Friday, 8 October 2010

How to Fix the Structural Deficit

The Government's main justification for its public expenditure cuts is that there is a structural deficit in the UK's finances, which was left by the previous set of incompetent nincompoops. It's standard practice for an incoming Government to blame the previous regime for anything and everything that might be wrong with anything at all, so that's fair enough. Never mind that it's anybody's guess whether or not a Conservative Government would have done anything different in the circumstances of the last three years (Michael Howard would have been Prime Minister had they won the 2005 election...)
So what is the structural deficit? Well, it's a notional figure - 'A budget deficit that results from a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factors', as defined by The Financial Times - but it is nevertheless an estimate based on forecasts of how the economy will operate in the long term. Not everyone agrees that there is such a thing in 'reality', or even if there is a structural deficit that it is necessarily a problem. For example, if you've got a mortgage you have a structural deficit in your household budget but it doesn't mean you're doomed to everlasting perdition. There's an article over at The Investor's Chronicle which examines the concept critically in more detail.
Any road up, we are told that the structural deficit is £178 billion and that the Government deems it essential that we clear this within five years (the lifetime if this Parliament, coincidentally or not). This is to be achieved through public expenditure cuts which involve all manner of misery and hardship and which, so far, have been focussed on welfare benefits and quangoes, and we face an era of austerity and uncertainty as Government departments look for ways to cut between 25% and 40% from their budgets.  All so that the financial markets do not lose confidence in the UK's ability to repay its loans. But there is a way to rectify the deficit without any of this talk of gloom and doom.
There was a 'Tax Gap' in the UK's finances of some £40 billion in 2007/08. Her Majesty's Revenue and Customs (HMRC) quote this figure in their publication Protecting Tax Revenues 2009. Basically, the Tax Gap is the difference between what HMRC expects to collect and what it actually collects, and it arises from several factors such as simple error and failure to take reasonable care, evasion, avoidance, and crime. It is safe to assume that this figure of £40 billion recurrs every year. So, you've guessed it, what we need to do is fix the Tax Gap for the next five years and, Hey Presto, we move from a structural deficit of £178 billion to a structural surplus of £22 billion! You could thus spend up to £22 billion on fixing the Tax Gap and still break even.
So there you have it. Problem solved by The Mighty Xorg.
The snag so far as the Government is concerned, however, is that this would mean reinforcing staff numbers and systems in HMRC in order to sort it out and this goes against their doctrine of reducing the 'size of government'. Another problem for the likes of Cameron and Osbourne is that it is the financial markets who are perpetrating the biggest slice of the tax evasion and avoidance, and a fair proportion of the crime. (Remember Bernie Madoff? It's not just self-employed builders dodging VAT who operate in the 'Black Economy'). Oh, and if the Government doesn't owe all this money to the financial markets any more, the financial markets' profits would be affected negatively.
Addendum: Meanwhile, you could reduce day-to-day expenditure without rendering widows and orphans homeless by scrapping Trident (£20 billion) and withdrawing from Afghanistan (£10 million per day). And save lives into the bargain. But that's just the old peacenik hippy in me talking, I suppose.

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