Political reform in itself will not be enough to create a prosperous and equal society. This also demands a clear break from the neo-liberal interpretation of classical economics, which has provided the intellectual foundations for policy under Conservative, Labour and Coalition governments for the last forty years and which has been the driving force behind rising inequality, social exclusion and the decline of British manufacturing. But this does not mean resurrecting discredited Marxist inspired dogmas of the kind the current leadership of the Labour Party is flirting with, which have failed so often in the past.
Rather, as a starting point, we believe that Britain should look to the successful north European social-market economic model, which experience shows can provide the basis for a dynamic, plural, productive market economy, which works in the interests of the population as a whole. Building on a far-reaching programme to extend democracy, this will require radical tax reforms which permit increased spending on education, the NHS and welfare services. And it will require changes in the structure of the economy and diversification in the ownership, financing and control of business to encourage long term-investment, participation and the growth of knowledge-based companies.
A Failed Policy of Cuts
To ensure the capacity of the Government to borrow, public debt must be contained and the budget deficit kept within limits compatible with continued access to international lending. However, by cutting public spending and taxes on business, the Conservative/Liberal Democrat and Conservative Governments after 2010 shifted the burden disproportionately onto the shoulders of those who depend most on public services. Even by the parameters the Government set itself, this approach clearly failed. Overall, it never achieved the reduction in spending and debt that the Chancellor predicted.
He was able to get away with his austerity agenda because the burden of tackling the consequences of the financial crisis was largely imposed on those who were least able to use the political system to defend their interests. The falsity of repeated claims by Coalition and Conservative ministers that there was no alternative to starving public services is clearly shown, first, by estimates that abandoning the previous policy on fuel tax duty has cost the Revenue over £100 billion in the period since 2010; and, second, that nothing has been done to tackle the manifest injustice of provisions which shield wealthy people from paying meaningful amounts of council tax on very high-value properties.
Calls for changes in taxation that would lead to a fairer distribution of income and wealth are regularly countered by claims that the UK is already over-taxed in comparison with other countries and that higher taxes would inevitably lead to lower economic growth. However, OECD figures do not support this conclusion. Government revenue as a share of GDP among the 35 OECD member countries averages 45% (with a range from 25% to 56%), with the UK, at 38%, being the fifteenth lowest. Corporation Tax in the UK is levied at a rate of 19%, the lowest among comparable OECD member states apart from Ireland.
At the same time, the UK’s top rate of tax (including National Insurance) at 48% is lower than the rates which apply in, for example, Austria (59%), Australia (55%), Belgium (53%), Denmark (56%), Finland (55%), and Germany (55%); all of which have achieved higher income per head than the UK. Moreover, experience in these countries belies the frequently made assertion that even modest increases in tax on higher incomes will lead to an exodus of capital and skills. Indeed, these countries are demonstrably a magnet for investment and highly skilled workers from around the world.
The Party believes that, where compatible with the need to raise sufficient resources to fund health, education and welfare services, a lower rate of tax with a higher level of compliance is far preferable to a higher rate with lower compliance. Government estimates suggest that some £30 billion of tax due is never collected, with the black economy costing society a further £60 billion of lost revenue. 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 increasing the social wage by maintaining excellent public provision.
To this end, a dual approach is needed involving, first, immediate measures to ensure that existing legislation works as Parliament has intended with 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. Second, loopholes in the tax system should be closed with stronger measures to ensure transparency and tackle tax minimisation through devices such as trusts. The inheritance tax system should be reformed to remove exemptions, to ensure that very large estates pay their fair share of tax and to encourage inherited wealth to be spread more widely.
Serious consideration should also be given to the introduction of a practical system of Land Value taxation as part of a radical, medium-term platform of reforms designed to produce a robust revenue system which is fair, transparent and conducive to the optimum employment of the nation’s resources in the interests prosperity for all.
In keeping with this approach, the Party recognises the need to protect the UK’s credit-worthiness by maintaining debt at a level which preserves the capacity to borrow at competitive rates. It believes that this should be achieved in a way that protects public services through a combination of careful management and socially equitable tax policies, To achieve this, the tax system should be remodelled, enforcement strengthened, the resources available to the HMRC increased, balanced increases be made in direct, business and indirect taxes. Corporation Tax should be increased from its current low of 19% while maintaining business taxes at levels broadly in line with those of our main trading partners; a carbon tax introduced with transitional arrangements for sectors which are carbon dependent and exposed to international competition; the ceiling on council tax on expensive properties removed and consideration given to the introduction of a tax on land value.
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 mutual ownership which has occurred under Labour, Coalition and Conservative 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 in shareholder-value driven equity finance is moderated by other forms of finance and stakeholder systems of company governance.
The Radical Party stands, therefore, 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 (for example where investment returns are long-term or strategic national interests are involved), public ownership. A sustained effort is needed to tackle fundamental structural weaknesses and re-balance the economy taking these factors into account.
Britain’s over-dependence on mobile equity capital, much of it controlled by dividend-dependent pension funds, together with the growth of short-horizon shareholder-value ideology, has had far-reaching and damaging consequences. The first of these is fragility resulting from the tolerance of extreme risk-taking in the UK and US financial communities nurtured by a free market ideology which encourages irresponsibility, exaggerated bonuses and inadequate governance controls. These factors led directly to the crisis of 2008, which was fuelled in the UK by the privatisation of mutual building societies and insurance companies over the previous decade. A second negative consequence has been the loss of headquarters functions resulting from the sale to foreign investors of high tech startup companies and formerly state-owned utilities, for example in the energy sector.
Business investment is crucial to modernisation and economic growth and the government plays a key role in creating an environment which favours a high level of investment. Unfortunately, the UK has failed to keep up with other advanced economies in this respect, coming, according to the OECD (2014), 33rd out of 35 countries, with investment of 17% of GDP compared with an average of 20% for all members countries. Similarly, the World Bank reported in 2016 that UK investment accounted for 17% of GDP compared with a global average of 24%.
Since the 1970s, successive governments have energetically and successfully promoted the UK as a location for investment by third country businesses wishing to sell into the European Single Market, boosting employment and growth and supporting the balance of payments. Opposition to Single Market membership by the Conservative and Labour Parties threatens these benefits and increases the urgency of finding alternative means of addressing the UK’s long-term investment problem.
To this end, the Party proposes new powers to enable the regions to promote investment and entrepreneurship in projects with the potential for long-term growth and improved access to affordable capital, using local intermediaries, together with increased resources for regional transport, education and recreation, which are known to be significant factors in attracting inward investment. A large-scale drive to raise educational standards is also needed, focusing on communities and regions that have fallen behind, leading to improved literacy and numeracy skills and broader and deeper secondary school learning.
The long-term relative decline in UK manufacturing resulting from the impact on the exchange rate of North Sea oil and growth of the financial sector, and, from short-termism linked to the pattern of ownership of large businesses and their consequent over-dependence on mobile institutional finance, is a significant factor in the imbalance between London and the South East and the rest of the country. Measures to address this problem should include increased public sector funding for investment projects whose time horizon is too long for equity finance and the mobilisation of additional resources for technical training in priority sectors, such as exists in Germany and the Netherlands.
Alternative Forms of Ownership
In mature industrial economies, a predominance of private business ownership is strongly associated with economic dynamism and a high standard of living. However, experience shows that an equity capital monoculture of the kind successive Governments have sought to create in the UK is far from being the best model. Some of the structural changes that have occurred in the economy in recent decades are an inevitable consequence of advances in technology, transport and communications. But there is no fundamental reason why these changes should have led to the dramatic increase in inequality that has occurred in the UK and the US. The real reason for this is that politicians of the major parties have uncritically adopted the neo-conservative belief in “shareholder value” as the only benchmark for business success. This, in turn, has encouraged the view that economic efficiency requires decision-taking to become top-down and concentrated in the hands of professional managers.
In a number of the most successful European market economies, diverse patterns of business ownership (including public, family and mutual ownership) have contributed to a high level of research and development as well as social cohesion and stakeholder engagement. They have also permitted a long-term approach to investment of a kind which (as the fiasco over the Hinkley B power station graphically demonstrates) is incompatible with short-term shareholder-value decision taking.
A clear commitment to economic pluralism and an evidence-based approach to ownership is all the more vital today with the Labour Party led by people who refuse to face up to the lessons of Britain’s post-war economic failure and show every sign of wanting to replace the neo-conservative dogma of Mrs Thatcher and Tony Blair with a return to discredited ideology-driven solutions which experience suggests are likely to make conditions not better but worse.
Demutualisation has reduced the scope for lay people to make decisions that affect their lives and has increased the fragility of the UK economy as a whole. The durability of the mutual model is illustrated by the fact that in the 175 years since the first modern consumer co-operative was established, only one co-operative society has been bankrupted. The demutualisation of most building societies and large formerly customer-owned financial insurance and pension providers, such as Standard Life and Abbey National, helped to trigger and exacerbated the 2008 banking crisis. Changes in legislation should be introduced to help to promote the rebuilding of the mutual sector. The use of the term co-operative should be given effective protection and Treasury regulations should be clarified to remove possible ambiguities over the capacity of co-operatives to use member share capital for investment.
The Party believes that a 110% inheritance tax concession should be introduced for company proprietors who follow John Lewis’s example and provide for their enterprises to become viable worker-owned businesses. The possibility of promoting co-operative participation in parts of the rail transport system, where customers have a long-term stake in developing the service (for example, as commuters), should be actively explored.
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 much that 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 calls for a change in legislation to promote the renaissance of the co-operative sector including clarification of Treasury regulations to underpin the capacity of mutuals to use member share capital for investment and protection for the use of the word co-operative as a business name.
As well as being a vital component of an inclusive society and essential in tackling climate change, a public transport system which is comprehensive, reliable, affordable and capable of moving people and goods efficiently is crucial for the growth of a productive economy. The UK has performed badly in maintaining and developing of its public transport infrastructure, with a road system that is inferior to those of most comparable countries and railways where delays and congestion are often the rule rather than the exception. Rail privatisation has failed to deliver the promises that were made for it and weaknesses in franchising and resources have undermined the long-term planning needed for upgrading and expanding infrastructure and services.
Congestion on our roads also imposes an enormous and barely recognised burden on individuals and society. Traffic data analyst Inrix estimated that over the period to 2030, traffic jams will cost the UK economy £300 billion at 2013 prices and that individual drivers wasted an average of 31 hours in 2017 in rush hour hold-ups, costing an average of £1,168 a year per person.
The Radical Party considers that public expenditure on transport infrastructure in urgently needed, primarily funded through borrowing, taking advantage of the current low cost of government debt. Instead of expensive, environmentally damaging prestige projects such as HS2, rail capacity should be expanded by tackling bottlenecks in the existing network and by technological improvements such as the introduction of in-cab signalling technology. Policies should also be agreed as a matter of urgency, to tackle congestion on the roads by means such as improved public transport, fiscal measures, smart road pricing and congestion charging and steps to contain the apparently inexorable growth in the number of cars on the road. At the same time, support should be given to local authorities in promoting low carbon, urban public transport solutions, extending rural bus networks and in ensuring that bus fares do not discriminate against poorer individuals and families who live in peripheral estates.
SUMMARY OF PROPOSALS
Expenditure and Debt
- maintain debt at a level which preserves the capacity to borrow at competitive rates in a way that protects public services through a combination of careful management and socially equitable tax policies.
Simpler, Fairer Tax
- remodel the tax system making balanced increases in direct, business and indirect taxes and conduct a review of possible additional equitable sources of revenue;
- reform the taxing of property, remove the ceiling on council tax on expensive properties and consider the case for introducing a tax on land value;
- increase Corporation Tax from its current low of 19% while maintaining business taxes at levels broadly in line with those of our main trading partners;
- introduce a carbon tax with transitional arrangements for sectors which are exposed to international competition.
- strengthen enforcement, increase the resources available to HMRC and tackle tax minimisation through devices such as trusts;
- promote an international effort to curtail tax havens and ensure transparency;
- reform inheritance tax system to remove exemptions, ensure that large estates pay their fair share of tax and encourage inherited wealth to be spread more widely.
- give the regions new powers and resources to promote investment and entrepreneurship in projects with the potential for long-term growth;
- improve access to affordable capital, using local intermediaries, and increase resources for regional transport, education and recreation as significant factors in attracting inward investment;
- 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;
- promote measures to reverse the long-term decline in manufacturing to help address the economic imbalance between London and the South East and the rest of the country;
- tackle short-termism resulting from the decline in private, mutual and public sector ownership, and the consequent over-dependence on mobile institutional finance;
- increase public sector funding for investment projects whose time horizon is too long for equity finance.
Alternative Forms of Ownership
- introduce 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;
- clarify Treasury regulations to underpin the capacity of mutuals to use member share capital for investment and protect the use of the word co-operative as a business name;
- refocus resources on technical training in sectors with investment potential.
Transport and Communications
- increase public expenditure on transport infrastructure taking advantage of the current low cost of government borrowing;
- end expensive, environmentally damaging prestige projects such as HS2 and expand rail capacity by tackling bottlenecks and by improvements such as the introduction of in-cab signalling technology;
- develop policies to tackle road congestion through improved public transport, fiscal measures, smart road pricing and congestion charging and steps to contain the growth in the number of cars on the road;
- support local authorities in promoting low carbon, urban public transport solutions, extending rural and city-peripheral bus networks.