It was a poor budget by George Osborne, one of ‘no economic significance’, as Martin Wolf observed in the Financial Times on Thursday, ‘either there will be a recovery in 2013 2014 or there will not, His influence is now essentially zero.’ We agree with Wolf on this. Osborne has failed to identify the problems the economy has, perhaps this is why he has failed to undertake any measures that will alter the course of the economy? It certainly seems that it was not a well guided budget, as Damian McBride acutely observed.

 

It seems, on the surface, that in this budget all pretence of austerity being the only alternative has been abandoned, it was a redistributive budget, one to enrich a few people just a little bit more. What is more revealing though, and more worrying, is the budget demonstrates something of the many economic fallacies that the treasury have faith in, which explains why they could produce something so ineffectual.

 

Where is the recognition at the high levels of personal debt, far higher than Government debt, and any actions to address this? Where are the actions to control the astronomical debt of the financial sector, the regulations to control the sector sufficiently? Where is the confidence going to come from for small enterprises to flourish, the money going to come from to finance their expansion? What is the incentive for families to save when banks are paying below inflation interest? What of those who live in fear of job insecurity, or, worse still, struggle with interests rates on small loans that are at the level that can only be described as extortion?

 

There are many small steps Osborne could have taken and many large ones he should have enacted. Here are just a few examples that people in Occupy Birmingham have been examining:

 

 

Personal Debt

“The total amount of UK personal debt has exceeded the country’s entire GDP for the second year running. According to the accountants Grant Thornton, the total amount of outstanding debt amassed through mortgages, loans and credit cards rose by 7.3 per cent” This was written at the height of the credit crunch, in the Independent, but it has got worse since. Credit Action report that ‘Outstanding personal debt stood at £1.456 trillion at the end of January 2012.’

 

 

Small Steps

Tighter regulation of Pay Day loans and a cap on the interest rates that are legally chargeable would be sensible options. The Centre for Responsible Credit report detailed a range of considerations:

 

“The Office of Fair Trading reported that the industry makes over £900 million of loans in the UK per year. Payday loan customers are typically single, without children, and have incomes of over £1,000 per month. The average size of an initial loan is between £230 and £300”, but repeat customers are offered higher amounts of up to £1000.

 

Qualitative research undertaken by Consumer Focus has found that lower income consumers were particularly at risk of getting into financial difficulties and could become caught up in a cycle of increasing indebtedness.

 

The UK could seek to enact Payday lending laws that are in place in the US and Canada, notably placing restrictions on:

• the amount of loan relative to the borrower’s income
• the absolute maximum level of loans.
• the number of loans that can be provided in any given period
• the number of times a loan can be ‘rolled over’
• the level of fees that can be charged for overdue loans

 

It is also notable that members of the Canadian Payday Lending Association have signed up to a complete prohibition on roll over lending.i”

 

Big Step

 

The banks got bailed out by the tax payer in 2008 and we have continued to put money into the financial sector through QE since, which has caused some inflationary pressures, but not the amount many commentators have feared. However the QE money has not enabled any significant impact upon the Economy. The last round of QE in October 2011 of £50bn was estimated to boost the GDP of the country by 0.1%. The money is not going to small businesses in any great amounts but is being used by the banks to boost their balance sheets and inflate asset prices. In total £325 bn has been spent on QE, which equates to circa £5,240 for every woman, child and man in the UK.

 

A more radical alternative has been suggested by Professor Steve Keen, Quantitative Easing for the people, in his Debtwatch Manifesto. This is, in effect, a modern debt jubilee, where you have quantitative easing and rather than give money to the banks, you give money to the public, but ‘it goes into their bank accounts, and the very first use of that money has to be paying the debt down. Now that would mean, for a start, is that anyone who was in debt would have their debt level reduced, and banks would be unaffected in terms of their solvency because their money-making assets like loans would fall, but their cash assets would rise, and anybody in the public who had no debt would suddenly have an injection of cash. Now their income strength would fall, because it would be reduced in the value of the loans, but they’d have less income coming out of the debt in the future, and they’d have a cash reserve they could send out in the meantime.

 

So the idea is to have a jubilee that focuses on a reduction in income simply on the group who should have a reduction in income, and that is the finance sector, while trying to minimize the damage being down to the rest of the economy, and try to minimize the damage done by massive deleveraging so that, if we don’t do anything systemic about it, it might give us twenty years of a downturn before we finally start to stabilize.’

 

Corporate & Financial Debt

This is one of the elephants in the room, and it is largely unacknowledged. What level of debt actually exists in the financial and corporate sectors? Gordon Kerr, writing for the Adam Smith Institute questions how financial reporting of profits is undertaken in his report ‘The Law of Opposites, Illusory profit in the Financial Sector’. It is a devastating examination of what is wrong in that sector, explaining why bankers bonuses remain big even when the worst happens, he begins:

‘Investors depend on the accuracy of company accounts. If profits are overstated, people will buy a company’s stocks and bonds when they would not if they knew the truth – or, at least, they will buy them at higher prices than they otherwise would. By causing such misallocations of capital, inaccurate accounts harm not only investors but society more generally.

 

The proper functioning of accounting rules is therefore necessary to protect the investment community – and taxpayers, in the case of businesses that may attract state bailouts.

 

Not everyone, however, benefits from accurate accounts. Those who already own a company’s securities and plan soon to sell them benefit from an exaggeration of the company’s profits and hence of the value of its securities. And, more importantly, a company’s executives, whose performance is typically measured and rewarded on the basis of profits, also benefit from their being overstated.’

 

Kerr concludes the report:

 

‘The UK banking system has grown from 60% of GDP in 1960 to 460% today. Banks are fully aware of the points made in this paper, that on any ordinary “true and fair” view they are insolvent, and most bank assets are for sale as they try and shrink. This is effectively a liquidation process, but a process being run by managers not with the interests of taxpayers at the forefront, but their own.

 

This liquidation process should be encouraged by the UK Government but put under independent control. If this does not happen then, just as the Euro appears on the verge of collapse under the weight of its own contradictory rules, there is no doubt that the remarkable incentives for bankers to report fake profits will bring down state finances in a way that will threaten the continued existence of the currency.’

 

Kerr’s report provides us with something of why all the furniture in the room is wrecked, but does not tell us the size of the elephant. There are two sources that attempt to. One describes a massive elephant the other says, no, it’s gigantic. First the McKinsey report indicates total UK debt is 507% of GDP of which 318% is in corporate (109%) and the financial sectors (219%). Then there is A. Sanders report, which paints a different picture, one of total UK Debt of 950% GDP with the financial sector accounting (or not) for 600% of that figure. Which ever way you look at it it is one large elephant.

 

A budget which continues to ignore such an elephant is beyond complacency. Funding for a new Financial Reporting Council (FRC) is required to enact better quality regulation, greater transparency can help in ensuring that accounting firms do not assist banks in false reporting.

 

 

The Budget Deficit

 

We have been constantly told that the budget deficit was due to ‘too much government spending’; too much money spent on welfare, or wages, or health or education. This is a poor argument. A budget deficit indicates an imbalance between the money raised in tax and the money expended, the tax gap. So called ‘austerity measures’, amount, in effect, to asset stripping of the common wealth built up by generations of the people.

 

What is required is an evaluation of tax, particularly as successive governments have been using the tax system to ensure a redistribution of wealth, from the poor and modestly affluent, to the rich. We call for a stop and a reversal of this flow in finance. We need to rebalance the economy and the most effective method of doing this involves a switch from taxing income to taxing wealth.

 

As Phillip Inman noted in the Guardian; ‘the Institute for Fiscal Studies has thrown its weight behind OECD proposals for a shift away from income taxes to consumption and wealth taxes’.

 

A Land Tax is difficult to avoid unlike many other tax systems, is easy to collect, is a significant way of redistributing wealth, and could be used to accelerate closing the budget deficit . Fred Harrison in his book Boom and Bust argues that taxing land encourages useful development. Landowners who accumulate it for speculation purposes face huge bills, encouraging them to sell up to developers with more of an incentive to put the land to work. The OECD in a report examining land taxes indicate that would smooth out damaging housing bubbles and encourage more productive investment.

 

In addition a Tobin Tax, which has been widely discussed, would contribute significantly with paying off the deficit too, as would simple things such as cutting Defence spending from to the European average, abandoning any attempt at replacing the Trident missile system and passing restrictions against trading with tax havens.

 

These budget proposals would help to boost growth, enact a fairer redistribution of wealth, ensure more efficient tax collection, protect public services and do much to help alleviate the high levels of personal debt that ordinary people in the UK face. A budget for people not to spite people.

 

These budget proposals would do something else too, something much more significant, they would help to change the discourse, for as Michael Hudson pointedly remarked:

 

‘A false picture of reality does not happen by nature; it is subsidised. And the banking sector has subsidised a junk economics that is taught in the universities, broadcast from your newspapers, mouthed by the politicians, whose election they sponsor, to try to make you believe, that you’re living on Mars in a different kind of a world—instead of the actual country that you’re living in—and to pretend that there is no financial class that is trying to grab what belongs to the public at large.’

 

 

 

iPayday lending in the UK: a review of the debate and policy options Damon Gibbons, Neha Malhotra, and Richard Bulmore