Tuesday, 4 September 2012

National debt and public spending increasing: Is it time for the government to consider the case for a negative income tax?

Despite the mandate of this Government being derived from its commitment to whipping out the structural deficit by the end of a five year period, the Coalition is somehow on the path to failure. Whilst the targets are the right ones for the UK’s economic credibility, the means have been counterproductive and badly thought out.

With the forecast that the official national debt is due to rise by £605 billion over the course of this parliament alone (from 53% GDP to a staggering 76% GDP) it is clear that the Coalition’s commitment to a sustainable economy has been thrown off course. This increased borrowing has not been evoked as a desperate attempt to restart business and provide growth, rather it has actually gone mostly on meeting the demands of an increased welfare bill, fuelled by the sharp rise in public sector unemployment. This clearly isn’t sustainable.

The Government’s agenda was to make up the downsizing of the public sector with increases of jobs in the private sector. This has not happened for two primary reasons. One being that it is unrealistic to expect to make it up over a short period of time. Secondly, and most worryingly of all, it is because they haven’t provided the policies conducive to growing private enterprise. Putting this agenda on the back-burner for now, one way in which the government can bring down public spending, and therefore the structural deficit and national debt is to consider something very radical to bring down welfare costs. The negative income tax could be the lifeline this Government needs.

The reduction of the deficit has been made up mostly by tax increases and cuts to investment programmes. This simply won’t do as it is a short-term strategy, it is an ill-thought out way to meet the immediate goal of eradicating the deficit.  This, even if it were to work, may succeed in giving the government credibility in the eyes of the public, but long-term doesn’t sort out the structural problems with the UK economy. Growth aside, one of the biggest of which is welfare costs.

Before the Coalition took office, the cost of welfare under Labour exceeded tax receipts by almost £25 billion annually. This model was indicative of a government attempting to grow dependency and therefore its own power rather than growing a healthy economy. Osborne took the pragmatic approach in his first budget of raising taxes to meet this unbelievable short-coming. Whilst this was understandable, especially because of the Tories fixation on reassuring the public of the earnestness of their centrist agenda, it was a mistake.
The answer isn’t to raise taxes, as common sense perhaps would dictate. Taxes were too high under Labour already. The real problem was that the extortionate costs of welfare dwarf the issue of high taxation. Cameron and Osborne should not have been trying to meet the demands of increased welfare, rather they should have been looking to remedy the problem of this unsustainable public spending.

The conventional methods are limited. For instance simply cutting the provision doesn’t resolve the problem of dependency culture.  It simply scapegoats and points the blame at dependent individuals and punishes them, fuelled by populist demand, for their ‘moral’ failures. This doesn’t offer any kind of redemption for individuals in such circumstance. It only aids social disenfranchisement, rather than encourages them to engage in employment which in the process helps both the individual and the rest of society.

Another method practiced is increasing the provision. This method is perhaps even more damaging as it enables and validates a culture of dependency and inactivity. It takes away any remaining incentive to work, and therefore the need to develop skills which make them more employable. Rather, increased provision traps them in poverty and therefore makes them ever more reliant on state hand outs. This method takes away the human dignity and freedom of such individuals. This sentiment is the primary cause of an Underclass which is so prominent in modern social life. This of course is unacceptable. Although advocates often have forgivable intentions which aim to solve such social ills, it creates vast social problems and tensions.  The means to this end is wrong.

But, if the government takes away the reasons not to work, leaving only the incentives of work for dependent individuals to ponder, this can go a long way to ease this problem. However, the real issue of dependant individuals is not the amount of welfare administered to them, rather it is the very principle of welfare that it is a deterrent to finding employment, no matter how little or large. Therefore dependency alone does not explain away the increasing welfare costs. The biggest problem economically is its flabbergasting inefficiency. Perhaps it’s time the Government considers a negative income tax in the place of this highly flawed and detrimental system.

Critics, including myself (ideologically speaking) may argue that the negative income tax does take away many of the incentives to work. In addition, it also advocates ‘something for nothing’ benefits. It fails to eradicate the notion that if one wishes not to work as hard, they can still be subsidised by the State through taxation of hard-working tax payers. But in reality welfarism is something that will not be resolved any time soon. Accepting this, the negative income tax is far more efficient and cost-effective to the tax-payer as it requires an inevitably much lower welfare bill to individuals who do not make up the income required for a minimum standard of living. Taking this pragmatic approach will surely bring the cost of welfare down to realistic standards, whilst ensuring it always pays to work. This is because the negative income tax would be ideally introduced in conjunction with a flat rate income tax. Guaranteeing that the State never penalises hard-working successes, whilst on the other hand rewarding idle failures, will remove the problem of Government discrimination, inherent within a ‘progressive’ tax system. It would ensure that every individual is treated equally in the eyes of the State, the bedrock to a just democratic society.

Another possible problem a negative income tax could encounter is the validity and fairness of the figure estimated to be the ‘minimum standard of living’ wage. The Left, if ever to enter government, would of course be inclined to increase this rate of entitlement. This would allow for increased allowances. What this would do is hugely damaging. It would ensure that tax payers are lumbered with a system that disproportionately rewards failures and inadequacies.  It would lead inevitably to abuses of a system which was introduced purely for good intentions. Furthermore, socialists may even increase the level of negative income tax, over Friedman’s recommended 50%. This again disproportionately takes away the incentive to work, making the system pointless. Certain legislative powers must therefore be enacted, such as ring-fencing of the rates, to ensure the system always remains effective in rectifying the problems it sets out to cure, rather than adding to them or causing new levels of deep-rooted State dependency.

Those critical of the negative income tax feel it would lead inevitably to the withdrawal of welfare altogether. The temptation to libertarians may be to withdraw spending in welfare areas such as health and education, with an expectation that individuals are fully responsible for paying for their own services. This of course may be true and whilst this argument cannot be dismissed, the truth is no sensible or right-minded Government would believe that having no role to play in the provision of welfare would have no negative impact on the workforce which wealth generators employ. The risk is that it may lead to generations of infirm and uneducated individuals. This causes a vast range of social problems which of course aren’t amenable with market forces. Furthermore, an unhealthy and unskilled work force holds back the economy. A Government surely realises its greater vested interest of ensuring a strong, healthy, educated society as it enables a strong, efficient and skilled workforce, essential for maintaining a strong economy. The negative income tax must not be used as part of such an ideological agenda. The implementation of a negative income tax must be viewed simply as the means to the ends of a) making welfare vastly more efficient and b) Making the tax system simpler and fairer.