Political reform in itself will not be enough to create a prosperous and equal society. This also demands strong policies to build a dynamic, productive market economy, which works in the interests of the population as a whole and encourages individual initiative. It requires far-reaching tax reforms which permit increased spending on education, the NHS and welfare services. And it requires 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 the 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 Goverments after 2010 shifted the burden disproportionately onto the shoulders of those who depend 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, while severely damaging provision for people in need and for essential services such as education, health and the police.
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 taxation 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 hghly skilled workers from around the world.
The Party believes that, where c0mpatible 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. 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.
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;
- believes that this should be achieved in a way that protects public services through a combination of careful management and socially equitable tax policies;
- considers that, with this aim, the tax system should be remodelled and balanced increases be made in direct, business and some 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 should be introduced with transitional arrangements for sectors which are carbon dependant and exposed to international competition;
- the ceiling on council tax on expensive properties should be removed;
- a determined drive should be made to tackle tax evasion (embracing all British territories) as part of an international effort to curtail tax haven provisions around the World, 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, ensure that very large estates pay their fair share of tax and encourage inherited wealth to be spread more widely.
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 stake-holder 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 governace 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 start up 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.
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 optimum model.
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 levels 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 in 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.
Promoting mutual ownership
Demutualisation has reduced the scope for lay people to take 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 exaccerbated 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 development of the service (for example because they commute regularly), should be actively explored.
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 occured in the UK and the US. The real reason for this is that politicians of the major parties have uncritcally 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 require decision-taking to become 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 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 proposes:
- new powers and resourcesto enable the regions to promote investment and entrepreneurship in projects with the potential for long term growth;
- improved access to affordable capital for the regions, using local intermediaries;
- more 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, 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 significant factor in the imbalance between London and 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;
- increased public sector funding for investment projects whose time horizon is too long for equity 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;
- changes 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;
- to refocus resources on technical training, such as exists in Germany and the Netherlands, in sectors targetted for investment.