy. A more fundamental approach is needed, based on a recognition that failure to modernise our political system has handed power to those who benefit from policies that lead to a high levels of inequality.
The concentration of huge wealth in the hands of a small number of very rich people may raise moral issues, but international experience suggests that poverty cannot be abolished through transfers to the less well off funded by confiscatory taxation on high incomes. The issue is not that a few people squander fortunes on luxuries but that our laws permit them to buy things that should not be up for sale: political influence; control of information; and privileged access to justice, education and jobs. The priority, therefore, must be to address the underlying causes of inequality: a distribution of power which is incompatible with real democracy; corruption in the political system; weak and inappropriate laws and regulations; inequalities in access to objective information, educational opportunity and health care; and restrictions on labour market and social mobility.
Equity between generations
Successive governments have pursued electoral advantage by pushing the responsibility for paying for services and infrastructure onto the shoulders of future generations. This has led to a situation where many young people are denied advantages, such as home ownership, which their parents took for granted. Devices concocted to shrink the public sector borrowing requirement, such as student debt, the Public Finance Initiative and the long term price guarantee underpinning the Hinckley B power station, are wasteful and inequitable. They amount to a system of taxation without representation on future generations. The Party considers that:
- student loan-based funding of post-18 education should be replaced by a system which shares the burden fairly between generations;
- a code of conduct should be drawn up to govern the behaviour of public authorities, and the powers of the Office of Budget Responsibility extended to encompass monitoring decisions affecting equity between generations, to ensure transparency and minimise the scope for cushioning current expenditure at the expense of future tax payers and consumers;
- public sector funding for investment projects whose time horizon is too long for equity finance should be expanded.
But political reform in itself will not be enough to create a more prosperous and equal society. This also demands a dynamic market economy, which works in the interests of the population as a whole and encourages individual initiative. National wealth is a reflection of dynamic processes, not a finite stock to be divided one way or another. In an open world economy, the level of direct taxation is a factor in attracting and retaining essential skills and investment. This, together with the relatively small tax base represented by very wealthy people, limits the scope for simply transferring resources from one category of individuals to another.
The Conservative/Liberal Democrat and Conservative administrations after 2010 cut funding for public services in real terms, while reducing taxes on business. Even by the parameters the Government set itself, this approach clearly failed. Overall, it never achieved the reduction in the public spending deficit and public debt that the Chancellor predicted, while involving sharp reductions in support for people in need, and for education and health.
To ensure the capacity of the Government to continue to borrow, public debt, which rose sharply as a result of the crisis of 2008, must be contained and the budget deficit progressively brought into balance across the trade cycle. The Party believes that a lower rate of tax with a higher level of compliance is far preferable to a higher rate with lower compliance. A key component of the Party’s strategy, therefore, is far-reaching reform of the tax system to significantly reduce the number of exemptions, while at the same time involving harsh cuts in services for those on modest incomes. As part of this approach, the Party supports:
- measures to protect the UK’s credit worthiness by bringing debt under control progressively, by ensuring that public expenditure is funded in a responsible way and by remodelling the tax system, through balanced increases in business and indirect taxation;
- Corporation Tax should be increased from its current low of 18% to 22% . At this level, business taxes in the UK would continue to be very competitive with rates in most of our main trading partners;
- a carbon tax with transitional arrangements for sectors which are carbon dependant and exposed to international competition;
- removal of the ceiling on council tax on expensive properties;
- a determined drive to tackle tax evasion (embracing all British territories) as part of an international effort to curtail tax haven provisions around the World and more effective provisions to tackle tax minimisation through devices such as trusts;
- reform of the inheritance tax system to encourage wealth to be spread more widely by dividing estates between multiple recipients.
A balanced and diverse economy
The decades since 1979 have seen a steady erosion in economic pluralism in the UK, with privatisation and the decline of the mutual ownership which has occurred under successive governments. This contrasts with the situation in other north European countries, where equity investment has continued to be balanced by family ownership, mutuality and municipal and state ownership, and where the short termism inherent shareholder value driven equity finance is moderated by stake-holder systems of company governance.
The Radical Party stands for responsible economic management based on a vigorous, efficient, knowledge-based market economy with a plurality of forms of ownership, including private, equity, mutual and (where investment returns are long term), public ownership. A sustained effort is needed to tackle fundamental structural weaknesses and re-balance the economy. Tackling inequality between different parts of the UK must play a central part in bringing about social justice and ensuring that the nations’s human capital is used effectively. Office of National Statistics figures show that, in the period 2013 to 2015, life expectancy at birth was ten years lower in the most deprived parts of England than in the least deprived, with the difference in the number of years that an individual can expect to stay healthy approaching 20 years.
Britain’s over-dependence on mobile equity capital, much of it controlled by dividend-hungry pension funds, together with the growth of short-horizon shareholder-value ideology, has had damaging consequences. The first of these is fragility resulting from the tolerance of extreme risk-taking in the UK and US financial communities. This led directly to the crisis of 2008, which was exacerbated in the UK by the privatisation of mutual building societies and insurance companies in the previous decade. A second negative consequence has been the loss of headquarters functions resulting from the sale to foreign investors of high tech start up companies and formerly state-owned utilities, for example, in the energy sector. Demutualisation has also reduced the scope for lay people to take decisions that affect themselves and their communities in the economic sphere.
Some of these changes are an inevitable consequence of internationalisation resulting from advances in transport and communications, but the problem has been made worse by the fact that politicians of the major parties have uncritically espoused the neo-conservative belief that economic efficiency inevitably involves decision-taking becoming more and more top-down and concentrated in the hands of professional managers.
It will take time for people brought up in this environment to realise that they too can make a difference in the economic sphere. But there is also much that the government can do to encourage a change of attitudes leading to a greater local control and a more plural, flexible, sustainable and democratic social market economy. To this end, the Party proposes:
- new powers for the regions to promote investment and entrepreneurship, and access to affordable capital, using local intermediaries supported by more resources for transport, and cultural and recreational opportunities, which are known to be significant factors in attracting inward investment;
- a large scale drive to raise educational standards, focusing on communities and regions that have fallen behind leading to improved literacy and numeracy skills and broader and deeper secondary school learning;
- measures to reverse the long term decline in manufacturing (a key factor in the imbalance between the South East and the rest of the country);
- a strategy to tackle short-termism resulting from the decline in private, mutual and public sector ownership, and the consequent over-dependence on mobile institutional finance;
- a 110% inheritance tax concession for company proprietors who follow John Lewis’s example and provide for their enterprises to become viable worker-owned businesses;
- clarification of Treasury regulations to underpin the capacity of mutuals to use member share capital for investment and protection for the use the word co-operative as a business name.