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Sharing the economic cake post-crisis

Neil King, Director, CERT Ltd.

I'm worried. Really worried.

The countries economy has been in partial lockdown for over ten months now and the cost will be unlike anything this country has seen since the second world war.

"We're all worried" I hear you cry and I understand that but let me explain what is really concerning me.

During the ten years of austerity, the funding available to third sector organisations was decimated. Estimates vary and I haven't been able to find any definitive numbers, however, academics estimate the sector's income diminished somewhere between 15 to 25%. Given the precarious state of the sector's finances before the cuts, that impact cannot be underestimated.

To put it into perspective, the income of the sector in England and Wales was around £77.4bn in 2017/18. Without those cuts, it could have been nearer £100bn* - just imagine what we could have achieved with that level of extra funding.

And this wasn't the first time this has happened.

I've been unfortunate enough to be around for the two recessions before austerity and every time that fiscal savings needed to be made the third sector was first to the wall. This occurred even when the demand for support from deprived communities soared.

Einstein says that doing the same things over again but expecting a different result is madness. Taking a few liberties with his wisdom, expecting a different result from the cuts that are about to hit us would equally be madness.

Like most people in the third sector, I have spent a career chasing tiny crumbs from the public table to carry out work to support our most disadvantaged communities and individuals and constantly being pushed to the back of the line. We were always told that the money tree had been stripped bare and there was no more money to be had.

At the time of writing, the U.K. the government is spending a staggering £280bn on measures to fight Covid-19 and its impact on the economy.

That includes £73bn for measures to support jobs such as the furlough scheme, where the government pays most of the wages of employees who cannot work.

At this point, I just need to say that I'm not having a pop at the current government for its financial handling of the current pandemic. I guess the enquiries will come later and I'm happy to wait for their conclusions in the fullness of time. What I am saying is that when push comes to shove, the economic arguments that have stifled us (the need to "balance the books" for example) can be thrown off the bus in spectacular style. The money tree was apparently bigger than we were told.

I'm not for one moment suggesting that the scale and nature of the spending during a global pandemic have any relationship to levels of support for the sector - just that when needs must, all things are possible and that given the comparatively minuscule investment required from government to gain substantial benefits, its time that the sector stopped being the financial patsy.

My point is that it has never been the absence of resources that has prevented the government from supporting the development of the sector, it has been a choice.

I firmly believe that this crisis has caused enormous damage to the fabric of our society and will take decades to repair. The obvious cost in terms of employment and debt is only the start.

Somehow we are going to have to rebuild confidence, tackle social isolation, combat increased domestic violence, build a civil society, rebuild the health sector, create jobs and sustainable support mechanisms and that's just the starting point. While all this has been happening we have taken our eye off the ball of what was considered the greatest threat to humanity; global warming and its impact.

I think that some of the best organisations to tackle those issues are the third sector - and that's why I'm worried.

Just as we are most needed I'm afraid history will repeat itself and yet again, we will be the first target for cuts.

We need a way to re-balance how we allocate resources based on what is most effective in tackling the huge crisis we are about to face and to ensure that money is spent on what works, not on what we have always done.

For me, the first obvious move is to ensure that every person and organisation contributes its fair share into the pot.

In the U.K. we have used the taxation system to incentivise the behaviour of the private sector for generations. If we want them to create jobs we invent a tax discount in the expectation that we will get more jobs. More often than not we create perverse incentives that companies use to evade tax.

Having done this for generations we have created a system that is too complicated to effectively scrutinise and have become one of the worlds tax-havens.

Our taxation system is so perverse that we have an industry whose sole purpose is to help organisations evade taxes.

Big corporations simply use the system to "legally" not pay taxes.

If you think that's a bit dramatic take a look at this.

The top five tech companies operating in the UK managed to generate profits estimated at £8.1bn from UK customers in 2018, a new analysis by TaxWatch shows.

However, due to these companies implementing complex financial structures to take these profits offshore, these companies only paid a combined total of £237m in taxes on these profits in the UK, an effective tax rate of just 2.9%. That puts the total amount of tax avoided by the companies in the UK at an estimated £1.3bn in 2018, the latest year where figures exist.

And that staggering figure is from just five companies. The global corporate tax system loses an estimated $500bn (£395bn) to avoidance. The amount dodged globally each year is more than three times the NHS budget or roughly equivalent to the entire Gross Domestic Product (GDP) of Belgium. Tax haven territories linked to Britain are responsible for around a third of the world’s corporate tax avoidance.

The argument that keeps this inequality in place is that if we make them pay tax the corporations will simply move out of the U.K. Given that companies like Amazon for example, already operate of Luxemburg, you can make your own mind up about that.

If the system is too complicated to stop these abuses simply replace all tax incentives with direct, performance-based grants and monitor those grants effectively - it works in our sector.

So what is my point?

  • The current crisis has cost the country billions that will have to be re-paid

  • If history repeats itself the third sector will suffer unduly, just as it is most needed

  • We need to prioritise spending to ensure that key issues are prioritised and that we are able to scrutinise those spends and perform proper cost/benefit analysis

  • Much of the gap in the countries finances could be filled by simply ensuring that the corporate sector pays taxes like the rest of us.

Finally, this crisis has revealed the inequality that exists in our society and how that impacts on the most disadvantaged when something like Covid occurs. If we learn nothing else from this we must ensure that we re-build a fairer and more equitable society going forward.


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