Think of it as an emergency transfusion, transferring idle money to where it can help those in need – and revive the economy
With another year of stagnation staring us in the face, it is now time to look for a real alternative to the current economic strategy of austerity and wait-and-see.
The current crisis has one key cause: a prolonged contraction of demand. The economy’s vital blood supply has been drained by a collapse in private investment, falling real wages and public spending cuts. Yet recovery could be triggered by an emergency blood transfusion: a one-off redistribution of cash from those with spare money to those without.
Despite the recession, Britain’s (and the globe’s) largest companies are mostly enjoying booming profits and sitting on a record, but unspent, pile of cash. It is a pile that is contributing big time to the current paralysis. Mark Carney, the Bank of England governor-designate, has called it “dead money“. In August, he urged corporate Canada to “put the money to work”. He was ignored. UK companies have also turned their backs on similar pleas to use this hoarded money to finance a desperately needed investment boom.
With gentle persuasion tried and failed, the government needs to change tack. It should introduce an emergency “revival levy” on cash-rich corporations. This could then be used to finance an immediate payment to those most likely to spend it – those in receipt of tax credit. This would represent a one-off, direct redistribution from the main winners of the 2008 crash and its aftermath to the biggest losers.
A 10% levy on the largest corporations would raise around £10bn, enough to pay each household in receipt of tax credit – a mix of the unemployed and those on the lowest earnings – more than £2,000 (or a smaller amount to a wider group of benefit recipients). This level of demand injection would help break the current economic deadlock.
Of course companies would complain. But an emergency situation requires emergency measures. And there is a clear precedent. In 1997, the incoming Labour government imposed a windfall tax on the privatised utility companies, raising £5bn to finance a job creation programme for the unemployed.
These idle balances can be seen as a form of windfall gain, created in part by successive rounds of cost-cutting which have themselves stifled demand. They have also been boosted by a tax bonanza, with the rate of corporation tax cut from 28% in 2010 to a planned 21% in 2014. Yet this tax giveaway has come with no strings attached. Moreover, as the US Congressional Budget Office has shown, cutting corporation tax is the least effective way of boosting activity.
There would be an element of rough justice in the levy, but much less than the way the pain of the recession has been concentrated on those with the narrowest shoulders. The gains would be realised quickly while the costs would be small. Since the levy would be fully funded (by extra taxation) there would be no additional borrowing to frighten the markets. Business would still be left with record reserves, much higher than those accumulated in earlier recessions. Those at the bottom of the income pile would get a cash boost.
By converting idle money into real spending, the dole queues would shorten, the public sector deficit would fall and the incentive to invest would actually rise. Big business would get money back as the economy revived. The corporate sector would in essence be making a temporary loan to the wider economy and might have to wait a little longer for the tax bonanza. Yes, it would require political courage. But such a levy offers a real chance of rescuing us from persistent slump.