How to balance every budget, guaranteed

In today’s issue:

A plan to balance the budget
But how does it work?
Who would you vote for?

It’s proving nigh on impossible to keep up with the news this month. By the time I write something, the world has changed. Sometimes radically. So, let’s consider something of a very different sort for your weekend reading: a tax plan that guarantees balanced budgets, every year.

It might sound politically implausible to achieve. But one look at Argentina has encouraged me to dream how the UK may yet escape its own fiscal nightmare someday too.

One thing is for sure. We can’t go on borrowing like we have been. Not unless inflation is allowed out of the box deliberately, again.

So, how do we stop?

How can we ensure that politicians don’t build up dangerously large debts?

My idea is to adjust tax rates to balance the budget each year.

It’s quite simple, really. At the end of the tax year, the Treasury figures out what the total cost of government spending was. And HMRC adjusts tax rates accordingly to whatever they need to be to pay for spending. Thus, we get a balanced budget every time.

No doubt you’re laughing with relief that such an idea could never even be considered. Imagine having to actually pay for Labour’s upcoming budget spending!

And yet, hear me out…

What if people had to pay for government spending?

Before I mention a few more details about the plan, and deal with some of the objections you’re going to email me at [email protected], consider the impact of such a system on political incentives.

How would you vote in an election if you had to pay for government spending out of your pocket at the end of the year?

Then again, of course, it goes without saying, you personally vote for a party that is a paragon of fiscal responsibility already…

But what about your neighbours? Do they think money grows on trees? Are they happy to leave future generations with crippling debt? Would you like them to get a whopping tax bill for the ridiculous policies they backed to make them realise the truth about government spending?

A tax system that adjusts tax rates for government spending radically changes voting incentives. People would vote for governments that are financially prudent and highly predictable. Or they’d have to pay for it.

Of course, there are times when governments should spend a lot of money. During a war, for example. And you could suspend the system to allow borrowing during such emergencies. But that’s beside the point.

A tax system that adjusts taxes to pay for spending would link the cost of such spending in our minds. I believe this is precisely the sort of political awakening the country needs if it is going to elect sensible politicians that stop spending so much money.

But how would it actually work?

Let’s start with the simplest form as an illustration. The income tax rate is legislated to be whatever percent is needed to balance the budget. Let’s call it x%.

At the end of the fiscal year, we provide our incomes to HMRC and the Treasury totals government spending. Then HMRC calculates the tax rate needed for the two to balance and sends each of us the bill.

We repeat the process each year. And the x% goes up or down depending on how much the government spent.

Of course, the actual system would work differently in many ways. But that’s the basic idea.

A government that spends a lot of money would be forced to send a whopping tax bill. A government that is frugal would tax less. Each year, it’d be slightly different.

Don’t misunderstand me

You may not like the idea of a whopping tax bill at the end of the year. Indeed, the Australian news feed is currently dominated by whining young taxpayers who have discovered they owe even more tax after doing their end of year “tax return”.

But this objection is easily overcome in all sorts of ways. The country could apply last year’s tax rate during the year and then balance the books at the end, for example.

Then people would get money back if their government spent less than last year, or have to pay a top-up if it spent more than last year. Again, that seems like a rather good set of incentives for a political system, if you ask me…

Another possibility is for Treasury and HMRC to estimate the x% rate needed and make small adjustments at the end. We could update the estimates quarterly, or come up with any manner of other ways to avoid a surprise at the end of the year.

What about tax brackets? Am I proposing some sort of flat tax?

Again, that’s not the point. You could easily sustain the same tax brackets we have today. If we want to mimic something like the current system, the first tax bracket would be taxed at rate x%, the second at x+20% and the third at x+25%.

This would give you a similar structure to what we have now. In a year where x must be 20% to cover government spending, our tax bracket rates would be exactly the same as they are now.

What about the national debt?

That’s beside the point. The country could decide to sustain the current debt at current levels, slowly letting it inflate away to insignificance. That’s what we did with our Napoleonic War debt.

Or we could commit to repaying it slowly as part of government spending. It wouldn’t really affect the new tax system I’m proposing.

But you would think our interest bill would be radically lower under such a system of balanced budgets and far more responsible politicians…

Obviously, I’m only dreaming about all this. Although several US states do have balanced budget amendments that require the state to keep things under control…

Regardless, the UK is in for a major fiscal crisis at some point. And maybe people will want a system that really does force politicians to balance the books someday?

The alternative certainly looks more painful.

Let me know what you think by emailing [email protected] with your permission to publish your thoughts under your initials.

Until next time,