Nigeria needs to spend more on social support

I was alarmed to read a report in the Nigerian Observer, which told me that the World Bank was pressing Nigeria to ‘reduce the poverty net’.

If structural reforms are not implemented, Nigeria’s future looks bleak, per capita income will plateau, Nigerians will not have a full-time job by 2030 and if the employment rate does not improve, 23 million more Nigerians will live in extreme poverty by 2030,” according to the [World Bank’s] chief economist.

The report goes on to list the kinds of reforms that are being looked for: support for the private sector, ‘unlocking’ private investment, introducing ‘critical’ macroeconomic and structural reforms.  That, on the face of the matter, looks like a call for ‘structural adjustment’ and a return to the ‘Washington Consensus’, which emphasised liberalisation, privatisation and fiscal discipline.  Structural adjustment was not an unmitigated disaster – its effects were mixed – but it did lead to substantial hardship  and in some cases created positive obstacles to development.  One might have hoped it had been left behind in the 1990s.

As it turns out, however, this is not what the World Bank has been saying at all.  The Bank’s Nigeria Public Finance Review bemoans the chaotic arrangements that characterise many of Nigeria’s current policies, but the central theme is very different: Nigeria needs to devote far more of its resources to  public expenditure, and it needs particularly to expand its systems of social support.  Yes, it calls for ‘fiscal adjustment for better and sustainable results’, but it also argues that ‘Nigeria’s social spending is too low, both in levels and as a share of budget resources’; that education and health provision is not enough to raise human capital; and that government and the states need to raise revenue substantially to pay for it.  Nigeria has been shaping up to become one of the world’s largest poor countries – ‘the world’s second-largest poor population after India’. The World Bank’s policies have been misjudged at times, but this is not one of those times.

How much should income be cut by?

The government claims to be concerned about ‘inflation-busting’ settlements.  Public sector wages have generally ‘risen’ by 2.7%; private sector wages by 6.9%.  Many benefits (not all) have ‘risen’ in line with inflation.

I have put ‘risen’ in inverted commas because incomes have not risen at all.  As a simple matter of maths, a rise ‘in line with’ inflation is not an increase in income; it is a reduction.

Initial income 100
Inflation 10.7%
Value of income after inflation 89.30
Increase of:
2.7% (recent public sector awards) 91.71
6.9% (recent private sector awards) 95.46
7% (NHS in Scotland) 95.55
10.7% (‘in line with’ inflation)
98.56
12.32% (break even) 100
19% (the claim made by the RCN) 106.27

Increasing benefits ‘in line with inflation’ implies a cut in real income. It would take an increase of 12.32% before that did not happen.  And the supposedly unaffordable claim by the RCN for 19% is actually a request for an increase in real terms of 6.27%.  Since 2010, the real wages of nurses have fallen by 8%.  The RCN claim would not restore that level of income.

A case for higher taxes

Professor Richard Murphy argued yesterday in a tweet that the government should be aiming to cut taxes in a recession.  He duplicated that tweet in his  blog, but the core point he makes is this:

When facing a recession a government should
– cut interest rates
– cut taxes
– increase its spending.

In a recession, a government needs to stimulate the economy, and that can be done by injecting resources.  I’d question, however, whether either of the first two would actually stimulate the economy as things stand.  Interest rates have been close to zero for some time, and while lowering them further (perhaps into negative rates) would have some effect on economic activity – primarily, dis-saving, converting holdings from money to goods (such as houses) and diverting money to activities or locations which offer higher interest rates  elsewhere – most of those effects have already been realised. Cutting taxes – the policy of the catastrophically inept Truss government – would primarily release money to those who pay more in taxes, and the resources released will go in large part to rentiers.

The simple case for higher spending is made by Keynes:

Pyramid building, earthquakes, even wars may serve to increase wealth …. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

Higher spending doesn’t have to be financed point for point, and it doesn’t have to be financed by tax – there are lots of other options.  However, it can be inflationary if it means that ‘too much money is chasing too few goods’.

A large tranche of what we call ‘public spending’, however, is something different.  Benefits and pensions are transfer payments, a point I’ve made in previous blogs.   Government doesn’t spend the money it allocates to pensioners; it passes them the money so that they can spend it.  Taxation to fund cash transfers doesn’t withdraw money from the economy.  When transfer payments are directly financed – that is, being transferred from someone else – they are presumptively neutral in economic terms. This is not inflationary, because the amount of money in the economy remains the same after the transfer.  Any differences will depend on whether the recipients spend money differently from those who pay. That will be true to some degree, but it’s marginal: people on lower incomes spend proportionately more on food and energy, and save less.

Taxation is not the only way to finance public spending, but there are particular advantages in funding cash benefits this way.  If transfer payments are funded by ‘helicopter money’ – like the extra £20 pw for Universal Credit during the pandemic – they’re politically vulnerable and implicitly temporary.  Transfer payments financed by taxation, or by an equivalent mechanism such as national insurance, imply a more equal distribution of income than the same payments financed indirectly through creating credit.  They will fund markets that function better for people on lower incomes. They do it without risking inflation. And they offer a better prospect of growth. The IMF have argued that a 1% increase in the income share of the lowest paid 20% produces growth of 0.38%, four and a half times the growth that comes from increasing the income share of the top 20%.

 

Low-tax investment zones: three things to watch out for

It’s been suggested that the government is on the point of announcing 12 ‘low tax investment zones’, where businesses and perhaps employees will benefit from deregulation and reduced taxes.  Much of the response to this, predictably enough, will be about fairness, and the suspicion that the government is offering special favours to its mates.

Let me offer a different perspective.  I’m going to assume, although there are grounds for scepticism, that the government’s basic claim is justifiable: that these programmes will have an effect in stimulating economic growth.  The question is: what sort of effect?

There are three things that governments should always be aware of in judging value for money in special programmes and initiatives. They are deadweight, spillovers and externalities. Deadweight happens when those who are benefitting do not actually change their behaviour.  If a firm that is already trading successfully moves from one area into another, simply to get the benefit of the programme, it’s a dead loss.

Spillovers occur when people do benefit  and change their behaviour, but carry on reaping the benefits of the programme after the case for stimulation has ceased to apply.

The term ‘spillovers’ is now increasingly being used in development economics to refer to externalities, but externalities are something different.  Externalities, or external effects, can be positive or negative.  The stimulation of the economy would be a positive externality.  An increase in crime, for example, is a negative externality, and crime in freeports, such as smuggling, drug dealing and money laundering, has been a major concern.

There is no certainty that the deregulation and low tax will have any benefit to the economy.  They may be detrimental.  Let’s have fewer assumptions, please, and more evidence.

We need to talk about Corporation Tax

The contenders in the Conservative Party election are mustard keen on the idea that Corporation Tax should be reduced.  Liz Truss, in particular, seems to think that it will encourage firms to expand and be more productive.  The evidence does not support her.

Corporation Tax is levied, not on activity, but on profit.  It’s possible, at one and the same time, to reduce profits while increasing the rate of return.  It’s done primarily through ‘leverage’ – taking on debts.  Reducing the apparent profit is done by  making the firm pay the costs of takeover.  If the firm pays, the purchaser doesn’t have to.  This is done by loading the debt onto the firm, rather than the purchaser.  This also has a tax advantage: the firm’s profits will be less because servicing the debt repayments is part of its costs.

Debt also increases the rate of return on the initial stake.  Let’s say, for the sake of argument, that a firm is worth £50m in assets and has a return of £5m per annum.  If it’s bought outright, the return is 10%.  If it’s bought with £10m in equity and £40m debt, the return depends on the debt repayment, but a debt repayment set at anything less than £4m – 10% – will increase the effective rate of return on equity.

There are three other factors that help to generate greater returns.  First,  inflation reduces the value of debt – effectively transferring money from creditor to debtor.  Second, the debt is often repaid abroad, so that this part of the return avoids  taxation.  Third, more parent firms are able to bump up costs to offset against profits, for example by the pretence of outsourcing functions such as management, payroll or IT to subsidiaries.

There are two egregious examples of this kind of financial chicanery at the moment: the conduct of residential care providers, and the water companies.   I’m always wary of economic analyses that claim to demonstrate an ‘incentive’ effect, because economic behaviour is far less rational than the textbooks like to claim, but it seems plausible to say, at least, that the effect of Corporation Tax as it is currently constituted is to reward some pretty undesirable behaviour.  In particular, Corporation Tax rewards firms  for financing themselves on debt. It creates opportunities for fly-by-night purchasers who contrive to buy firms with other people’s money.  It offers a bonus for outsourcing economic activities elsewhere in the world, removing them from the British economy.  I’m not going to claim that I have the answer to all this; the people who put together this kind of financial engineering are quick on their feet, and cleverer than I am.  But surely, there must be a better way?

A Charter for Tax Cuts

The contest for the leadership of the Conservative Party has been focusing on the issue of tax cuts.  The case for these cuts has been made by economist Julian Jessop, in a pamphlet for Conservative Way Forward.   (The format of the online version makes it exceedingly difficult to read, but the author has sent me a clean copy I can work from, for which thanks are due.)

The first step is to consider whether or not we need to take measures, at this point, to stimulate the economy through an injection of resources.  I was uncertain about this a year ago.  We’ve moved on from then. We were facing a clear threat of an economic recession at that time, which argues for some kind of stimulus, but now we also have the immediate prospect of rampant inflation.  Injecting money into the economy would fuel inflation – simply put, too much money chasing too few goods. This paper talks about a ‘dash for growth’.  That would be risky, and previous experience argues against it.  The ‘Barber Boom’ (1971-73) destabilised the economy and left us in a parlous position when further problems arose.  The Conservative government of the time had believed that the obstacles to sudden growth were self-imposed, and that if they rushed at the barriers hard enough, the economy would break through those barriers. The conventional economic analysis of the time suggested, on the contrary, that the effect would lead to ‘overheating’ – generating a demand that couldn’t be satisfied, fuelling inflation and forcing money abroad because the domestic economy couldn’t meet the demand.  That is exactly what happened.  By the end of 1973, we had the three-day week; and then there were the deflationary terms dictated by the IMF, which made a bad situation worse.  The problems of the 1970s weren’t caused by the unions, who only responded to the situation, or even by the oil crisis, which only took hold when we we already facing a slump.  They were created by economic mismanagement. There’s every reason to think that pumping money into the economy will have the same effects as it did in the 1970s: fuelling inflation and diverting money abroad.

The second part is the question of what tax cuts will do.  The idea that a modest tax cut of one or two pence from income tax will shield people from rising prices in any meaningful sense is, frankly, preposterous.  There’s a good argument for reforming much that goes on in our tax system – it’s too complex, and there are too many anomalies, and in so far as it creates perverse incentives, the most destructive is the incentive to load companies with debt (because that is tax-deductible) rather than building  viable structures for the long term.  Fiddling with corporation tax or VAT won’t address these problems; both measures are indiscriminate.

Third, there’s the question of values.  The demand for tax cuts is linked here with a set of familiar claims:  that the frontiers of the state should be rolled back, that people should keep more of their ‘own money’,  and that the ‘formula for success’ is (in a short appreciation by Lord Frost) ‘free markets, low taxes and personal freedom’.   The idea that people’s income before tax is ‘their own money’ is spurious (salaries and wages are largely  based on social conventions, including tax rates) and there is no evidence to support the contention that low taxes promote more successful economies.

There are points in the argument which I’d agree with.  The tax system is too complex, there’s been far too much of an obsession with debt, and we should be looking for ways to support effective demand.  However, if we are talking about government using national resources differently, tax cuts are just about the worst possible choice -ill-directed and primarily beneficial only to those who don’t need it.  If we really wanted to inject money into the economy, we should do it at the other end of the income distribution. Let’s get the money to people who can’t afford food or heat.

Further thoughts, 31st July

Since this initial blog, the arguments have been gathering pace.  Some of them seem to me, frankly, half-witted.  One really stupid argument is based on the ‘Laffer Curve’, which claims to demonstrate (as a matter of theory, not practice) that there are circumstances in which lowering the rate of tax will increase the amount of revenue a government receives from tax.  There are two problems with that.  One is saying that there are circumstances where this could happen is not the same as saying that it happens in every case: clearly, it doesn’t.  The other relates specifically to its application to Corporation Tax.  It seems abundantly clear that offering people the option to pay one kind of tax rather than another will lead to those people, especially if they have a competent tax advisor, to choose to pay the lower rate of tax available to them.  That is done, of course, at the expense of revenue from the higher tax.  Corporation Tax is already set at a rate which is lower than the upper rates of income tax, and accordingly those who have a choice will put the money through the Corporation’s books rather than their personal income.  That is not evidence of getting higher revenue – the opposite is the case.

The other daft argument is that tax cuts don’t alter the money supply, and so aren’t inflationary.  That is daft partly because tax cuts (as opposed to cancelling proposed changes in taxation) clearly would inject money into the economy – unless they are paid for by reduced government spending, which would be disastrous for millions of people – and partly because it’s a misunderstanding of inflation.  Inflation depends not just on how much money is going round, but on what that money can buy – it’s a matter of balance.  In current conditions of high inflation, which are already leading to higher production costs and higher wage demands, that balance is at best precarious.  I see no good reason for the current optimism that inflation will fall of its own accord.

Macron wins

I voted for Emmanuel Macron today.  Macron’s programme is less than compelling.  In the first round, there wasn’t much to bite on, with the main exception of tax cuts.  That’s the clue that Macron has been tacking to the right, a strategy which hasn’t played well with those concerned about public services.  But perhaps he was wise not to signal too much: Anne Hidalgo, for the socialist party, offered more than forty policies in her main campaign leaflet, and that got her nowhere. In his second-round campaign leaflet – I didn’t get it until after the vote had taken place – there was more: help with expenses and benefits, preventative health measures and help with home adaptations for care.

The choice between Macron and Le Pen wasn’t difficult. I don’t think it’s right to describe Marine Le Pen as a fascist, because she’s not bought in to the corporate authoritarianism that distinguishes fascism. (Contrast Golden Dawn, in Greece – that’s what fascism looks like.) It may be safe to say that Jean-Marie Le Pen, the former leader of the Front National, was  a torturer  (he lost a libel action against a former prime minister on that point), but that part of the status isn’t passed down from father to daughter.  However, the Front national, sorry the Rassemblement national, is still repulsive: nakedly populist and racist. The pledges to stop immigration, ‘arreter la submersion migratoire’ and close ‘radical mosques’  were quite enough reason not to vote for her. After that, the promise of higher wages and animal welfare legislation really couldn’t do much to swing it.

I didn’t get to vote in the first round, because the rather late notice I received while in Fife told me I’d have to vote in Glasgow, a round trip of more than seven hours. The Consulat absolutely refused to let me vote in Edinburgh instead – none of this nonsense about reasonable adjustments, this is French bureaucracy in all its glory.  For the second round, I arranged to be in Edinburgh, and went on to Glasgow by train.

 

Keir Starmer’s vision is lukewarm about principles

In a pamphlet published by the Fabian Society, Keir Starmer lays out a series of policies and priorities.  There are brief – very brief – genuflections in the direction of child and pensioner poverty, though the only policy I can see that is related to either is the fleeting suggestion that there has to be a reduction in poverty-related lack of educational attainment.   On benefits, Starmer offers us this:

We would replace universal credit and reimagine our social security system to ensure that work pays. We want low-paid people to keep more of the money they earn, so that having enough money to raise a family isn’t the
preserve of the better-off.

Apart from replacing Universal Credit, that looks a lot like some standard Conservative pledges: make work pay and cut taxes.    On the first, there’s a simple problem: making work pay is done by making work pay, not by changing benefit systems.  On the second, while it’s true that low earners have important problems, the central issue is not  about money deducted from earnings.  For low earners, the most obvious problems are income security, the costs of housing and child care.  However, most people on benefits are not earners.  They’re pensioners, they’re sick, they’re full-time carers, or they’re unemployed.   Politicians in both major parties have fixated on the relationship of benefits to the labour market; it’s only a small part of what benefits do.

If Starmer’s priorities are not about well-being, or poverty, what are they about?  What he has to say about public services looks like this:

we must face the future. That means a new settlement between government, business and working people. It means completely rethinking where power lies in our country – driving it out of the sclerotic and wasteful parts of a centralized system and into the hands of people and communities across the land. It means banishing the culture that unthinkingly accepts public services not keeping up with the sort of advances we have come to expect in the private sector.

In what respect are our public services inferior to the private sector – apart from funding?  Who thinks our NHS is wasteful – seriously? How can it be acceptable to focus on “government, business and working people” – the corporatism of the 1970s – when a quarter of the population are not part of any of it?    There is nothing in this pamphlet I could relate to disability or the dispossessed.

This is not an argument for Labour’s former regime – I’ve previously commented that the 2017 manifesto  was ‘pretty feeble stuff’ and the 2019 manifesto was mainly reactive.   Labour may not have lost its way completely, but the lack of an agenda for public services, well-being or disadvantage doesn’t help to dispel the impression.

At the risk of being doggedly unfashionable, let me go back to Anthony Crosland in The Future of Socialism. Socialism was, Crosland explained, ‘a set of values, or aspirations, which socialists wish to see embodied in the organisation of society.’  Those values included empowerment, the  progressive removal of disadvantage, and mutual responsibility: the ‘Liberty, Equality and Fraternity’ of the classic left.   Many modern-day socialists would want to add the core principles of democracy and human rights.  The Labour Party is a party of values, or it is nothing.

 

 

Shortages were predicted.

The shortages that have followed Brexit are no surprise; we knew they were coming.

The most basic principle of international trade, ‘comparative advantage’, depends on the idea that people and countries can be better off if they specialise in the things they do best.   The European Union was founded on that basis.   Specialisation also increases mutual dependency, and that is a good thing; it makes war more difficult.  However, it can also have negative consequences.  As countries and regions build on their strengths, there will be a certain amount of disruption – what free market economists like to call ‘creative destruction’.  The European  funds – the Regional Fund and the Social Fund – were designed to compensate and offer some protection to the people and areas which would be displaced as local industries focused more on local strengths, and moved away from those activities where it made more sense for that work to be done somewhere else.

It was clear, for a long time before Britain joined the EU, that a range of Britain’s longest-established industries – coal, textiles and heavy engineering – had largely ceased to be sustainable as competitors entered the field.  When Britain joined the EU, there was further displacement in a wide range of other areas, such as agriculture, car production and electronics.  Conversely, the British economy came to depend increasingly on fields of activity where the UK was relatively successful – areas such as  finance, scientific research, education and culture.

Currently, there are shortages in a wide range of areas.  Some are obvious, and should have been predicted, like the shortages of HGV drivers or agricultural workers; some less so, such as the shortage of phials for medical samples or building materials.  Our expertise in theatre or banking  was never going to be an effective substitute. What was evident from the outset was that there was always going to be a wide range of activities which the British economy no longer had the capacity to do, and would have to import until a home-grown industry could develop – if it ever does, because there are things that can always be done more effectively somewhere else. It’s built in to the nature of international trade.

 

‘Greed is good’, revisited

Boris Johnson’s claim that the vaccine programme is a triumph of self-interested ‘capitalism’ has been roundly condemned; I don’t think I need to explain why it’s simply not true in this context.  It has spurred me, however, to come back to the broader argument, that we owe our prosperity and living standards to private enterprise.  That argument has been vigorously restated in support of Johnson, for example by Rod Liddle in the Sun: “this is what brings about progress in society”.

It’s an argument that goes back at least to Mandeville – private vice leads to public benefit – but it’s most often cited from Adam Smith:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”

That much is clearly true, as far as it goes; I do not want to take anything away from it. However, it’s only one aspect of our current standard of living in the UK.

If we look back at the things that have made our lives better than it was in Adam Smith’s time,  there are a few other things to consider besides butchers and bakers.  First, there’s the fabric of public space: roads, drains, pavements, street lights. Second, there are the standards and services that govern our private space: housing standards, sanitation,  sewerage, waste disposal, water supplies, and energy supply.  Third, there are the services and facilities which shape our daily lives: education, health, social security, and housing.   (The last one on the list deserves a reminder: we built six million council homes, and most of them are still standing even if they’ve been privatised or transferred to new management.)

It’s become commonplace for the advocates of free markets to claim that we owe everything to private enterprise.  That claim is false.  In some cases, governments paid private enterprise to provide goods and services; in some cases, such as agriculture or energy supply, they kept services going that would have collapsed otherwise; in some cases, they produced the goods directly.  All of the examples I have given were, at least to some degree and in some cases predominantly, the result of collective social action.  Not private enterprise, not self-interest, but government.