Political reform alone will not create a prosperous and egalitarian society. This also demands a clear break from the neo-liberal, public-is-bad/private-is-good interpretation of neoclassical economics, which has underpinned the policies of all recent governments. But this must not mean resurrecting Marxist inspired public-is-good/private-is-bad dogmas, which have led to division, economic failure and disenchantment in the past. For the Government to function effectively, debt must be honestly defined and the budget deficit kept within limits compatible with borrowing at competitive rates, but this must be done in a way which protects all sections of society, especially the most vulnerable.
What Went Wrong?
Many 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 should have led to the dramatic increase in inequality that has occurred in the UK. A more convincing reason is that politicians have uncritically accepted short-term profitability as the only benchmark for business success. This has encouraged the view that efficiency requires top-down decision-taking focused on the interests of a single stakeholder. The Radical Party recognises that the best way to promote well-being is by fostering synergies between the public and private sectors in a predominantly market-driven economy, while ensuring that prosperity is spread throughout society.
In the Post War decades, the major parties shared the view that the state should play a leading role in ensuring prosperity for all. The NHS brought improved health, slums were replaced with social housing, and full employment led to higher living standards for almost everyone. The UK was still a major manufacturing country, which helped to spread prosperity between regions, and by the 1970s, it had become the second most equal major European nation.
But with the adoption of a neo-conservative framework for public policy in 1979, this achievement evaporated. On the generally accepted GINI index, the UK fell from 0.31 in 1985 to 0.35 in 2013, coming 23rd out of 27 OECD countries in terms of equality, while a cluster of Nordic countries achieved ratings of between 0.26 and 0.28. Using a different measure, Wilkinson and Pickett compared the average income of the top 20% of the population in 23 countries with that of the poorest 20% and found a multiplier of four in Japan and the Scandinavian countries, six in Germany, seven in the UK and close to nine in the US. By this criterion, the UK was again the fourth most unequal country of the 23 surveyed.
Defenders of the neo-conservative model assert that the negative impacts of inequality are more than balanced by faster growth. But OECD figures show this to be untrue, with 9 of the 12 OECD nations with the greatest income equality (Iceland, Norway, Denmark, Finland, Belgium, Austria, Luxembourg, Sweden and the Netherlands) also achieving higher average incomes than the UK. IMF studies demonstrate a robust correlation between greater equality and faster and more durable economic growth, while the OECD estimated in 2014 that growth in the UK would have been a fifth higher over the period 1985-2005 had income inequality not increased.
Crisis and Austerity
In response to the banking crisis of 2008, Gordon Brown sought to prevent the economy sliding into depression by encouraging the Bank of England to pump £450 billion into the private banking system (through so called “quantitative easing”) and to reduce the bank rate to 0.5%. While this helped stave off recession, it greatly increased public debt. It also inflated the price of equities and housing as crisis-hit private banks shunned entrepreneurial projects for less risky investments, boosting the wealth of those with property and shares at the expense of poorer people, who depend on pensions and interest on savings accounts.
From 2010, the Coalition attempted to tackle public debt by reducing the gap between annual government expenditure and income (the budget deficit), primarily by cutting public spending. Even by its own parameters, this approach clearly failed. It never achieved the reduction in the deficit and debt that the Chancellor predicted, while severely hitting those who depend most on public services. While the level of employment held up, real wages and productivity fell, threatening the prospects for future growth.
A fairer way of boosting the economy would have been to cut the bank rate while allowing public authorities to take advantage of very low interest rates to upgrade infrastructure and build social housing, but the ruling political parties were unwilling to challenge the dominant orthodoxy by turning to the public sector to help stimulate growth. At the same time, taxes should have been increased to reduce the budget deficit while protecting essential public services. The Coalition claimed that there was no alternative to austerity but held down fuel tax duty at a cost to the Revenue over £40 billion between 2010 and 2018, Corporation Tax was cut to almost the lowest rate in the industrial world and high-value properties continued to be protected from meaningful levels of council tax at a time when homelessness was rapidly rising.
While the number of people in work rose, this was achieved at the cost of a sharp deterioration in the quality of employment opportunities for ordinary job seekers, with few secure jobs available and over a million people in work but earning so little that they need to draw benefits to house and feed their families. The neo-conservative model has also created an economy where wages, insecurity and one-sided, zero hours contracts can make it more attractive for employers to take on and lay off staff than to invest in new skills and machinery. As a result, productivity has scarcely increased over the past decade, while incomes have failed to keep pace with increases in GDP.
The Radical Party Proposes:
- Partnership-Based Economic Leadership
- Properly Managed Public Debt
- Fair and Effective Taxation
- Secure, Well Paid, Productive Work
- A Robust and Diverse Economy
- Investment in Skills, Infrastructure and Knowledge-Based Enterprise
Partnership-Based Economic Leadership
Experience in this country and abroad shows that in an advanced democracy, a pre-dominantly market economy with a government working to create an environment that favours long term investment, learning and the optimum deployment of resources is the best means to achieve sustainable growth. To help to achieve this and to promote social cohesion, the Party proposes that a consultative council be created at the national level made up of representatives of employers organisations, trade unions and the regions.
This should not engage in planning but should have the resources to explore emerging economic opportunities by commissioning scenario studies and other research and making recommendations to government. It should have a statutory right to publish reports and meet periodically with the Prime Minister, the Chancellor and other relevant ministers. Addressing the country’s serious deficits in training, support for research and development and investment in the regions should be high priorities for the attention of the consultative council.
The Government should develop a strategy and timetable for reducing regional economic disparities supported by funding for commesurate improvements in education, training and infrastructure in disadvantaged areas. A network of Regional Development Agencies (RDAs) should work under the aegis of the proposed regional tier of government to provide a powerful stimulus for economic and employment creation, focusing on regions outside London and the South East on the pattern of the Scottish Regional Development Agency.
These should work with employers, trade unions, universities and local planning authorities to promote the development of their local economies across all sectors, with a special focus on supporting training and skills development and investment in globally competitive areas of business which are capable of generating high quality jobs and export led growth.
To support the RDAs, a Regional Development Bank should be created to work alongside the proposed Scottish National Investment Bank, with headquarters in one of the regions. This should provide long-term equity finance for small and medium sized businesses based in regions with incomes below the national average. In regions with income above the national average, the bank would focus on providing risk capital for knowledge-based start-ups and small companies with growth potential and would be channeled through facilities linked to research-strong universities and research institutes. The Regional Development Bank should be required to consult with the RDAs and to take their recommendations into account in formulating its own investment priorities.
Properly Managed Public Debt
The Party believes that debt should be maintained at a level which preserves the capacity to borrow, while protecting public services through careful management and balanced tax increases. The Treasury’s definition of public debt should be clarified to make it easier for local authorities to invest in social housing. It is strongly opposed to the use of devices such as the Public Finance Initiative and debt-funded higher education designed to massage the Public Sector Borrowing Requirement at the expense of future taxpayers and consumers. To this end, the Office of Budget responsiblity should be given a specific responsiblity to monitor public spending to identify off-budget spending initiatives where the government in reality remains ultimately liable.
Fair and Effective Taxation
Calls for changes in the tax system that would lead to a fairer distribution of income and wealth are regularly met by the assertion that the UK is already over-taxed compared 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 35 OECD member countries averages 45% (with a range from 25% to 56%), with the UK, at 38%, being the fifteenth lowest. Corporation Tax at a rate of 19% is 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 in Austria (59%), Australia (55%), Belgium (53%), Denmark (56%), Finland (55%), and Germany (55%), all of which have higher income per head than the UK. Moreover, experience in these countries belies the frequent assertion that modest increases in tax on higher incomes would lead to an exodus of capital and skills, as these countries are magnets for investment and skilled workers from around the world.
To achieve an appropriate balance between spending and revenue, increases should be made in both direct and indirect taxes, with the focus on taxes which are progressive and difficult to avoid. The Party would be prepared, as necessary and prudent, to increase taxes in a balanced and reasonable manner to rebuild essential public services and ensure the basis exists for the future economic growth. Corporation Tax should be increased from its current exceptionally low rate of 19% to bring it into line with those of our main trading partners and a carbon tax phased in, with transitional arrangements for sectors which are currently carbon dependent and exposed to international competition.
Increasing compliance and tackling exemptions
The Party believes that, all things being equal, a lower rate of tax with a higher level of compliance is far preferable to the opposite. To address this issue, the resources available to the HMRC should be increased, a measure which would more than pay for itself through improved compliance. A determined campaign is needed to reduce avoidance with the Government estimating that some £30 billion of tax due is never collected, with the black economy costing society a further £60 billion of revenue. Immediate measures are needed to ensure that existing legislation works as Parliament intended by closing loopholes, stepping up efforts to ensure transparency and tackling tax minimisation through devices such as trusts.
At the same time, a stringent review should be carried out of all tax exemptions to ensure that they meet their original intention and public interest criteria and that they are socially equitable. The yield from Income tax was £182.1 billion in 2017/17 with exemptions costing the exchequer some £136 billion a year (of which personal allowances accounted for £97 billion).
The Party believes that public revenues could be substantially increased by curtailing tax exemptions and that such a policy would increase transparency, provide extra funding for priority areas of public provision and and help to bring about greater equality and fairness. Inheritance tax exemptions should be reformed to help fund priority pubic spending, ensure that large estates pay their fair share and encourage inherited wealth to be spread more widely. All existing individual and corporate tax allowances should be reviewed and withdrawn or modified if they do not clearly meet the public interest.
Allowances on pension contributions cost the Treasury £23 billion in 2016/17 as a result of a system which the Centre for Policy Studies described in 2012 as: “crude and mis-directed” and as doing: “little to encourage a savings culture amongst younger workers” – with 68% of pensions contribution relief going to higher and additional rate tax payers. The underlying purpose of tax exemptions on pension contributions should be to ensure that pensioners have financial security and independence in old age, not to create an avenue for tax minimisation for the better off. To that end, the Party considers that higher rate tax relief on pension contributions should be removed, saving some £7 billion a year, and the ceiling on the maximum amount that can be accumulated in a tax exempt pension fund reduced from the current maxium of £1.03 million.
ISAs, at an annual cost of £2.75 billion, should be reformed as should exemptions for donations to registered charities, which cost the Treasury £1.9 billion a year and are based upon a system which is among the laxest in the world.
Currently, according to the Financial Times, a gift to a charity of £1 million by an additional rate tax payer really only costs the donor £435,00, with the balance of £565,00 coming from the tax payer. Research in the UK and the US indicates that tax exemptions have little effect on the level of charitable giving, while often directing resources to causes which should either be funded from other sources or are of little or no value to society.
While the UK itself has a fairly transparent tax system, the ability of financial institutions to outsource secrecy to Crown Dependencies and British Overseas Territories puts it at the centre of the largest international tax secrecy network. A determined drive to tackle tax evasion embracing all British territories should be carried out as part of an international effort to curtail tax havens around the globe. At the same time, measures should be adopted to prevent foreign-based companies which are active and have siginificant sales in the UK from avoiding paying meaningful amounts of tax by transferring profits to low tax locations abroad.
Devices concocted to artificially shrink the requirement for public sector borrowing such as the Public Sector Borrowing Initiative (PFI), funding universities through student debt, and the long-term price guarantees set up for the Hinkley B power station project, amount to stealth taxes on future generations. The Party considers that a code of conduct should be drawn up, and the powers of the Office of Budget Responsibility extended, to ensure transparency and minimise the scope for cushioning current expenditure at the expense of future taxpayers and consumers.
Secure, Well Paid, Productive Work
The labour market has undergone enormous changes over the last four decades because of legislation promoting flexibility, globalisation and the impact of new technologies and work organisation. Trade union membership has halved and lifelong employment has been replaced in many parts of the economy by self-employment, short-term contracts and part-time work. Flexibility can be beneficial, helping resources to flow more quickly into areas of the economy with growth potential and giving individuals a wider choice of employment options. But in the absence of proper regulation it also encourages exploitation and impedes the growth of productivity, the key to future prosperity.
Individuals have different priorities, conceptions of well-being, abilities, skills and experience and differences in remuneration can help promote the rational use of human capital and attract highly qualified staff. But it is simply not the case that inequality of the kind that exists in the UK is necessary for prosperity. Indeed, equality can benefit wealth creation through better social cohesion and better education and health. The benefits of greater equality are illustrated by the issue of trust, a key factor in perceptions of well-being and in economic efficiency. Asked in the World Value Association Wave 6 Survey: “do you think that most people can be trusted, or, alternatively, that you can’t be too careful in dealing with people”, 64% of people in Norway, one of the most equal countries, said they trusted other people, compared with 5% in Brazil, which is one of the most unequal.
Ending low pay
Low pay not only blights lives but it holds back skills development and productivity growth. The minimum wage should be progressively raised to the level of the Living Wage and minimum wage legislation enforced more effectively; especially so in low skill, grey-market areas of the economy, such as cafes, clothing workshops, car washes and nail bars, which have a track record of employing people who are young, isolated, have poor English language skills or who have recently arrived in Britain. HMRC has the central role in enforcing the minimum wage, but employees of other agencies, including local authorities, who have regular contact with places of employment, could also play a part in identifying workers who are being exploited.
It is essential that the minimum wage is treated as a stepping stone to progression to better remuneration and is not seen as a ceiling on employers’ and society’s responsibilities. Reflecting the central role that empowerment plays in the Party’s proposals for a fairer Britain, trade unions should be given special rights to contact and recruit employees in organisations which cannot demonstrate that they are paying all their staff the Living Wage.
A Robust and Diverse Economy
Economic pluralism has declined under Conservative, Labour, and Coalition Governments leaving large businsses over-dependant on mobile equity capital. This contrasts with the situation in other European countries, where family, mutual, municipal and state ownership and stakeholder systems of company governance countinue to foster long-term planning, research and development and workforce engagement.
Dependence on mobile capital has had far-reaching consequences for the British economy. The tolerance of extreme risk-taking nurtured by shareholder-value ideology, short-term horizons, exaggerated bonuses and inadequate governance controls led directly to the banking crisis of 2008. It has also encouraged the loss of headquarters functions resulting from the sale of high tech startup companies and formerly state-owned utilities, for example in the energy sector, to foreign-based investors.
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 or strategic national interests are involved), public ownership. A sustained effort is needed to re-balance the economy taking these factors into account.
The first step should be to reform company governance by amending the Companies Act of 2006 to give directors a clear responsibility for ensuring the long term sustainability of their companies. All companies should be required to spell out, and take account of, stakeholder interests in major decisions affecting employees, host communities, customers, technology and intellectual property.
The Party is opposed to requiring companies to include employee representatives on Boards, which can lead to conflicts of interest and impinge on the role of trade unions. Rather it considers that large utility companies should to required to establish multi-stakeholder supervisory boards, with clearly defined responsibilities where strategic issues are concerned. All other large companies should be required to establish supervisory boards unless they are able to put forward other effective mechanisms for consulting and reflecting the interests of major stakeholders, including their employees.
At the same time, the remit of the Competition and Markets Authority should be strengthened to take account of the long term impact of large or strategically significant mergers and takeovers on employment, regional development and advanced skills and technology.
Promoting a plural economy
The privatisation of building societies and insurance and pension providers, such as Northern Rock, Standard Life and Abbey National, helped trigger the 2008 banking crisis and removed the opportunity for lay people to influence decisions affecting their financial security. Though pioneered in the UK, co-operatives now play a smaller role in Britain than they do in most OECD countries – despite clear evidence that they have a significantly higher chance of surviving their first three years than other business startups, and also typically have lower staff turnover and more equal pay structures.
It will take time for people to realise that they too can make a difference in the economic sphere, but there is much that government can do to encourage a more plural, flexible, sustainable and democratic economy. Regulations should be introduced to protect the use of the term co-operative and Treasury procedures clarified to remove possible ambiguities over the right of co-operatives to use member share capital for investment. A 110% inheritance tax concession should be introduced for company owners who follow John Lewis’s example and provide for their enterprises to become viable worker-owned businesses.
The Government should support the creation of co-operative development agencies at the regional level as part of a strategy to nuture innovative business startups, with the aim of substantially increasing the number of viable co-operatives from the current total of about 6,000. The possibility of promoting co-operative participation in parts of the rail transport system, where many customers have a long-term stake in developing the service (for example, as commuters), should be actively explored.
At the same time, the current climate of hostility to public ownership should be replaced by a pragmatic, evidence-based, approach, which would allow for learning from experience in other successful advanced economy countries. Greater use should be made of public equity to support the growth of innovative businesses and investment in sectors such as power generation, where returns are too long-term for private sector investors or where important national security considerations are involved.
Manufacturing’s share in the UK economy has declined sharply in recent decades to the point where a country which was once the birthplace of the industrial revolution now has the smallest manufacturing sector in relation to its size of any of the major OECD economies. This has contributed to a huge trade deficit, has exacerbated the imbalance in jobs and income between the South East and the rest of the country, and has increased our vulnerability to external shocks, such as the financial crisis of 2008.
Various reasons have been put forward for the relative decline in UK manufacturing, but the experience of other advanced economies makes clear that there was nothing inevitable about it. Germany and the Netherlands, for example, with labour markets very similar to our own, have thriving manufacturing sectors and enjoy very large positive trade balances.
An important factor in the UK was the rise in the value of the pound which resulted from Mrs Thatcher’s decision to use North Sea oil revenues to cut taxes rather than to invest for the future. More recently, capital inflows resulting from the role of the City of London in the international financial system has also inflted the value of the pound, made it difficult for UK manufacturers to compete at home and abroad. But the prevaling short-termist ideology, which has encouraged company founders to sell up and enjoy their riches rather than pursue long term growth for their businesses, has played an important part, alongside weaknesses in our educational and training systems.
Investment in Skills, Infrastructure and Knowledge-Based Enterprise
Investment is crucial for modernisation and growth and the Government plays a key role in creating an environment which favours it. The UK has failed to keep up with other advanced economies in this respect, coming, according to the OECD (2014), 33rd out of 35 member countries, with investment accounting for 17% of GDP compared with an average of 20% for all 35 countries. Similarly, the World Bank reported in 2016 that UK investment accounted for 17% of GDP, compared with a global average of 24%.
Successive governments have promoted the UK as a location for investment by companies from outside the EU wishing to sell into the Single Market, boosting jobs, growth and the balance of payments. Opposition to Single Market membership by the Government and the Opposition threatens these benefits and increases the urgency of finding alternative means of addressing the UK’s long-term investment problem.
The Party proposes new powers for the regions to promote investment in projects with growth potential and improve access to affordable capital. Increased resources for regional transport, training and recreation, which are known to be significant factors in attracting inward investment, and for the green economy. A large-scale drive to improve literacy and numeracy standards and promote broader and deeper secondary school learning is needed, focusing on communities and regions that have fallen behind. The failure of British manufacturing to grow as fast as its foreign rivals is not just a material problem. It also reflects cultural factors including the low uptake of science, mathematics and technology in our educational and training system, an issue which demands a long-term partnership approach, informed by a thorough understanding of successful experience both from the UK and around the world.
The Party believes that a major effort is needed to improve public transport. As well as being vital for creating an inclusive society and tackling climate change, a system which is comprehensive, reliable, affordable and capable of moving people and goods efficiently is crucial for growth. The UK has performed badly in maintaining and developing its transport infrastructure, with roads that are full of potholes and trains that run late and are often congested.
Rail privatisation 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 burden on individuals and society, with traffic data analyst Inrix estimating that drivers wasted an average of 31 hours in 2017 in rush hour hold-ups, costing them on average of £1,168 a year and that over the period to 2030, traffic jams will cost the UK economy £300 billion at 2013 prices.
Public investment in infrastructure should be stepped up, taking advantage of the current low cost of government debt. This should embrace both transport and communications, with a high priority being given to extending high capacity broadband to all parts of the country. Instead of prestige projects such as HS2, investment should be focused on upgrading existing assets, tackling bottlenecks and introducing technological improvements, such as in-cab railway signalling technology, to make it possible to run more trains on the existing tracks.
Congestion should be addressed by requiring local authorities to tackle local blackspots, by making it easier for them to introduce congestion charging and by improving the choice of transport options through devices such as park and ride and reserved bus lanes. Councils should be given additional resources to promote low carbon urban public transport, extend rural bus networks and ensure that fares and routes do not discriminate against poorer people living in peripheral estates, a problem which has labour market as well as social implications.
SUMMARY OF PROPOSALS
Partnership-Based Economic Leadership
- establish a multi-stakeholder Consultative Council at the national level with powers to explore emerging economic opportunities and make representations direct to government;
- create similar structures at the regional level, supported by a network of adequately resourced regional development agencies;
- open a regional development bank with headquarters in one of the regions, to invest in small and medium sized businesses in regions with income below the average for the country as a whole, and in knowledge-based start-ups in more prosperous regions.
Managing Public Debt
- maintain debt at a level which preserves the capacity to borrow, while protecting public services through careful management and balanced tax increases;
- clarify the Treasury’s definition of public debt to allow local authorities to invest in social housing;
- end the use of devices such as the Public Finance Initiative and debt-funded higher education designed to massage the Public Sector Borrowing Requirement at the expense of future taxpayers and consumers.
Fair and Effective Spend and Revenue
- increase Corporation Tax from its current 19%, while maintaining business taxation broadly in line with our main trading partners;
- remove the ceiling on council tax on expensive properties, carry out regular revaluations of property values and explore the case for systems of taxation which better capture the market value of land;
- introduce a carbon tax with transitional arrangements for sectors exposed to international competition;
- strengthen enforcement, increase the resources for HMRC and tackle the use of trusts to minimise tax, while promoting international efforts to curtail tax havens;
- increase fuel tax annually to take account of inflation plus an escalator factor;
- reform inheritance tax to limit exemptions and encourage inherited wealth to be spread more widely.
Secure, Well Paid, Productive Work
- progressively raise the Minimum Wage to the level of the Living Wage, promote transparency on earnings and tackle the escalation of top salaries through higher governance standards;
- introduce a kite mark for employers who demonstrate best practice in equal opportunities and require this to be a contitikon for awarding public sector contracts;
- give trade unions rights to access and recruit employees in organisations which do not pay all staff at least the Living Wage.
A Robust and Diverse Economy
- tackle short-termism by reforming company governance to ensure that boards take account of company sustainability and the interests of other stakeholders;
- require utilities companies to establish supervisory boards and all other large companies to ensure that stakeholder interests are taken into account in strategic decision taking;
- promote exchange rate, investment and training policies which encourage the rebuilding of manufacturing;
- tackle the decline in private, mutual and public sector ownership and the consequent over-dependence on mobile institutional finance;
- create a network of regional co-operative development agencies as part of an effort to diversify business ownership;
- introduce a tax concession for company proprietors who provide for their enterprises to become viable employee-owned businesses;
- clarify the scope for mutuals to use member share capital for investment and protect the use of the word co-operative as a business name.
Investing in Skills and Infrastructure
- give the regions new powers to promote investment and entrepreneurship;
- improve access to affordable capital and increase resources for regional transport, education and recreation to attract inward investment;
- raise educational outcomes in communities and regions that have fallen behind and refocus resources on technical training in sectors with investment potential;
- increase public sector funding for investment projects whose time horizon is too long for equity finance;
- increase expenditure on transport and broadband infrastructure, taking advantage of the current low cost of government borrowing;
- end instead of expensive prestige projects such as HS2, expand rail capacity by tackling bottlenecks and through improvements such as in-cab signalling technology;
- tackle road congestion through improved public transport, fiscal measures, smart road pricing and congestion charging;
- support local authorities in promoting low carbon, urban public transport solutions and extending bus networks in rural and city periphery areas.