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Why cuts on this scale aren’t only unnecessary but counter-productive too

There’s a big story with a long backwash behind today’s latest official economic data. The figures show real disposable income (the berst indicator of household economic well-being) fell 0.8% in the fist quarter of this year. Reason: higher costs of fuel, basic goods and VAT exceeding the squeezed rise in pay. As a result consumer spending dropped by 0.6% for the second consecutive quarter. Result: Mervyn King (and everyone else except perhaps Osborne) believes that the fizzling out of consumer confidence will keep household spending flat or negative for at least the next year, and with consumer spending flatlining or more probably falling and UK export markets damped down by severe internal problems in both the US and EU, there’s no hope of a recovery for a long way ahead. So much for Osborne’s private sector surge substituting for the public sector squeeze. But was all this inevitable? Not for several reasons.

One reason was indicated in other official figures released last week. The National Audit Office has been examining controversial tax deals made by HMRC with multinationals after the £1.2bn tax settlement with Vodaphone which many believe should have been nearer £6bn. What was discovered was that HMRC is currently involved in no less than 2,721 disputes with the UK’s biggest businesses over levies due from Corporation Tax, petroleum revenue tax and insurance premium tax among others. The disputes involve 770 companies where the HMRC has reason to doubt the accuracy of their tax returns, and the total tax payable at issue is £25.5bn. That is not far short of the £32bn spending cuts which Osborne is imposing this year.

This is not an academic point. £32bn of aggregate demand would not need to be taken out of circulation if multinational companies were made to pay the tax due from them, or if the 0.1% hyper-rich whose wealth ballooned by a staggering £300bn between 1997-2010 were forced to pay their fair whack, or if the insidious culture of tax avoidance/evasion by the banks and big business’s massive use of tax havens were stamped out. Of course even the toughest measures will still be partly circumvented by some tax fraud tricksters (other wise known as some blue-chip top companies and their accountants), but the extra revenue to HMRC would still be huge and thus obviate most of the destructive spending cuts which are currently killing the recovery stone dead.

And it would help for a start if the engine of this revenue take-up were being strengthened rather than squeezed. There have been big staffing reductions at HMRC from 99,179 in 2004-5 to 68.037 by June 2010, and during that time total tax revenues have been falling. If eve there were a more perverse way of running the economy, I would be interested to hear it.

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