There are 3 ways to cut the deficit – why has Labour chosen the wrong one?

The budget deficit, which has been far more central to this election campaign than it should have been, can be dealt with in three separate ways. It can be reduced by cutting net expenditure either by taxing the poor or by taxing the rich, or it can be reduced by cutting unemployment (the ‘automatic stabilisers’ to sustain the jobless cost £9bn a year per million persons unemployed), growing the economy, raising wages and thus increasing government revenues to pay off the deficit faster.

The Tories once again have chosen the first alternative, making clear that the country is only a third of the way through its toxic regimen of cuts, with at least £25bn still to come, half of which will be levied on reducing disability benefits, cutting back on industrial injury benefits (for which people have paid though national insurance contributions), and clobbering carers’ allowances.

Labour has promised to cut the deficit every year, and its manifesto promises that balancing the books “will require common sense spending reductions”, whatever that means. Presumably this will certainly not include the items in the Tory cuts package, but it is not clear what common sense reductions refers to.

A deficit cutting programme can of course be organised in a very different manner. A financial transaction tax could be brought in in Labour’s first budget before the summer recess (exactly as Osborne notoriously did in June 2010) which even at the minuscule rate of 0.01% would raise £25bn a year. This alone could pay off the deficit, currently standing at £92bn, in less than 4 years. Another option is to replace the council tax, Thatcher’s highly regressive housing tax, by land value taxation which could raise billions largely at the expense of the rentier class. Or the rate of capital gains tax, currently at 28%, could be raised to 40% to match the higher rate of income tax. This is hardly a radical proposal since 40% was the rate agreed by Nigel Lawson, Thatcher’s chancellor. Or the absurdly unfair structure of national insurance, whereby it is levied at 12% on earnings up to £805 a week but only at 2% above that £41,860 a year level, could be largely reversed. Or farm subsidies which give millions of pounds a year to the biggest landowners could be made subject to a benefits cap which is a lot more justified than the households’ benefit cap.

But there is another, and much better, option to clear the budget deficit. Instead of continually contracting the economy by endless cuts, a much better option is to expand the economy through public investment (Labour wisely declined to put a cap on capital expenditure) which would steadily increase the number of full-time well-paid jobs and thus raise wages, boost household incomes, and because people would then spend more it would raise government revenues far more effectively so as to pay off the deficit a great deal faster. What’s not to like about that?