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Policy Review Magazine

This article was published in Policy Review Magazine in September 2009, before the Pre-Budget report, and made proposals for the best way to deal with the budget deficit.


Dealing with the UK's future budget deficit is the biggest question facing British politics. As we do, it is good news that Labour's leadership seems to have abandoned the misleading and incredible proposition that the general election choice will be between "Labour investment" and "Tory cuts".

There has been a genuine economic policy difference between the Conservatives and Labour about the need for the fiscal stimulus which was initiated in late 2008. The Conservatives have been proved hopelessly wrong and Labour's approach has assisted economic recovery in the UK, whilst also leading other economies in the G20.

However, when steady economic growth resumes, it is widely accepted that the UK's current public sector deficit has to be narrowed. Whichever government is elected next May will address this by a combination of tax increases and public spending cuts which will, and should, define the political debate.

Most people understand that these hard choices will have to be made but do not yet appreciate the scale of what is likely to happen.

So Labour's strategy has to be honest, transparent and founded in our values, in particular focusing upon fairness. That is our genuine "dividing line" with the Conservatives despite the damage to our reputation caused by the 10p tax rate fiasco, itself the direct consequence of the politically-driven decision in 2007 to reduce the main rate of income tax by 2p.

Our commitment to fairness must be crystal clear in rigorous control of public spending as well as in taxation. That is the only way to overcome widespread scepticism about the operation of Government.

The general tax increases recommended by some do not solve the deficit problem. People will only accept higher taxes if they believe that the money is well spent and that they support the spending it funds.

So whatever overall tax changes are made, four additional means are needed to address the deficit problem: genuinely fair corporate taxation, extending the "hypothecation" of taxation, increasing user-charging (or "copayment") for some public services and tighter control of public spending.

Recent analyses have shown how easily corporate taxation can be evaded. The UK Government has been ineffective in collecting revenues and its toleration of UK tax havens has been a disgrace. Both G20 and European Union decisions must be implemented rapidly and fair corporate taxation established.

"Hypothecation" of taxation means allocating tax revenues to a particular purpose, such as health. This can be done in various ways, like allotting car taxation to improving public transport, or using local authority bonds to fund particular infrastructure investments. The Treasury rejects this approach in order to avoid restrictions upon its own power. As a result, citizens have little identification with the way that their taxes are spent.

An important move towards this would be to establish a much closer link between local decisions and the level of local taxation, in the way recommended by the Lyons Committee.

The third change is to extend "user-charging" ("copayment"). This is fair and promotes efficiency, since those who benefit pay more of the cost of key services. Such charges can help fund growth in public services, whilst discouraging more use of the private sector.

University tuition fees are an example of these charges, as is the approach to funding set out in Andy Burnham's Social Care White Paper. So too would be a major extension of road tolling and congestion charges, which also have environmental benefits. This method may well be the only way to fund comprehensive provision for under-5s, and a genuine extension of out-of-school activity.

Any form of user-charging in health risks controversy, but developments like Alan Johnson's decision to permit payment for some non-NICE approved cancer drugs, and charging for hospital car parks, already exist. Closer co-operation between the NHS and occupational health should be incentivised, but some Conservatives' proposals to charge for GP visits should be rejected.

These radical taxation changes would raise money, improve efficiency and offer reassurance of effective control of our public finances. But they need to be reinforced by stronger action on the spending side.

Whilst across the board efficiency savings are necessary, they are not enough. Some "big ticket" commitments have to be dropped. Any of them will be difficult but I would particularly identify the renewal of Trident (which is in any case utterly out of time), and some other major military equipment contracts, for example by sharing the costs with European allies. Some investment in the London airports, such as the extra facilities at Heathrow and Stansted, should be halted in favour of a strategy based on regional airports and European hubs.

But beyond this, a far less rigid approach to public spending is required, including in fixing public sector pay and pensions. State organisations should be given more independence. Each one should have a tight rolling three-year budget, without constant changes of funding formulae. They should receive 100 per cent of the efficiency gains that they achieve, or other income that they generate. The performance incentives of their employees should be closely aligned with those of the organizations themselves. They should be responsible for their own pay and employee numbers, within overall budgets. At local level, foundation hospitals and trust schools should be extended so that they can own and benefit from their own assets.

Of course, such a programme would require careful implementation over time since the level of competence to take on these responsibilities varies, and so strong audit and training processes would need to be established. But over time, the expectation should be that all national and local organisations would work in this way. This would encourage the commitment of the millions of professionals who are committed to high quality public services and want to play their part in delivering them.

Labour will be judged by the clarity and conviction with which we propose to deal with the country's future budget deficit. A fair approach to taxation, combined with rigorous and transparent control of public spending, would command confidence and increase our credibility.


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