Legal & General chief executive's three steps to fiscal fortitude

After a decade of wage decline and falling tax receipts, it’s no surprise the deficit is proving hard to clear. Here’s a solution, says Nigel Wilson

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The Independent Online

Public spending and government deficits are going haywire. However, three simple measures would enable the Government to get spending under control, fund tax cuts and still protect essential services like the NHS.

The right package would include pension tax reform, welfare reform and a massive programme of regeneration for our cities.

The problem is rooted in the consistent, decade-long decline in real wages. Too many workers are low-paid, part-time or self-employed, paying little or no tax. No surprise, then, that income tax receipts are at least £20bn behind the Office for Budget Responsibility’s 2011 forecast, and the £100bn-plus annual government deficit is proving stubborn.

The Party Conference season nevertheless triggered a bidding war. David Cameron promised £7.2bn of tax cuts in the next parliament. Everyone vowed to protect or increase NHS spending. No one explained how this is to be funded. Ed Miliband forgot the deficit altogether.

In France, President Hollande has simply said “Non” to the eurozone’s 3 per cent deficit limit rule. Politicians know austerity loses votes, and messages about sound economic management, even recovery, mean little when real wages continue to decline. For voters, not all 3 per cents are the same: 3 per cent GDP growth plus 0 per cent real wage growth is less attractive than 1 per cent GDP growth plus 2 per cent real wage rises. In the UK we have the former – hence the growth without votes.


Superficially, this may not matter so much. Capital markets aren’t punishing high-spending governments or rewarding thrift, and central banks can print digital money if they need it – the UK’s quantitative easing programme has created £375bn this way. But with all debt, there comes a day of reckoning – not necessarily as governments default, but as they pass on indebtedness to individuals and families. So we need to try to help governments balance the books: their debts are ultimately our debts, or our children’s.

Reform Pension Tax Relief

The first reform to enable the UK Government to get spending under control would be to make pensions tax relief fairer. The current arrangements, whereby higher-rate taxpayers get tax relief at their marginal rate of tax, is expensive and unfair. More than 70 per cent of the tax subsidy goes to higher and additional rate taxpayers, and 20 per cent of the relief goes to just the top 1 per cent of earners.

Moving to a standard tax relief rate of 25 per cent would be fairer, would give a bigger incentive to those who most need to save for old age, and would cut the Government’s bill by about £8bn annually. Like the now-forgotten abolition of mortgage tax relief, it would be initially unpopular with richer voters, and politically difficult. But it will happen at some point anyway: parties should be upfront about it in their manifestos.

Reform Contributory

Welfare Benefits:

‘Beveridge 2.0’

We need to reform welfare. Contributory sickness and unemployment benefits cost the Government over £5bn annually. They’re complicated to administer and are not genuinely “contributory”– merely another aspect of tax and national insurance. They could be replaced with a simple insurance-based solution that uses the structures put in place for pensions auto-enrolment – a policy that is working astonishingly well.

A genuinely contributory system would give people the same or better income replacement than the present contributory welfare system. For the average earner it would cost less: £10 a month, or around the same as a couple of lottery tickets a week. The savings made could be used to cut national insurance contributions for low-paid employees and smaller businesses: NI is a tax on jobs and an unfair drag on individual earnings for the lower-paid.

Rebuild Britain’s Cities

Regenerating cities and infrastructure will take longer, but it dwarfs the other reforms in terms of potential benefits. If the result is a (very conservative) 1 per cent rise in GDP, the public sector deficit will soon start to be eroded. Over time the effect will start to cut into the much bigger structural deficit, for which the Chancellor has promised £40bn of cuts in the next parliament.

Cities drive growth, and devolution is the key to unlocking it. The man from Whitehall does not always know best, and empowering capable local leaders in cities like Manchester, Liverpool, Leeds, Newcastle, Cardiff and Glasgow can give core cities the freedom to push on with privately funded regeneration. The capability is there: Ian Stewart, the Mayor of Salford, is just one example of a civic leader with a vision and a growth agenda – to build a digital media centre around the BBC – and we are proud to be helping him.

The money exists in the institutional sector: we have $15bn invested in overseas bonds – much of this can be brought back onshore to invest in real assets in the UK. Our 2,000-plus international clients, including sovereign wealth funds and pensions, have much more. They need to be encouraged to invest alongside British institutions – the UK is a great place to invest.

Investment on this scale would give the Government a sustained lift to GDP growth and to the tax take. It would also address the huge disparity that exists between London, as our premier city, and the others. This is worse than in any other developed country: we need to be more like the US or Germany, where the economy is driven by much more than just the capital city.

None of the changes are too difficult. We have started on some already. Each combines greater discipline in public finances with benefits for the individual and better overall growth in jobs, take-home pay and the economy.