Updated Nov 2016
Tax & Spending
It is through fiscal policy - taxing, spending and borrowing - that the government delivers the services and infrastructure that support both efficiency and fairness in the economy.
While it is important that the government does not persistently borrow to pay for day-to-day spending over the long term, public debt is an essential tool if it is used correctly. Public infrastructure, such as roads, schools and hospitals, typically benefit multiple generations over several decades. From both an ethical and an efficiency point of view, it is therefore important that the government has a means to spread the cost of those investments across all the generations who stand to gain from them. Depending on the point in the economic cycle, fiscal rules should allow government to borrow appropriately to invest in long term public goods.
We recognise that decisions about tax and spending do not operate in a policy vacuum; they both affect, and are affected by, other areas of policy as well as the economic climate as a whole. Healthy public finances are both an enabler of, and dependent upon, other areas of economic intervention such as industrial strategy and trade policy.
Fiscal policy must also be considered in light of monetary policy. This is especially relevant when interest rates are so low (as today,) that the ability for monetary policy makers at the Bank of England to manage demand in the economy is diminished. Looking forward, we believe fiscal policy and monetary policy will need closer coordination, with a renewed mandate and refreshed targets for an independent Bank of England that allows both the Treasury, and the Bank’s Monetary Policy Committee, to respond appropriately to the types of economic shock we are likely to face in the 21st century.
Spending should be smarter, better targeted and managed to increase income and reduce need
In general, spending should prioritise preventing undesirable outcomes from happening in the first place, rather than ameliorating the costs after they have happened. Public spending should also be better integrated to avoid duplication and make the overall deployment of resources smarter. In many cases, this may require a relocation of public resources away from Westminster and towards regional and local government. It will often also mean increased levels of upfront investment to raise levels of productivity that can lead to longer term savings and improved social outcomes.
Taxation should shift from productive to unproductive activities and from earnings to wealth
The tax system should be redesigned and rebalanced to offer better incentives for productive activities and disincentivise or discourage damaging activities. In practice, taxes should be reformed to ensure they attach more uniformity of liability to similar kinds of economic activity, and the burden of overall taxation should be rebalanced away from incomes, profits and earnings and towards concentrations of wealth, unproductive assets and pollution.
Rebalance spending in England to ensure regional prosperity
The UK is reliant on London to drive national economic growth and the city contributes proportionally more taxation than other parts of the country. However, government policy perpetuates and even exacerbates this reliance when public spending prioritises London while other parts of the country experience years of underinvestment. Fiscal devolution is therefore an essential part of supporting areas like the North in their ability to grow.
For the UK economy as a whole to be sustainable, many more regions across the UK need to be increase productivity and reap the rewards of doing so.
As fiscal devolution takes hold, we believe that the rules around the 100% retention of Business Rates should change to a ‘growth first’ system. Under this method, any increase in a council’s funding after the first year would be calculated by multiplying their business rates growth rate by their funding need. This would give all local authorities an equal incentive to grow.
Scotland should use its ‘Devo Max’ powers to create a progressive approach to taxes, benefits and wages
The devolution of greater powers over taxes and benefits to the Scottish parliament offers Scotland opportunities to develop its own distinctive tax and benefits system.
The Scottish government’s new powers over income tax offer significant flexibility to reduce or increase tax paid on earnings by Scottish households, particularly those further up the income distribution scale.
Pay growth in Scotland has outperformed the rest of the UK over the last five years. However, both Scotland and the UK underperformed relative to both inflation and expectations for earnings growth. How pay performs over the next five years and beyond will have an impact on the resources available to Scottish policymakers. In their role as setters of public sector pay, there is potential for the Scottish government to offset some of the costs of increasing pay through increased tax revenues (which will flow to the Scottish parliament rather than the UK Treasury), and for the benefits of increased pay in both the private and public sectors to be felt more directly within Scotland.