Saturday, October 18, 2008

Time for a Global Debt & Tax Holiday

assuming, that is, we want a "soft landing" and speedy recovery...

It is profoundly revealing that $2 Trillion of public monies has been found, so quickly, to rescue the rich when, for the past 50 years it has proved so difficult to find much smaller sums to rescue the poor. Perhaps it's time for a partial rebalancing of that equation.

One can't help noticing that this huge safety net has been prepared for the exclusive benefit of the money men who steered us into this mess. Their principal victims - homeowners and other individual debtors - are being left to pick up their own pieces. Seems to me that this is a fundamental injustice. What's good for the geese ought to be good for the ganders. With that in mind, I propose a two year debt and tax holiday so that we ALL get some of the benefits.

Anyone who cannot afford repayments on current debts should be offered the option of a debt holiday. Not for free of course. If we did that then everyone with a debt would suddenly decide they could no longer afford the repayments.

The creditor can add reasonable interest to the loan so that, in effect, if you take a two year holiday, at a reasonable rate of interest, then once you resumed payments, it would take you perhaps an extra two and a half years to pay off the delayed payments. Something like that.

No doubt there'll be some haggling but now we've accepted we're all in this together (and we have accepted that - haven't we?) then I'm sure that the vast majority of reasonable human beings (both creditors and debtors) can approach this proposition with good will.

A reasonable constraint on the debtors, should they choose to take a debt holiday - with ANY of their creditors - would be an undertaking (on penalty of cancellation of their holiday) not to incur any further debt with any other creditor until they've either cleared their debts or at least resumed normal service of those debts. (There could be exceptions to that, where both creditors and debtors agree the viability of new loans)

This measure would have the immediate effect of sharing the benefits of the global $2 Trillion bailout of the credit industry with the homeowners and other overstretched debtors at the bottom of the financial food chain who would otherwise lose their homes, businesses etc while the fat cats struggle by on a reduced ration of cream.

More practically, stretching the credit this way (essentially a massive rescheduling of private debt) would dramatically reduce the default rate and help to maintain the integrity and viability of the credit market (largely by preventing the Credit Default Swap scam - which we discussed a couple of weeks ago - from being exposed as an insurance bubble)

However, in addition to relieving the pain of debt, and sparing the blushes of the derivative traders, it will also help - a little - to revive the marketplace - which urgently needs to maintain the trading cycle (or, in some cases, to restart it) albeit on a more sustainable basis. The funds that would have been going to loan repayments will now be available to buy at least the essential goods and services that people need to maintain their normal standards.

To go beyond that and stimulate a genuine revival of the marketplace, or at the very least significantly mitigate the otherwise very painful recession, I propose a two year VAT/Sales Tax holiday.

This is the most effective and easily implemented tax cut that we could dream of. Unlike any other tax cut, the taxpayer can't "cheat" by saving instead of spending (the reason for which, economists argue, other tax cuts don't necessarily promote economic growth). You only get the benefit of this tax cut by spending! It just means you get more bang for your buck. It would immediately slash high street prices by significant amounts (on average about 15% across Europe)

It would be relatively trivial for businesses to implement - they simply tell their Point of Sale and Accounting software that the Standard rate of Tax is now zero %.

Governments will still want to collect the data of course, but that's no biggie. I don't know a businessman who wouldn't happily send in the quarterly Tax return if he no longer had to send a cheque with it!

From that data, the government can calculate exactly what their Tax receipts would have been and issue bonds to the money market to finance the shortfall. Yes, that does mean an increase in government borrowing, but that - as governments around the world are acknowledging - is the sensible option in the circumstances. as it would prevent drastic public spending cuts which would otherwise fuel the downward spiral.

While I was drafting this over the weekend, the UK political parties were coming up with their own diluted versions of these proposals. The Tories were punting a VAT delay of six months and the Government were pleading with lenders to scale back on re-possessions.

Both these feeble approaches are like throwing a cup of water into the flames when we need a couple of dozen fire-hoses. Delaying VAT payments for 6 months will cause more problems than it helps. If small businesses are in the kind of trouble in which this kind of cash flow assistance is necessary, then, obviously, they'll spend the money - and won't have it on hand to repay at the end of the 6 months - leading to a wave of additional defaults then.

But, in addition, merely delaying VAT payments won't have ANY effect on the market - because prices would have to stay right where they are (because the Tories want the tax collected eventually). So as well as storing up a bigger debt problem in six months, we'll have done nothing to stimulate the market. FAIL!

Simply pressurizing lenders to reduce their pressure on borrowers is, first and foremost, inequitable. If the big players are being recapitalised at public expense, and having their debt rescheduled, renegotiated and/or forgiven, why is it even possible for those same lenders to penalise their borrowers? The conditions for this rescue package should have included stipulations for similar treatment to be passed down the line.

And, again, merely reducing pressure doesn't free up the funds. And, as the government trumpets its rediscovery of Keynes , when the market is about to take a dive, we need to sustain spending, not reduce it. The debt holiday will release funds for that spending.

Still, it's encouraging that they're at least thinking in the right direction. We might be pushing at an open door. Nevertheless, putting their sticking plasters onto the compound fractures of the global economy isn't going to help. We need to allow time for the system to heal.

Two years of the FULL debt and tax relief treatment and we will be on the other side of this black hole we seem to have dived into. It could be the difference between a mild recession and a severe depression. Which for millions of people around the world might also mean the difference between Life and Death.

1 comment:

Anonymous said...

Pardon me, good sir, while I briefly hijack your blog.

To those that may find this blog in the future, I feel compelled, for reasons beyond my full understanding, to at least inform you that between myself and the good Mr. Stottle, a glorious solution to all the world's problems had been found. Regrettably we failed to record our realizations in either a permanent electronic, or physical form, and thus the world will have to trundle along, making due with whatever the half-wits in charge come up with.

Onward to financial ruin!

(And Happy Hallow'en!)