economics politics

The other way to cut the deficit

As the graph above shows, Britain has been living beyond its means for some time. The government steadily rising spending levels never were sustainable, and the sharp dip in income that the recession has brought has left us with a big problem – the largest budget deficit in the developed world. We need to reduce the deficit, or we will face a sovereign debt crisis in the very near future.

From the beginning of the recession, the Conservatives have been talking about cuts. All through the election they promised to scrap wasteful projects, slim down the public sector and trim budgets. Now that they’re in power, the thankless task begins, and last week the first £6 billion of cuts was announced. It included a first-class travel ban for civil servants, the end of the Child Trust Fund, but so far these are small changes – the kind of thing Nick Clegg referred to as ‘paperclips and pot plants’ before he found himself in government. More cuts will follow, and they will get a more hostile reaction.

However, there are two ways to reduce the deficit. One is to cut expenditure. The other is to raise income. Strangely, there is very little talk of this second option. Perhaps that’s because everyone’s first thought would be more taxes, and that would be political suicide. But there are plenty of taxes that could be levied that wouldn’t hurt ordinary people. Here are a few:

  • The Robin Hood Tax on financial transactions in sterling could raise £3.2 billion
  • If applied to bond swaps and derivatives, a Robin Hood Tax could raise a further £5 billion
  • The TUC suggests a tax on empty properties, and estimates a £5 billion return.
  • Tax Research recommends a 10% tax on bank profits – £2.2 billion
  • Compass‘s suggestions include adding a higher council tax band, which would bring in £1.7 billion

These sorts of measures begin to close the gap a little, but there’s an even greater unnoticed opportunity – claiming the taxes that are already owed. Tax avoidance drains billions from the treasury every year through countless loopholes and allowances and exceptions. Since it is the richest tier of society that can afford the accountants and lawyers to reduce their tax bills, we’d also be correcting a serious injustice if we dealt with it. Here are some ways that could be done:

  • Ending tax relief in kind for high earners would net £2.4 billion, according to the TUC.
  • Abolishing the domicile rule would add £3 billion to the coffers.
  • British companies can currently hold board meetings overseas and claim to be foreign. This easily fixed tax loophole costs us £1 billion a year.
  • Closing the tax havens could bring in as much as £8.5 billion from individuals and £3 billion from companies, according to Tax Research

Finally, The Green New Deal group points out a rather strange oversight. One of Labour’s cost cutting measures was to cut the slack from the Revenue and Customs office, including redundancies and the closure of local offices. This means that our tax systems is rather strained. The country is already owed £28 billion in unpaid taxes, but doesn’t have the manpower to chase the debts. Under the economic circumstances, wouldn’t it make sense to be recruiting and expanding the tax system?

And it gets worse: with fewer staff, the chances of getting away with tax evasion are greater. This is the illegal tax dodging, as opposed to the entirely legal tax avoidance mentioned above. According to one recent estimate (pdf), Britain loses 15% of its tax revenues to evasion. This varies from false accounting in major companies right through to people dodging cigarette duty. (53% of cigarette duty goes unpaid, apparently). Add it all together and you get the rather stunning figure of £70 billion annually. Again, why on earth are we reducing capacity in HM Revenue and Customs?

None of this means that cuts won’t be needed. There are still plenty of efficiency measures that need to be taken, and some services are going to go, but with a little creativity we may not need to be as brutal as we think. Let’s expand the tax system, and tighten up on evasion. Let’s reform the law so that it’s harder to avoid paying up. And let’s add some new progressive taxes. Then let’s cut what needs to be cut, and meet halfway.


  1. scrap stamp duty and replace it with house sale tax. the seller pays this on the property he is selling, therefore tax is raised on EVERY property sold. At the moment stamp duty starts at £125,000 and first time buyers dont pay. With the new scheme first time buyers still wont pay duty but tax will be raised on every property transaction. Virtually all sellers would welcome this idea.

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