Who pays for the crisis?

Splitting the bill for the cost of living crisis. The two week pause ahead of the Chancellor’s Autumn statement on 17th November has left plenty of room for speculation and debate about the likely contents. We will explore the wider macroeconomic context in next week’s Digest, but, for now, one question dominates: who should ultimately pay the bill for the cost of living crisis? 

• Filling the fiscal ‘black hole’. Jeremy Hunt reportedly “confronted” the Cabinet with a “demand to find new spending cuts” when he became Chancellor and reversed Kwarteng’s tax cutting mini-budget in a bid to repair the Conservatives reputation of fiscal responsibility, earlier in October. Bloomberg reported the Treasury has prepared a list of 104 spending cuts for the government to choose from in order to fill the £35bn fiscal ‘black hole’ which still remains to meet the fiscal rules Sunak had previously chosen as Chancellor. 
• Fiscal rules. However, as PEF’s James Meadway notes: “Change the forecasts, change the target, and the black hole shrinks.” The FT reports that the Chancellor might change fiscal rules to have debt to gdp ratios falling after five years, rather than three, so that “much of the fiscal pain will not be felt until after the next general election”. In a separate blog post, James explains how this leaves a “trap” for Labour who may be tempted to partly accept the premise of spending cuts in an attempt to appeal to perceived notions of fiscal responsibility. (Reminder: Across 32 of 32 advanced economies, reduced government spending led to slower economic growth and Osbourne-era austerity failed to reduce the UK’s debt to GDP ratio.) 
• Defining fiscal responsibility. The Telegraph’s Ambrose Evans-Pritchard argues that the OBR “must stop pushing the economy into a contractionary vortex” as “Jeremy Hunt is more or less forced to tighten hard into the teeth of recession, even if such a course is macroeconomic lunacy”. He continues: “The clear danger is that the OBR mechanism will push us into ill-timed austerity, inflicting far more lasting damage than the storm of over the mini-Budget…until they reframe their definition of what constitutes budget responsibility, they are objectively complicit in economic vandalism.” (Check out NEF’s proposals for scrapping fiscal rules entirely and replacing them with ‘fiscal referees’ - a new Fiscal Policy Committee at the OBR.)

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Wealth tax reform is preferable to austerity. More recently, the Telegraph reported that “Hunt is considering up to £20 billion of tax rises in the [now delayed] Halloween budget, with high earners to bear the brunt of his quest to balance the books.” 

• Raising money without harming growth. The FT’s Martin Sandbu argues that the government should levy a 1% annual tax on net wealth “above the level needed to get into the top 10% richest in the UK” could raise £35bn and encourage more productive uses of capital.
• Other revenue-raisers that don’t harm the majority. Tax Justice UK has set out 5 ways the Chancellor could raise up to £37bn through wealth taxes. Taxing income from wealth at the same level as income from work could raise up to £14bn, applying national insurance to investment income could raise up to £8.6bn, a 1% wealth tax on assets over £10 million could bring in up to £10bn, ending inheritance tax loopholes could raise another £1.4bn and scrapping non-dom rules raises a final £3.2bn. (Guardian coverage from Rupert Neate.) 
• Wealth taxes are politically popular. Polling by Opinium on behalf of the Stop The Squeeze campaign has shown that a majority of voters who backed the Conservatives in 2019 would support wealthy individuals paying more in tax than they do now. Centre-right think tank Bright Blue’s sets out the Conservative case for reforming taxes on work and wealth: “A centre-right Government that is committed to ‘levelling up’ the UK should rebalance the tax system from income associated with work and effort and onto income associated with privilege and luck.”

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What about the energy sector? Chancellor Hunt had previously also avoided ruling out the introduction of a new windfall tax. Current loopholes in the current windfall tax on oil and gas producers mean that drilling in new oil fields (such as Equinor’s new site at Rosebank) amount to a net loss for the taxpayer. 

• Reforming the windfall tax. NEF calculated that reforming the windfall tax on oil and gas producers could raise an extra £9bn. The Counterbalance newsletter explains how to turn temporary windfall taxes into longer-term excess profit taxes on monopolies. The Balanced Economy Project argue that “a deeper and more long-lasting source of unproductive unearned income is, of course, monopoly power.” 
• Taxing dividends and share buybacks. Last week, Shell announced their 2nd highest quarterly profits ever as their profits increased by $5.4bn. IPPR and Common Wealth calculated that $4bn of increase went directly into share “buybacks” to artificially inflate the share price of the company. (BP made $8.2bn in Q3 and gave $2.5bn to shareholders via share buybacks.) Share buybacks hit record levels in 2022, where FTSE 100 companies have announced $46.9bn so far in 2022. IPPR’s George Dibb argues that share buybacks are “a symptom of a firm that can identify no productive investments beyond boosting their own value.”  (IPPR’s Shreya Nanda explained why share buybacks are part of a wider cycle of business failure in this thread.) The report finds that new taxes on share buybacks and dividends could raise up to £17bn per year, help encourage more productive uses of capital investment and avoid cutting public services even further.
• Lost revenue from private ownership. The TUC calculated that the cost of privatisation of the UK’s power sector means the public misses out on £63-122bn over the next two years (£4,400 per household). The TUC’s Mika Minio-Paluello stated: “If the UK had publicly owned energy like our European peers, the profits would instead flow to the public…£122 billion would have gone a long way to lower bills and retrofit our homes.”

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Stop The Squeeze. Nick Gutteridge reports that the Chancellor is “not considering measures that would hit the poorest Britons who are already struggling with rising prices.” A new coalition campaign, Stop The Squeeze, has launched calling on the government to deliver “a real plan for an affordable Britain” and tackle the cost of living crisis by guaranteeing affordable energy, boosting incomes, and raising taxes on wealth. The campaign has a wide range of supporting organisations from anti-poverty charities like Oxfam and Save the Children, climate campaigners like Uplift and Possible, progressive think tanks, trade unions and more. You can read more about their aims and get involved here.

• Public support? The new campaign group launched by releasing polling which demonstrates that only 1 in 5 of the voters that backed the Conservatives in 2019 believe cuts are inevitable in response to the current economic situation. The campaign also finds that 71% of the same voters believe that the minimum wage and social security system do not provide incomes people can live on.
• Uprating benefits. JRF has co-signed a letter with over 100 anti-poverty organisations calling on Rishi Sunak to “honour the promise he made this spring to increase benefits in line with inflation, and to do so now rather than waiting until April.”