Feel The Fear And Forego Child Benefit Anyway

The Inland Revenue is busy cleaning up part of Gordon Brown's poisonous legacy by clawing back Child Benefit payments made to households earning more than £50,000. Either you decline it, or you'll pay the equivalent in tax as a "Child Benefit Charge".

Given that you paid the government to pay you Child Benefit in the first place, you would be insane (or extremely passive aggressive), not to simply decline it. 

But if you do decide to hold onto the benefit undeservedly, the Child Benefit Charge means you know exactly which tax is being used to repay any Child Benefit you receive. Screwy, but it should teach you a lesson.

This also exposes Gordo's trick.

In paying child benefit to higher earners, Brown was trading on their greed, as well as their fear. He knew higher earners would feel justified in receiving the benefit because they already paid so much in tax and felt they should get something back. The stupidity of paying the government to receive a needless benefit would not dawn on them because it was all done indirectly, by stealth. There was no tax labelled "Child Benefit Charge", as there will be going forward (at least for undeserving recipients). As a result, he knew higher earners would struggle to believe that taxes would ever be reduced if they voted to restrict Child Benefit only to deserving families. The government would always find another sneaky use for the tax money.

The current government has had no alternative but to lift the lid on this nonsense. Public spending must be narrower and more targeted if the government is to spend less, get rid of the structural deficit, and release the tax drag on the economy.

Ideally we would seeer clear links between taxes and what they're used for - like crowdfunding public services.

Clearly income tax cuts are a long way off. But rather than shoot the current government as the messenger, we should blame Gordo and his Nude Labour cronies, including Balls and Milliband, for this predicament. None of those people must ever be allowed anywhere near the nation's coffers ever again.

Greed, Fear And The Child Benefit

The UK's Child Benefit spending programme is too broad. It was conceived amidst the devastation of 1945 - a far cry from where we are today - and it benefits people who don't need it... except to compensate them for paying higher taxes. 

In other words, higher income earners are fussing over the withdrawal of the Child Benefit because they don't trust the government to reduce their taxes if the Child Benefit is removed. Their focus is on being 'no worse off'. Officials know this, because this phenomenon is relied upon to 'sell' new spending programmes.

So, like the plan to raise the personal tax allowance, narrowing the Child Benefit provides a golden opportunity for the government to restore faith with those who pay taxes, rather than to continue the proud tradition of cynically preying on their greed and fear. 

That means the government has to be really clear about how a more efficient benefits system is going to mean lower taxes.

Further, Faster, Narrower, More Targeted

Raising the personal tax allowance is a great idea. Too many low income earners are paying tax at the same time as receiving benefits - needlessly pouring tax money into the leaky Treasury bucket. But as ever, how to fund the tax break is the £64bn question.

This change brings the opporuntity to begin trimming many public spending programmes to make them more narrowly targeted. As a result, taxpayers will begin to trust the government to cut taxes rather than merely cut public spending.

Currently, there are many cases where the link between the burden of a tax and how the money is spent is unnecessarily indirect. This is no accident. As explained previously by Kristian Niemietz, the proponents of 'tax and spend' deliberately design policy and related spending programmes to favour a proportion of undeserving recipients without appearing to tax them directly. These are usually called 'universal' or 'comprehensive' programmes. This political strategy not only preys on greed amongst the 'sharp-elbowed' middle class, so that they'll welcome the policy behind the spending; but it also preys on their fear that abandoning the policy and cutting spending will not translate into lower middle class taxes. 

On that basis, the government only ever spends more, and either borrows or raises taxes to do so - a vicious circle we need to break.

Why Should Londoners Help Cut Regional Public Spending?

I confess that I spent a long time ignoring politics and politicians. I didn't even vote, to avoid encouraging them. I figured if I kept perfectly still they'd lose interest and move away. And for a while it worked - John Major's heroically quiet government nearly brought spending down to a reasonable figure of 35% of the UK's output. At that sort of level, the tax burden can be reduced, there's more money for private enterprise, output increases, the government gets more tax revenue at the same rate - everyone wins. Or at least the Australians and the Swiss do (source: OECD, hat tip IEA, p. 47).

But the UK figures turned truly nasty during the noughties, and that certainly grabbed my attention. By 2009, Gordo and his cronies were spending an amount equal to about 50% the UK's output.  That left the UK in a terrible hole, and it's difficult to believe some hail Gordo as an economic saviour. Contrary to his own claim, he didn't put an 'end to boom and bust' - Mr Bust is alive and well and living high on his overdraft. And if you believe Osborne's plans for the greatest spending reduction since the invention of the stylus, he'll only cut national spending to 40% of GDP by 2015. 

But, for Londoners at least, the picture is a lot less depressing when you break down public spending by UK region. The rate of public spending has remained under 40% by regional GDP for London and the South East, while the rest of the country (bar the East at 45%) is way north, so to speak. In fact, public spending in the North-East peaks at a whacking 70% of regional GDP. England is cruising at 50%, while Scotland is at 60% and Wales and Northern Ireland are dragging around a millstone of government expenditure equal to 80% of their GDP  (source: HM Treasury, hat tip IEA, p. 57). 

As mentioned previously, the government is crowding out private businesses in the regions, and strangling their ability to compete, nationally as well as globally. Manufacturing seems to have been hit hardest, but even a local services business will have to compete with the public sector for administrative staff. And if those people don't want to work for the public sector, they may as well head to... London and the South East.

Funny that. And even funnier that Labour attacked Tory plans to reduce regional public spending. Far from risking a regional recession, the policy change was an opportunity for the regions to rid themselves of the cold dead hand of government.

Of course, bound up in this are national schemes that put public funds in the hands of middle-class people who shouldn't have been taxed to pay for them in the first place. You also see regional MPs resisting cuts to those programmes, preying on the middle class fear that they won't lead to tax cuts.

But people seem to be missing the competitive element to all this. Not only do London and the South East benefit from the flow of dissatisfied regional private sector workers and businesses. But there must also be a risk that London-based policy-makers won't persist in trying to administer medicine the regions don't want. I mean, it's hard to get the attention of Ministers and senior officials at the best of times. But when they're under the sort of pressure they are today, well, maybe they just won't get round to doing the regions a favour...

Trading On Greed and Fear In The Middle-Class

The ebbing financial tide is leaving many weird schemes high and dry - Madoff's ponzi, Icelandic savings accounts, Irish real estate, Greece, Californian municipalities, Royal Bank of Scotland... So we should expect to see at least a little of the same weirdness among the UK public accounts. 

Actually there's quite a lot, as you've probably guessed from the title of "Sharper Axes, Lower Taxes" and its cover design. And you can rely on the Institute of Economic Affairs to point it out in this fashion. The IEA is a research and educational charity whose "mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markts in solving economic and social problems." Street: "We give it to ya raw." Don't look for a juicy political manifesto from these guys. The Tea Party they are not. Look for pragmatic next steps and the odd yelp. The choice is yours to make.

But the thought that struck me most often while reading this book was not how the carpet at HM Treasury will cope with all the blood. It's that the font of all weirdness in the public accounts is the lethal cocktail of fear and greed whipped up for the middle class. 

This is perhaps best explained by Kristian Niemietz in the introduction to his chapter on welfare spending. Basically, a spending decision is more likely to be driven by the range of people who appear to benefit than the reality of who pays. This seems merely obvious at first, though not planned. But this is textbook stuff for politicians and public officials. First, they create a 'fiscal illusion' by simultaneously highlighting the benefits of a spending programme to the recipients - including as many (undeserving and greedy) middle class people as possible - and shrouding the costs in mystic runes of Whitehall jargon and indirect taxes (but Whitehall can't even count, so it's likely to get this wrong). This is why politicians are accused of having no apparent means of funding their promises. And it's why we have VAT, and taxes on alcohol, tobacco, gambling and driving around, and employer contributions and public sector borrowing. These costs are designed to be forgotten. Then, because "there is no direct link between any particular benefit and any particular tax", the middle class (most voters) will not only welcome the policy behind the spending, but later resist the abolition of the unduly expensive benefit, fearing that it will not translate into lower middle class taxes. "The benefit is certain; the tax reduction that could correspond with its abolution is not."

To emphasis the fact that this is a genuine play on greed and fear in the middle class and not some kind of whacky conspiracy theory, Kristian points out that those who advocate "a drastic expansion of the British welfare state" call this effect "middle-class buy-in":

"while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class." The Solidarity Society: why we can afford to end poverty, and how to do it with public support. Fabian Society, 2009

This is why Richard Murphy recommends universal social benefits and comprehensive pensions for all, and national pay deals for local workers. The comfy middle class soak up the benefit but don't see the cost, leaving those on lower incomes to bear the reality of stagnating growth, fewer jobs and the lost chance to use their lower local living costs to compete in, say, manufacturing.

These tactics are a particularly insidious form of disease the only cure for which is the rapidly growing and seemingly unquenchable thirst for sunlight that is the subect of this blog. There is no substitute for obtaining people's informed consent to public expenditure. So it was certainly worth wading through "Sharper Axes, Lower Taxes" and I'll be featuring more from it. That's not to say I agree with every suggested chop, but I'll be doing my best to hunt out the fiscal illusions and suggest the pragmatic choice.