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  • Writer's pictureIsaac Stanley

How would we pay for a Social Guarantee?

Updated: Mar 9, 2023


The time is ripe for serious reinvestment in the UK's beleaguered public services. Workers are striking across all services, not just for more pay but because they are worn out trying to hold up a collapsing system. There’s widespread support for investment, not just from workers but from the general public. But the question always comes back, “How would we pay for it?” A new paper published by the Social Guarantee takes on this challenge. It considers whether the UK is really too broke to pay for more and better public services and how costs have been calculated. It then draws together a range of proposals for generating funds.


Is the UK too broke?


A crucial justification for restraint has been the “fiscal black hole” – a looming danger that necessitates “difficult choices”, likely to include substantial cuts to public services. This analysis is misleading for at least two reasons. Firstly, in the same period as the Truss-Kwarteng mini-budget, France and Germany set out plans involving similar overall levels of borrowing without provoking such a sharp market reaction. Why? Because borrowing was proposed to fund price caps and social protections. So the problem with the Truss-Kwarteng budget (from the point of view of financial markets) was not simply that it increased the UK debt-to-GDP ratio, but that it failed credibly to address the economic challenges at hand and generated uncertainty.


The second reason, noted by the Progressive Economy Forum (PEF), is that the £50bn “black hole” is a product of arbitrary government accountancy rules and highly uncertain forecasts rather than an objective statement of economic “fact” akin to estimates of inflation or wage rises. Even small changes would have important implications for calculations around public borrowing and spending. PEF points out that if government reverted to the definition of public debt that it used prior to October 2021, then the “fiscal hole” could disappear altogether.


The most urgent challenge for the UK, is therefore not to fill the “black hole”, but to tackle the roots of economic decline. It’s no secret that the economy depends on people (their skills, knowledge, labour, motivation, creativity, productivity and care). It will prosper only if people’s needs are met so that they give of their best. Investing in public services that ensure needs are met universally and sufficiently – the aim of the Social Guarantee - is an indispensable strategy for achieving a prosperous economy.


How much would a Social Guarantee cost?


In the run-up to the last election, calculations for the Labour Party estimated that proposed “universal basic services” would cost £38.8 billion, or £45.2 billion if uprated to January 2023, i.e. 2% of GDP. Coote and Percy made another calculation in 2020 that the total additional annual expenditure required for a limited suite of “universal basic services would be 4.3% of GDP in a typical OECD country - approximately £95.8 billion if applied to the UK in 2023. More recently, tax expert Richard Murphy estimated an annual cost of £144 billion, or approximately 7% of GDP.


In short, costs could range from 2% to 7% of GDP, depending on what action is taken, on what scale and over what period of time. These figures don’t account for any potential savings or benefits generated by decent public services. Economies of scale, lower transaction costs and reduced profit extraction would all bring savings. So would early intervention to prevent harmful and costly ‘downstream’ problems such as ill-health and unemployment.


Where will the money come from?


IPPR has estimated that in 2023 there will be fiscal space for an additional £90-120bn of spending beyond the policy baseline of August 2022 - without aggravating inflation. Furthermore, even minor changes to the Government’s self-imposed fiscal rules would open up significantly greater space for borrowing, according to the FT’s Martin Sandbu, who has proposed that government should aim for a debt-to-GDP ratio that is stable and adjustable.


The gap between the richest 10% and the poorest 40% in UK wealth distribution is second highest in the OECD. It has been estimated that an annual tax at 1% on net wealth above the level needed to qualify among the top 10% richest in the UK would generate £35 billion a year - the very amount the Government has announced it needs to raise. Reforming Capital Gains Tax, to align rates with Income Tax, meanwhile, would reportedly raise up to £14bn a year, as well as simplifying the tax system.


While UK households are experiencing a cost of living crisis, some large British companies are making record profits. One proposal to tackle this is increasing the windfall tax from 35% to 45%, as well as removing loopholes, which could raise £14.3bn over the coming year - i.e. £5bn more than £9.3bn projected in the Autumn Statement. Another is to tackle the way corporations artificially

inflate their own stock market prices: an emergency 25% “windfall” tax on the buy-backs of FTSE listed companies, levied for a defined period of time during the cost of living crisis, could raise £11bn in a single year.


Progressive forms of consumption tax, focusing specifically on high-carbon luxuries disproportionately enjoyed by the wealthy, could make a useful contribution. A Frequent Flyer Levy, for example, could raise £5bn in tax receipts each year.


The Table below summarises these and other tax reforms outlined in the paper. Proposed sources that would yield funds annually (avoiding any overlaps in the Table) add up to £92.6 bn per annum. Inevitably, margins of error are wide in both directions. The total doesn’t include raising income tax for higher earners, or funds that could be available through monetary policy or borrowing. Investments in public services are likely to yield savings and benefits across the economy, making more funds available in future. What is not affordable, as Michael Marmot points out, is inaction. The social, economic and environmental costs of that are far too great.

Proposed reform

Yield

Author/source

Taxing wealth/ passively earned income

1. Annual 1% net wealth tax (on top 10% richest in UK)

£35 bn p.a.

2. One-off wealth tax (at rate of 5% over £500K per individual)

£260 bn over 5 years​

Wealth Tax Commission

A wealth tax for

the UK

3. Bringing taxes on dividends in line with income tax levels

£6 bn p.a.

4. Reforming Capital Gains Tax

£14 bn p.a.

Office of Tax Simplification

OTS Capital Gains Tax Review: Simplifying by design

5. Extending National Insurance to investment income

£8.6 bn p.a.

6. Lifetime Receipts Tax (in place of inheritance tax)

£4.8 bn (more than inheritance tax) p.a.

7. Scrapping Business Relief and Agricultural Property Relief on inheritance tax

£14 bn p.a.

8. Abolishing the non-dom regime

£3.2 bn p.a.

Arun Advani, David Burgherr and Andy Summers

Reforming the non-dom regime: revenue estimates

9. Replacing Income Tax, National Insurance Contributions, Capital Gains Tax and Inheritance Tax with a single National Contributions tax

£43.5 bn p.a.

Taxing Corporations (notably energy companies)

10. Increasing the windfall tax to 45% and removing loopholes

£14.4 bn over the coming year (£5 bn more than projected in the Autumn Statement)

11. 1% Tax on share buy-back schemes of FTSE-listed companies

£0.2 bn p.a.

12. ​25% Windfall tax on buy-back schemes of FTSE listed companies

£11 bn in a single year

Progressive Consumption Tax.

13. Smart VAT

No estimate available

14. Frequent flyer levy

£5 bn p.a.

NEF and Possible


A Frequent Flyer Levy

Isaac Stanley is a Research Fellow at the Social Guarantee


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