Tag: economics

Austerity and class warfare

I like Yanis Varoufakis even if he has chosen to spell his name in an idiosyncratic way. I like his enthusiasm and his style. I like his motorbike and I am personally indebted to his party for giving me time when facing serious problems in Greece in the early part of this century. His party, certainly before they got power, understood their role then in and to society in a way that the established parties of Pasok and New Democracy did not.

Nevertheless, for all my respect, it does not mean I think he is right! And as Yanis would have to admit, there is a big difference between what might be done in theory and what must be done in practice.

A while back, Varoufakis was quoted in the Independent suggesting that “Austerity” is actually a form of class-warfare. While Varoufakis is actually quoting Noam Chomsky (unacknowledged incidentally, or are they really joined at the hip?), his claim remains simplistic and at best, it merely acknowledges that, as a crypto Marxist, Varoufakis thinks class-conflict ought to play a role in the way economic policy has been dictated simply because Marxism says it plays a role in the way history develops. If there is class conflict in recent Austerity programmes then I suspect that is entirely incidental. I think, though, that it is also a bit rich coming from a man with a degree of domestic comfort that makes Mr Corbyn’s tax return look modest.

The poor have suffered from Austerity. That is quite true, but that alone does not make Austerity itself a “class war”. It simply means that Austerity causes casualties and that, as a remedy to the current economic crisis, the Austerity package is not properly thought through. “Austerity” is probably badly named anyway – it is not about being frugal with the national or international economy; it is about reducing public expenditure at a time when we are spending more than we are making. High debt, in other words, is recognised as an impediment to growth and should be curtailed. One way to do this is to increase taxation and the other is to decrease public spending. In fact, while claiming to be pursuing a policy of Austerity until 2015, our Government did not actually reduce public spending by much at all. (and there is an argument that the Government simply abandoned Austerity in 2012 and that this led to our recovery whatever the rhetoric. It again, rather suggests that “Austerity” does not work.)

Greece

In the case of Greece, Austerity has pretty-well destroyed the country, (the debt has gone up rather than down so proving that Austerity was the wrong medicine for the illness) but arguably the greatest destruction has been to impose an Austerity programme from outside and so to compromise Greece’s sovereignty and National self-esteem. To make matters worse, it was imposed by Germany -a country that benefited from debt cancellations after the war. Her post-war growth can be directly attributed to that. More than that, Greece was among the countries that cancelled the debts Germany owed it (one can think of the Viannos and Kalavryta massacres or of the 218 men, women and children slaughtered in Distomo, for example, in 1944 or indeed of the demand, in 1942, for the Greek bank to give Germany an interest-free loan of 476 million Reichsmarks which was used to pay for the military occupation of Greece?) on the understanding that a conference would be held after the reunification of Germany. That conference never happened and the debt Germany owed Greece was never paid (though Germany paid Greek individuals about 115 million Deutschmarks. If repaid now, the total debt to Greece would amount to between $14-$95 billion depending on the way it is calculated. The Syriza government calculated the amount to be 341 billion euros). If Greece had been allowed to devalue its currency, and had been given some form of debt forgiveness, then it would not have had to reduce public spending so suddenly and relentlessly. In practice, this process was interpreted both within Greece and by the International community as a punishment and has stifled growth. No one wants to sit with the naughty boy in the corner.

“Austerity” alone was not the problem. It was the way Austerity was imposed and the failure to keep the government fully on board which explains the problem. In Greece, a series of governments, from PASOK, new democracy to Syriza, has always pandered to its core vote. In the case of Syriza, that is the retired and current civil servants- hence bizzare pension reforms, a reluctance to cut public expense as well as a rise in unreasonable taxes (for instance, while public employees have remained fairly secure, the Self-employed have been penalised- Insurance contributions today often exceed half the monthly earnings and all private businesses are now expected to pay 29% of next year’s earnings! There are instances where the self-employed have to pay up to 70% of their income in taxes and insurance. It is unfair and completely absurd as it simply encourages tax evasion, bankruptcy and prologued unemployment because smaller businesses can no longer afford to take on staff).

Question time

On Question time, Varoufakis identified a number of tax issues in the past that may have needed clarification but certainly do not point to a class war. “To be talking about reducing the state further when effectively what you are doing is reducing taxes like inheritance tax and at the same time you are cutting benefits – that is class war.” A reduction in both corporation and income tax stimulates investment.

This is, at heart, something proposed by Keynes, even if it is often quoted by people on the Right and even if what most people remember about Keynes is his third option that Governments should borrow money and spend it. President Bush told Congress years’ ago, “To create economic growth and opportunity, we must put money back into the hands of the people who buy goods and create jobs.” Even so, it is worth noting that while reducing the amount of tax paid at the higher end, the Coalition Government was responsible also for raising the tax threshold in 2011, (helping the poor) and I think on principle there are some very solid reasons why we should cut taxes overall -cutting tax for both the rich and the poor, a principle incidentally that is absolutely the sort of thing Mrs Thatcher advocated.

Putting this into practice, though, is tough and events often get in the way of ideology and principles.

Ideal business policy

There are two ways to run a business. To employ as few people as necessary and pay them as much as you can or to employ as many people as possible and pay them each as little as is legally necessary. I much prefer the first model and I have seen the second model in action in both Greece and Russia. It is strikingly obvious that people who are not paid what they are worth, or who are not inspired or encouraged to do the most they can, are frustrated and unhappy. Yet exactly this second model has been rolled out with tremendous success recently in Turkey. A call went out to small businesses to employ more people and, so far, over 1 million workers have moved from welfare to work at minimum wage, with the Government topping up insurance contributions and tax. Once again, one size does not fit all. What might work in Turkey is unlikely to work here, but we should admire Erdogan’s direct appeal to a sense of National Responsibility.

Ideal taxation

Austerity is about a choice between increasing taxation or reducing public spending. I think there is a third way: I think we can reform public spending and also, at the same time, reduce tax.

We should look at what Turkey is doing and be inspired- because we also need our own sense of National Responsibility: specifically, we need to address the ways we collect tax and how we spend the money we get.

So, firstly, we need to recognise the principle that people of all backgrounds should keep as much of the money they earn. As I mentioned, that is something that was dear to the heart of Mrs T and I think it remains a worthy goal. (I was recently told that as a foreigner working in a State university in Russia, I should be taxed at a higher rate than nationals; indeed, I should pay twice the tax. Astonishing! It was made much worse to learn this after a very small amount was paid into my bank account. “I thought you knew” is not really an adequate explanation.) It still seems to be the case that individuals use money more wisely than large institutions and the higher the taxes, the less investment there seems to be, the less incentive there is. We need to look again at incentives to invest in public works.

I think Varoufakis is confused, because there are a number of models that support the principle of reducing tax, mostly to the rich- the laffer curve, beloved of Reagan, which suggests that taxable income changes in response to the percentage taxed, and so allows for the possibility that the less percentage we tax, the more people earn and so in theory, the amount the Government receives would be pretty much the same while the trickle down theory (which suggests favouring the rich ultimately benefits the poor) sounds patronising. In the end, the only moral approach is to reduce taxation overall. But part of that approach must involve a reduction in VAT. VAT is about not class-warfare. It is indifferent to class but it hurts the poor more.

By offering tax cuts to both rich and poor, George Osborne was not quite following the principles of Austerity, but rather reviving Thatcher’s moral vision- to reduce taxation as a whole. He was finally applauded by M. Lagarde who said, “At the IMF we have learned that there is no single best way to reduce the fiscal deficit. We clearly underestimated the growth of the UK economy in our forecasts a year ago.”

Secondly, we need to look at both the health service and social security because both systems are spiralling out of control; as we live longer, both long-term health-care as well as welfare dependency cannot be sustained in the present form. We know that is a problem with the current system, but there is also a problem with the way the system deals with those who fall outside the norm- I think it is appalling that we can see homelessness in Britain today, and it is appalling that many people struggle to access a proper doctor outside office hours. We have been seduced into thinking that one size fits all: it does not. We need to have a number of parallel systems -where one system might pick up what the other leaves behind. So, as we need to look again at welfare and health, both currently failing, we are not to embracing class warfare. Quite the reverse and we have a limited time to get this right. We must do more of this, not less.

Bureaucracy

The quick fixes of the last twenty years have, in effect, increased the number of bureaucrats who have managed a form of hybrid care that is neither genuinely private nor fully public. Bureaucracy is an attractive way to put a problem on hold because it is about passing the buck, but every new department that is created adds to the overall bill we must still pay. And in the end, the problem still needs to be addressed.

We need to reign back the Bureaucrats. And what an opportunity we have: just once in a lifetime, there is an event that will actually decrease the numbers of bureaucrats- because Brexit will cull their numbers in Brussels, so we should be careful not to create yet another class of bureaucrats to replace the ones we are “letting go”.

Attracting clever people to generate clever solutions

If we want to improve social equality, then we also have to find both the money to pay for it and the people to run our schemes more imaginatively. We need to do that through an efficient tax system. Our progressive tax system, as it stands, incidentally already taxes the rich more than the poor, but VAT remains a scourge: it is a fairly inflexible tax that hits everyone and hits the poor more than the rich; it is something that we inherited from the EU, even if a rudimentary version of VAT was once introduced here during the war.

We need to attract top business brains to get us out of this mess. We cannot do that if they know they will be penalised themselves by a punitive tax system. (How would they react when they look at their first month’s pay? “I thought you knew” is no way to command confidence) We need to reduce tax overall not increase it, and that is an aim we should nurture across the board. Lower tax means an incentive to invest. Lower tax means attracting the right people who will devise systems that work!

Whether we like it or not, the coming Brexit will create a Government spending spree that would make both Keynes and Michał Kalecki smirk. But that should really be where it stops. Kalecki has emerged from the shadows of post war Poland to be cited both as an inspiration for Keynes and Varoufakis as well as a solution to our current woes. It is from Kalecki that we get the perfidious idea that a tax on the rich might help us. It will simply drive the rich away. The French have tried it. It does not work!

Brexit is change. And change is a chance for new ideas to emerge. It is no time to drive people away, but to invite them to contribute to the new reality of a post-Brexit Britain.

Part of the process of inviting people into Britain to help us and keeping the best people here is getting our taxation system right.

Some clarification:

1. Rather than a crypto Marxist, Varoufakis calls himself an “erratic” Marxist. So I am being a bit coy here. I should be more direct.
2. I think the point of this article is a bit lost. (a) Austerity is a fairly aggressive treatment and like chemotherapy, it can cause damage and is often not effective. It does not seem to have been effective in Britain and it has been deeply destructive in Greece and Brazil. But the principle of reducing debt is perfectly sound. It is simply about how it is done. (b) Varoufakis’ claim that “Austerity is class warfare” has become a mantra of the left. In fact, austerity budgets in France and Italy have imposed surcharges on those with incomes over 500,000 and 300,000 euros. Hardly an attack on the poor, but I think equally not a very effective source of revenue.
3.  I did not address the issue of “retribution”: a theory that says the rich should be taxed more as a punishment for causing the banking crisis. In fact, over 40% of British do not pay any income tax (23 million people) so the burden of taxation has already shifted towards the richer Brits and the top 3,000 earners here (that is 0.01% of the total paying income tax in the UK) contribute 4.2% to total Government revenue as calculated in 2013. At the time the Treasury said, “The rich pay more under this Government than under Labour. The people who pay zero tax are the millions of low earners who have been taken out of paying income tax altogether due to George Osborne increasing the tax free personal allowance.” Across the Atlantic, the richest 1% of Americans pay 1/4 federal tax and nearly 40% income tax. So much for taxation. As spending cuts, however, hit the poor more than they hit the rich, the aim should be to restructure public spending rather than to cut it.
4. Varoufakis, incidentally, I understand, also wants to reduce VAT. We agree on that of course! He is not so wrong after all.