Every commentator likes to present their alternative vision, and this one is no different. But we will do it from a slightly different point of view. Unlike the majority, we understand that tax has nothing to do with raising finance, and everything to do with releasing physical capacity for the Government to purchase.
The Functional View
Many, if not most, people believe that The Budget is where the Government lays out its spending plans. It isn’t. That is the Supply and Estimates and the Vote on Account process. Those papers were published on the 22-February and will lead eventually to a Supply and Appropriation Act.
That you haven’t heard of them, let alone any media coverage of them, tells you everything that is wrong with the budgeting process in the UK. It is those spending plans that determine the impact Government has on the economy. Every single increased price in those plans should be quizzed by parliament as to why it is necessary. Yet the whole thing will almost certainly go through “on the nod”.
Instead, we have the annual Budget day media fest where the taxation plans are taken apart, usually obsessing about beer and fuel duty rather than the actual taxes that matter. And inevitably full of stuffed shirts talking about financing.
If there is one thing the last year has taught us it is that the Government is never short of money. There is no need for financing because spending finances itself. Spending automatically stops when the Government runs out of things to buy at a price worth paying. This again is why parliament should tightly control the authority to spend, and largely let the taxation look after itself.
What Needs to Happen?
After the last year, there is a lot of spare capacity in the country. Many existing jobs are dead, and that leaves lots of people without work that need it. Once restrictions come off, there will be no shortage of people looking for work.
When taxing functionally, you are using taxation to ‘crowd out’ current private usage of resources so that the Government can buy them instead. Given the carnage of the last year, what shortage of resources are there? What is being used elsewhere that the Government requires?
The first thing the Chancellor should be laying out in his speech is what resources are in use that he feels he needs to release, and where in the proposed Supply Estimates he intends to use those resources. That thinking should then inform the taxation that is being requested. The taxation should be targetted precisely at releasing the real resources required and go no further than that. A surgical strike is required, not carpet bombing.
At the moment, it is difficult to see what shortages the Government is up against. However, full consideration of the Supply requests would inform that.
At this juncture, it is difficult to see why tax rates need to rise. If savings are eventually spent, that will increase the total tax take automatically because that is how percentages work! Inflationary pressures are negligible (with fears of such overblown). The automatic backoff from the furlough scheme as people return to work will provide most of the required braking effect.
If anything taxes probably need to be cut.
What we will get
Instead, we will get rhetorical nonsense about financing and balancing books that even conservative commentators are now baulking at.
Ex-Chancellors and Tory grandees are calling on the Government to start “paying back the debt”. Such arguments misframe the issue and smack of the household fallacy. They reflect thinking that has led to repeated policy errors over the last century.
Even talking about tax rises to balance books is dangerous. That sets expectations that tax rates will be higher tomorrow than today, which will frighten people further and cause them to save more now. Precisely the wrong approach needed at present - unless you are using that as a trick to create space for more Government spending. Something I doubt this Conservative Government has in mind.
What I would do
This budget should set out the stall for reform of the Government spending process, which is entirely backward from what it needs to be. Here’s what I’d want to see in the budget:
Reassure people that the furlough scheme will continue but, over time, it will merge together with Universal Credit into a Job Guarantee, replacing interest rate targetting as the primary stabilisation mechanism of the economy. The top furlough pay rate will move down to the living wage, and as the job schemes expand Universal Credit will be uprated to the living wage.
Require the self-employed operate PAYE on their drawings and scrap the separate self-employed tax regime. Instead, treat them as unincorporated companies. Once on PAYE, they will have access to the furlough scheme.
Change the focus of parliamentary scrutiny from the Finance Bills to the Supply Bills. Much more parliamentary time should be used quizzing departments to ensure they are getting maximum bang for buck. Inflation control demands that Government always gets the best price for its spending. Parliament should be making sure that happens. In fact, it should insist on it.
Announce that the Monetary Policy Committee will be disbanded and the Bank Rate will be locked permanently at 0% once supporting banking system reforms are in place. No need to pay unelected wonks to get things completely and utterly wrong. We already pay MPs to do that. The difference is we can sack the latter.
Announce that the Debt Management Office will be dissolved and any remaining Gilt sale and purchase operations returned to National Savings. Government savings operations will then be offered only to UK individuals or their trustees. At the very least, eliminate the ‘full funding’ remit of the DMO, which serves no purpose in a world of excess reserves.
Require that the Office of Budget Responsibility operates on a functional basis, with a remit to ensure that the entire physical resources of the United Kingdom are fully engaged at all times and in the most productive manner. Look after the unemployment and let the numbers look after themselves. If they are unable or unwilling to do that, then the OBR should be disbanded.
Beef up the Office of Tax Simplification with a functional remit. Taxes must be assessed as to whether they achieve the functional goal of releasing resources for public use. If they don’t, they should be abolished or replaced with something that does. The goal should be to shrink the tax code down from the current several shelves to a large pamphlet. I would want to see one sales tax, one labour hours tax, and one property tax, and not a lot else.
Conclusion
We have to get past the Household Fallacy and remove from positions of power those who will cripple the country with their unnecessary fiscal obsessions. MMT shows how we can have far greater output at any given interest rate with fully stable prices. Output that will drive productivity forward faster and lead to a greater standard of living for all.
Both fiscal and monetary dominance have failed us. Time for a Functional Revolution.