Letter: Fiscal policy befitting a world of globalised competition

Sir: You are no doubt right (leading article, 30 September) to point out certain basic tenets about prudent taxation. What is missing, however, from the entire debate concerning taxation is a realisation of changed context in which macroeconomic policy must speak in a world of globalised competition.

It was possible through much of the post-war period to follow Keynesian rules of fiscal policy. Keynes saw the problem of the capitalist economy as lack of effective demand which could lock it into a stable position of below full employment. To remedy this he advocated use of fiscal policy - taxation as well as expenditure - to ensure that demand stayed high. Much of this policy was directed towards keeping consumption high. Redistribution instincts chimed happily with needs of full employment.

Today, though we still have a recession, it would be folly to see the British economy's problem as stemming from a lack of effective demand. Even out of the recession, we are unlikely to achieve a level of unemployment below two million. This is because the problem is not lack of demand but exactly the opposite, inadequate supply. Our chronic trade deficit and the present high level of public sector borrowing requirement indicate over- consumption as the problem. The counterpart of this over-consumption is insufficient investment. In a globalised context, there is always a demand for exports if we are competitive. To be competitive we must invest more.

Thus, the first priority is to redirect fiscal policy away from its pro- consumption bias. If, in addition, we should like to preserve the redistributive stance, as I certainly would, it must be consumption at the upper end of the income scale that must be taxed. One way to do this would be to adjust income

tax by allowing for deduction of savings, so that it becomes an expenditure tax. A progressive expenditure tax has a lot to recommend itself.

The current debate has unfortunately polarised as between direct (ie, income) taxation and indirect taxation (ie, value added tax). But even here it is a fallacy to view taxation in isolation from the structure of income entitlements. By increasing entitlements for those at the bottom, but using a broader based VAT, the fiscal structure may be left redistributive while enhancing revenue. It is a second best, of course, but in economic debates crippled with political cliches, one often has to move by subterfuge.

Yours sincerely,

MEGHNAD DESAI

Centre for the Study of

Global Governance

London, WC2

30 September