Why Should I Pay for Other People's Bad Debt through My Taxes?
Introduction
The United Kingdom officially entered recession for the first time since 1991 in the final quarter of 2008, when GDP ("Gross Domestic Product") fell by 1.5%, compounding a fall of 0.6% in the third quarter and satisfying the official definition of recession; contraction in GDP for two consecutive quarters. Public sector net debt in January 2009 stood at just over £703 billion, or 47.8% of GDP – already higher than the 46.2% peak recorded during the recession of the early Nineties – and at the time of writing, the British Government had already borrowed just over £67 million – or nearly three times more than the corresponding period in 2008 – in 2009. The impact of the so-called "credit crunch" and plummeting stock and housing markets, together with largely ineffective budgetary decisions on the part of the Government, have left the British economy in a sorry state, and made the headline question all the more poignant.
Recession, Fiscal Policy & Taxation
Britain is, of course, not alone in her economic plight; France, Germany, and even the economic superpowers of the United States and Japan are in recession. It is the handling of the crisis by the British Prime Minister, Gordon Brown, and Chancellor of the Exchequer, Alistair Darling, and their increasing reliance on the British taxpayer which is the main bone of contention however.
In October 2008, Mr. Brown unveiled a plan, funded by the British taxpayer, to bail-out Royal Bank of Scotland (RBS) and Lloyds Banking Group – formed by the merger of Halifax Bank of Scotland (HBOS) and Lloyds TSB – to the tune of £37 billion. That move, alone, was – according to Treasury figures – the equivalent of an 11p rise in the basic rate of income tax, if the money was to be paid back in a single year and saddled a generation of British taxpayers with an additional tax burden.
In his Pre-Budget Report in November 2008, Mr. Darling announced an economic stimulus package worth £20 billion in total, which included a temporary cut in the standard rate of VAT, from 17.5% to 15%, for a period of 13 months. The Prime Minister later admitted, however, that a plan to raise the standard rate of VAT to 20% or more was discussed before being rejected. Mr. Darling offset the VAT cut by increasing duty on petrol, alcohol and tobacco, and also increased National Insurance contributions for employers by 0.5%. Furthermore, he also announced a new 45% income tax band for those people earning more than £150,000 per annum – effective from 2011 – and the phasing out of personal allowances for those earning more than £100,000 per annum.
As if public borrowing and the exposure of the British taxpayer to potential losses were not high enough already, in January, 2009, Mr. Darling further announced that the Government was revising the terms of its bail-out of Royal Bank of Scotland and increasing its stake in the institution to nearly 70%. Combined bail-out efforts, and the underwriting of so-called "toxic" – that is, potentially financially ruinous – assets accumulated by banks during the "boom" years, are likely to add between £1 trillion and £1.5 trillion to the national debt – equivalent to between 70% and 100% of the GDP – and expose taxpayers to hundreds of billions of pounds in potential losses, if defaults on these debts occur.
The long-term hope is that the Government will eventually make a profit by selling its major holdings back to private investors, but until it can balance its books – which may take another 6 or 7 years – increased taxation, and decreased public spending are its only real options.Desperate times call for desperate measures, it is true, but there is a school of thought that suggests it may be better and less expensive in the long-term, to allow banks to go bust rather than subject British taxpayers to a reduction in their standard of living for the next 20 years or more. Banks did, after all, expose themselves to enormous liabilities in foreign currencies and there is no guarantee that the huge amount of public money "gambled" – to all intents and purposes – on rescuing banks will have the desired effect; full nationalisation of the British banking system is still a real possibility.
Banks, of course, have not been the only subject of Government bail-out in recent months. The British car industry – much of which, nowadays, is foreign-owned – has been offered credit by Business Secretary, Lord Mandelson, once again at the expense of the British taxpayer. The simple answer to the question, "Why should I pay for other people's bad debt through my taxes?", therefore is "You shouldn't.", but unless there is a dramatic shift in Government policy – towards competition, entrepreneurism and cutting, rather than increasing, taxes – or a change of Government, British taxpayers are likely to be doing so for the foreseeable future.