Wartime lessons on the deficit (how to cure it, but why bother?)

Published in www.politics.co.uk 29 Feb 2012

During the sadly regular economic crises of the 1970s Denis Healey, as Chancellor of the Exchequer, would receive frequent letters with small gifts of money – not for himself, but to help out the nation. (The senders always received a thank-you and a Premium Bond of equal value to their contribution.) Older people sometimes offered to return their state pensions.

Something tells me that George Osborne today is not receiving as many similar offers – although personal tax rates today are much lower than in the Healey years, when the standard rate of income tax rose from 33 per cent to 35 per cent, falling back to 33 per cent in what was supposed to be the election-winning Budget of 1978.

There may be fewer patriotic taxpayers around now than in the 1970s, when memories of the Second World War were still strong. Many of Denis Healey’s would-be helpers were ex-service people, like himself. However, it would do the government no harm to give the present generation an opportunity to pay more into the national Exchequer. It could put out printed payslips in banks and post offices and public buildings, and invite extra tax contributions online and by text.

Half the total proceeds would be used automatically to pay down the deficit. Donors could direct the other half of their contribution to the Department of their choice, and the relevant minister would specify in advance how it would spend it. In this way, voluntary taxation would not only raise money but extend democratic participation. It would give the Prime Minister useful extra guidance on people’s public spending priorities. He would also discover which of his ministers had the greatest appeal (in every sense) to taxpaying voters.

To make this wheeze still more attractive, all contributors might be given a free entry into the National Lottery (in place of Denis Healey’s Premium Bond), a gift which would cost the Treasury nothing except its administration. The biggest donors might be given a title – perhaps the style of “Right Bountiful” instead of “Right Honourable”, or even a baronetcy, a style actually invented by King James I to raise cash. It might seem tawdry to sell titles for money, but if people are willing to pay for them the receipts should go to the nation not to the political parties.

Any receipts at all from voluntary taxation would be a bonus for a desperate government, but even with all the incentives I suggest they are unlikely to make much of a dent in the deficit.

That is why George Osborne should ask the History section of the Treasury to dust down the files on postwar credits. Introduced in April 1941, postwar credits sought to ease the pain of heavy tax increases during the Second World War, which for the first time touched the earnings of millions of working-class people. The government promised to repay a portion of the additional tax as a “credit”, with interest, after the war. The same promise was also given (and honoured) to businesses for part of the punitive Excess Profits Tax.

Postwar credits were indeed redeemed at the Post Office for many years after the war (often to the great annoyance of people waiting to buy stamps). Originally, credits were paid to people on their retirement, but towards the end of the scheme’s life they were paid on demand to any claimants who could prove their right to them, including the heirs of the original wartime taxpayer.

It should not be impossible to devise a similar scheme today. A post-deficit credit would combine a sharp increase in taxation, to be paid back in part when the Budget deficit is halved. The government would set a time for achieving this and would penalize itself, with a higher rate of interest on the credit, if it failed to meet the target.

Wartime finance produced many other innovations (notably PAYE) and the government could learn a great deal from its history. However, it might make one embarrassing discovery. In 1940 the UK’s national debt stood at 110 per cent of GDP. By 1947 it had climbed to 238 per cent of GDP – a level previously reached only during the Napoleonic wars.

The national debt now stands at around 60 per cent of GDP: the government regards this as calamitous and is determined to drive it down. If the government were right, the country should not have survived the Napoleonic wars, let alone the Second World War. The country not only survived the Second World War but managed to double its living standards within a generation. The governments of the Napoleonic era (created by an unreformed Parliamentary system) did even better, with all their hideous debt. They not only defeated Bonaparte but acquired a global empire and presided over the Industrial Revolution.

Did our ancestors know more about public finance than we do?

01. March 2012 by rkh
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