A community fund could save social democracy

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The Independent Online
"Suppose that instead of nationalising selected industries in the 1940s, the Labour government had simply taken a small stake in all publicly quoted companies . . ."

Now that all political parties embrace the market economy, what of substance separates them? There is, surely, one thing at least. The Left still believes that a few of the products of a modern economy should be available to all citizens on broadly equal terms.

Conservatives accept as inevitable that money will always buy better education and health. The Left, however, thinks equality of opportunity is desirable - and that dictates, if not equality of access to education, at least universal access to quality education. Similarly, in health the Left believes access should be on the basis of need, at least for critical care, not of ability to pay. Another area where it is widely accepted that citizens have equal rights and claims on resources is security and law, though practice falls short of the ideal.

These aspirations seem still to be shared by a majority of the public. While many left-wing ideas have been in retreat these past two decades, the popularity of the National Health Service and the ideal of free, universal, comprehensive education have persisted. If the Left has appeared to be in retreat in these areas too, the problem is one of practicality, not one of philosophy or popularity.

If people wished to spend a constant proportion of their income on services such as education and health there would be no problem. Tax revenue that was a constant proportion of gross domestic product would finance public expenditure on those services. However, that crucial assumption does not hold. It is true that the proportion of national income devoted to education has fallen since the 1970s, but a consequence has been growing dissatisfaction with state education. And in all countries expenditure on health tends to rise as a proportion of GDP as GDP itself grows.

Labour-intensive services such as education offer less scope for productivity growth than manufacturing industry, so the relative cost of providing them tends to rise, and with it their relative price. Over time, therefore, they take up a larger part of the budget. Moreover, as people get richer, their aspirations for health and education may grow disproportionately quickly.

That gives rise to a central problem of modern social democracy. Political resistance to a rising tax burden ultimately limits the growth of universal entitlement to health and education, which therefore cannot keep pace with people's rising aspirations. The state then contents itself with providing a "basic" universal service. Higher quality services are purchased by individuals according to their means. Slowly the political support for basic provision is eroded and it becomes a slum service.

This may not matter to Conservatives; indeed it sharpens incentives in the money economy. However, to offer anything distinctive, the Left must avoid that outcome. There is a way: the state or the public must have a source or revenue, other than taxation, that grows over time so as to finance any growth in educational and health services above that of the economy as a whole.

Suppose, for example, that instead of nationalising selected industries in the 1940s, the Labour government had simply taken a small stake in all publicly quoted companies. No attempt need have been made to interfere with the running of these industries in any way. The state would have operated like a particularly sleepy pension fund. It would simply have collected its dividends (and taken its losses - it would be a limited liability investor so no support is implied for any failing company). A passive investment policy of investing equi-proportionately in all quoted companies would have seen the stake rise with the total capitalisation of the stock market.

The community revenue from this fund would have risen in real terms at about 7.5 per cent a year, significantly faster than the real growth rate of GDP. The Conservative governments of the 1980s could have achieved something similar by selling only 80 per cent of public utilities and reinvesting the funds in other industries.

None of this need or should have affected the operation of business in any way. The management of these funds would have been contracted out to fund managers. Politicians and corporate management need not even have known at any time what the community holding of a company was.

The basic point is this. Income comes either from labour or the ownership of capital. There is a political limit on the proportion of labour income that the community can take to finance collective consumption. To finance rising collective consumption, the community then needs a claim on some of the national wealth, a community fund. This has nothing to do with old socialist notions of control and, far from being inimical to dynamic market capitalism, depends on it.

Can this situation now be brought about? Clearly, it can happen, if at all, only gradually. The accumulation of the community fund would take a long time and it must, therefore, enjoy a political consensus that would survive changes of government. However, public support for the NHS and free education is strong; the consensus may be possible.

The Government could feed such a community fund by restoring the effectiveness of inheritance tax. Of all taxes, this one has the least disincentive effect. Indeed, it encourages industry at the expense of idleness and corresponds strongly with most people's idea of fairness. The tax used to raise about £2.5bn a year back in the 1970s. That has fallen to about £1bn because of loopholes. If the loopholes were closed, the tax could yield an additional £2bn a year, which could be hypothecated to the community fund. If the principal dwelling or the first half million pounds were excluded from tax, there would be no popular resistance. Wealth would continue to "cascade down the generations", as John Major wanted, but some would cascade in the name of the community.

That may be the best that could be done. Suppose, though, that a government wished to get the ball rolling faster. It could do so by means of a one- off wealth levy. That would require extensive consultation to find a fair, practical and unfrightening method. As an illustration, if all publicly- quoted companies were required to make a rights issue of a couple of per cent of their share capital, in favour of the community fund, that could raise over £10bn at a stroke. Dividends would be diluted by only a couple of per cent - less than 10 basis points off the dividend yield, an amount insignificant in relation to normal market fluctuations.

Moreover, the money would not leave the market, which could furthermore look forward to a net injection of some £2bn a year from inheritance tax proceeds. The promise of a major new investor offering City firms more cash to manage would probably make the market rise.

For a small sacrifice, by a class of people who have done very well over the past two decades, important social aspirations of a majority of the population could be met. If this could be agreed and arranged, social democracy would be saved.

The author is director of the Institute for Public Policy Research