Growth must take precedence over early deficit reduction

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date: 24 November 2009

embargo: 00:01 hrs Wednesday 25 November 2009

The TUC has told the Chancellor today (Wednesday) that the economy is still very precarious and that premature attempts to reduce the deficit risk a double-dip recession.

In its submission ahead of the 2009 Pre-Budget Report (PBR), the TUC says that the best route to recovery is for the Government and Bank of England to continue to boost the economy, even if in the short-term that makes the deficit bigger.

Once recovery has been established, the TUC says that increased taxes for the better-off should make the major contribution to ending the structural deficit.

The TUC submission suggests six options for increasing the tax take:

  • a major financial transaction tax (£30 billion);
  • a general anti avoidance principle (£1 billion);
  • a tax relief cap (£10 billion);
  • an empty property tax (£5 billion);
  • collecting tax that is due by improving HMRC resources (£20 billion);
  • abolishing the non-domicile rule (£3 billion)

The TUC says that the UK has spent 180 of the last 260 years with a national debt greater than 80 per cent of GDP. The likely size of the UK's debt is, and will continue to be, similar to that of other major economies.

There is no need for a crisis response to the deficit, the TUC argues, which is largely caused by a collapse in tax income that will recover when the economy revives.

The TUC believes that deficit reduction measures should only be introduced when the economy has returned to sustained growth and they must meet five principles.

The TUC submission says that deficit reduction measures must be:

  • effective;
  • progressive, with the costs of any measure met by those most able to pay;
  • proportionate;
  • limited in wider economic consequences, so that they do not threaten recovery; and,
  • just, so that the cost does not fall on those who bear no responsibility for the crisis.

TUC General Secretary Brendan Barber said: 'The financial crash struck the economy a double-blow. It not only provoked a deep recession, but revealed that much of our earlier economic success was an illusion. It will take years to repair the damage and even if things have stopped getting worse, the best bet is that we will scrape along the bottom with high levels of unemployment for many months to come.

'Cutting spending now or in an emergency budget would be disastrous. When business and consumers stop spending, the state must make up the difference. What the economy needs is a return to growth, and that means the deficit and national debt must get worse before they can get better.

'That is why we back the Future Jobs Fund and want to see direct support to companies to keep people in work, as they have in Germany and other European countries.

'When the time comes to reduce the deficit then those who did best out of the boom and bubble should pay the price. It would be grossly unfair to slash public services or raise VAT - both of which hit the great mass of ordinary people who bear no blame for the crash.'

NOTES TO EDITORS:

TUC tax proposals

A transaction tax

The total volume of major financial transactions recorded by the Association for Payment Clearing Services in the UK for 2008 was just under £74 trillion. This is the amount that runs through the sterling version of the Clearing House Automated Payments System (CHAPS) - the system used by large banks to make same day, irrevocable transactions. CHAPS is used for a number of purposes but by far the greatest part of its activity is generated by the trading activity of large financial institutions.

To put this in context, all other forms of transactions conducted in sterling in 2008 (such as debit cards, cheques and cash machines) amounted to just over £4.5 trillion. The total GDP of the UK is approximately £1.5 trillion.

At these scales, a Major Financial Transaction Tax would net £37 billion in tax revenues if the tax was set at just 0.05 per cent. With such a rate on £1 million the tax due would be £500.

The TUC believes that after adjusting for changes in the behaviour of financial institutions, a transaction tax of 0.05 per cent could raise around £30 billion a year.

A General Anti-Avoidance Principle

The TUC has estimated that tax avoidance of various sorts costs the UK at least £25 billion a year. An attempt to introduce a Code of Conduct for British banks that asks them to voluntarily stop tax avoidance has been greeted with claims that the Code is unconstitutional. Therefore there is no prospect of voluntary restraint in this area and we need legislative action to introduce a General Anti-Avoidance Principle (GAAP) as in Australia and South Africa.

A tax relief cap

By restricting total allowances and reliefs for those earning over £100,000 to the maximum average level claimed by those earning less than £100,000, the total tax saving each year would exceed £10 billion. This would not only generate large sums to help pay off the deficit, but would achieve greater equity in the allocation of expenditure on tax reliefs (much of which goes on pensions).

An empty property tax

There are at least one million vacant properties in the UK - many owned by off-shore, tax haven companies registered in locations such as the British Virgin Islands, Jersey, Guernsey and Switzerland. For all practical purposes, it is almost impossible to determine who owns these companies. They could, for example, be owned by people who are hiding the fact that they are UK residents by registering these properties in the names of tax havens companies.

The TUC suggests that there should be an annual tax on empty homes, designed to force the property back into the housing stock available for use by levying a sum equivalent to five times the council tax charge that would be due upon the property if it were in use as a dwelling.

Collecting tax that is due by improving HMRC resources

Arrears of tax due to HM Revenue & Customs are rising fast and are well in excess of £20 billion. Despite this, HM Revenue & Customs is cutting staff. Tax debts of less than £10,000 are commonplace but rarely chased. There is a total tax gap in the UK of about £70 billion, based on £25 billion of avoidance and about 14 per cent total evasion. If just one third of that gap could be collected by employing 25,000 extra staff, the recovery would be £20 billion at a cost of around £0.6 billion.

Abolishing the domicile rule

The non-domicile rule allows those living in the UK (including UK citizens) who can claim some close personal or business association with another country to pay no tax on their earnings outside the UK. The 2007 PBR changed the rule so that those claiming non-domicile tax status would have to pay an annual charge of £30,000. In 2007, the TUC estimated that the domicile rule might cost the UK as much as £4.3 billion a year in lost revenue.

There can be no doubt that the changes to the rule introduced by the 2007 PBR will have reduced this loss, but it is likely that the amount recovered is no more than £1 billion. This leaves £3 billion or so of tax that might be recovered by abolishing the domicile rule.

- The TUC submission to the 2009 Pre-Budget Report can be downloaded at www.tuc.org.uk/extras/pbrsubmission2009.pdf

- All TUC press releases can be found at www.tuc.org.uk

Contacts:

Media enquiries:
Rob Holdsworth T: 020 7467 1372 M: 07717 531150 E: rholdsworth@tuc.org.uk
Elly Brenchley T: 020 7467 1337 M: 07900 910624 E: ebrenchley@tuc.org.uk

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