There is an urgent need for a complete revamp in the existing models
of public finance. Most countries across the world are relying on
borrowing as one of the principal means of funding their ever-growing
expenses. It has brought the public debts to levels that are
completely unsustainable for too long.
Developed countries like Japan, Italy, Greece, Portugal, Ireland and
United States have debt levels that are more than 100% of their GDP.
The UK, Singapore, France and Canada are not much better either with
their public debt of more than 80% of their GDP. This debt is ever
increasing. Most countries are struggling to meet their immediate
obligations, something which has led to the crisis.
The past few years has seen a slowdown in many large economies. In
order to boost GDP, governments resorted to an increase in government
spending. It has been a recipe for disaster that has brought
significant increases in overall public debt.
Traditionally, taxes have been the mainstay of public finance. Taxes
across most European countries have increased significantly to the
level that they are impeding growth. Many governments are doling out
subsidies, unemployment benefits and welfare schemes, which indirectly
promote idleness and inefficiencies.
Vedas, traditional Indian scriptures, say that government should
collect taxes like a honeybee collects honey from flowers. The bees
take the honey without damaging the flowers and aid in growth and
reproduction. Governments of today need to follow a similar tax model
to run economies efficiently.
The United Kingdom has individual tax rates ranging from 20-50%, VAT
of 20% and Corporation Tax of 20-25%. In order to boost economies,
governments should plan to reduce overall tax rates. This will also
take away the incentive of wealthy individuals to sink their funds in
While individuals and corporations are heavily taxed, charities are
enjoying many tax benefits. They are exempt from tax on rental income,
tax on capital gains, Stamp Duty, Land Tax and others. Government can
gain substantially by rolling back some of these exemptions,
particularly on incomes such as on capital gains and rental income.
Similarly, it´s time to review tax exemptions on donations to
In the Indian Union Budget released on March 16, the government
introduced an innovation which made sale of residential property
exempt from capital gains if the amount is invested in a small
business. It will pave the way for higher investment in businesses
from sale of residential properties. Such an initiative in European
economies will promote investment in businesses and reduce burden on
banks for mortgage loans.
The benefits system in the UK needs a complete overhaul with tax
credits, housing benefit, child benefit, disability living allowance,
income support, incapacity benefit, jobseeker´s allowance and council
tax benefit costing over $100bn every year. Many of these benefits can
be scrapped or reduced without causing grave discomfort to people.
This would also help in reducing the budget deficit to manageable
The government should plan public finance like a professional
corporation with a focus on corporate social responsibility. It should
invest in promoting innovation and building sustainable small
businesses. Countries in Europe, and especially the UK, have realised
that the solution to current issues lies outside Europe.
In February 2011, the UK Secretary of State for Business, Innovation
and Skills, Vince Cable, presented a paper entitled Trade and
investment for growth to parliament. The paper laid out the
government´s plans to encourage exports from the UK, enhance inward
investment and to strengthen international trading systems. With the
support of government, over 20,000 SMEs have ventured into new
international markets and have secured over £800m of high value
opportunities overseas in just one year. These initiatives give much
better return on investment on government expenditure.
The UK was always one of the most important foreign direct investment
destinations in Europe. Government should make every endeavour to
promote investment within the country. The investment of $15 billion
by Indian industrial group Tata has made it one of the largest
industrial employers in the country with over 45,000 employees. It has
also helped British brands like Land Rover and Jaguar expand into
fast-growing Asian economies.
In Budget 2012, George Osborne had to announce some bold and
potentially unpopular changes to increase government earnings while
achieving economic growth and cut borrowing to £126billion. If it
eventually achieves what it sets out for, it may be a step in the
right direction. Higher income tax for senior citizens and middle
class is set to be an unpopular move. Perhaps the government feels
that unlike higher taxes on industry, widening the tax base to
individuals is not likely to scuttle growth.
Governments need to have a firm resolve to set their house right in
managing public finance. Solutions to current and future public
finance issues are possible with innovation, strategic thinking and a
long-term vision. The road ahead might be bumpy but the only way to go
now is forward.
Frank-Jürgen Richter is founder and chairman of Horasis, a global
Horasis is a global visions community committed to enact visions for a sustainable future. (http://www.horasis.org)
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