THE ECONOMY

Underground, the capitalists are flourishing

ARTHUR SELDON

The British economy is in better much better — shape than politicians, pundits and preachers (of all denomina- tions) proclaim. And capitalism re-asserts its creative powers by spawning new mar- kets to reflect embourgeoisement and tech- nological advance at a rate unprecedented since (or before) the Industrial Revolution. Total output is growing faster, industry is prospering more, earnings are higher, un- employment is lower, much lower, and poverty is less common than the profes- sional gloom-mongers assert.

They are deluding themselves and mis- leading the rest of us because they are still reflecting, at first or more probably third hand, the official government statistics. Whatever the reasons — high taxes, rebel- liousness against oppressive regulation, natural cupidity — many people are work- ing and earning, buying and selling, saving and investing, even exporting and import- ing, without reporting to the authorities. They have evidently come to write off the law-makers, regulation-enforcers and tax- gatherers as obstructors, inquisitors (this was an objection to Pitt's original income tax in 1798), officious bureaucrats or im- pertinent autocrats. Lord (Douglas) Houghton, one-time general secretary of the Inland Revenue Staff Federation (and chairman of the Parliamentary Labour Party) was moved to warn, in 1979, of pushing 'the disciplines and fiscal exactions and enforcements' too far. 'There now exists a precarious balance between bureaucracy and the public.' In 1986 exac- tions and enforcements are still resented.

Government has, by now, unintentional- ly created an 'underground' that must be included in judging the activity and per- formance of the economy as a whole. In 1978 the then chairman of the Inland Revenue opined, in evidence to the House of Commons Expenditure Committee: 'I think avoidance has become a national habit' A year later his successor ventured an estimate: he thought that tax was evaded on the equivalent of about 71/2 per cent of the gross national product.

Since then an estimate by Professor Edgar Feige has arrived at 15 per cent. That seems to me nearer to the real proportion. And, if something is added for barter — transactions without the use of any kind of payment, which are undetect- able because it can be regarded as free services between friends as well as evasion of tax — the total could rise to 18 to 20 per cent.

If total economic acitivity is anywhere near a tenth or a fifth more than the recorded output and incomes, the attempt by government to manage or guide the economy will be in error, certainly in magnitude, possibly in direction. Much of it is inspired by the anxiety to contain and reduce unemployment. But this is the official statistic that is the most misleading of all. The explanation is again the under- ground.

When Kent Matthews of the University of Liverpool calculated that 1.4 million of the 'unemployed' were happily hard at work, full time or part time, and paid in cash, the figure was met with some disbe- lief. Now it has been virtually vindicated by the ORC (Opinion Research and Com- munication) Report in May and by Lord Plowden's Committee for Research into Public Attitudes the other week.

We have been mesmerised by the totem pole of 'three million' whose regular appearance is met by ritual Pavlovian Labour-Alliance denunciation or Con- servative apologia. An economy that ex- ports a fifth of its GNP to pay for imports required for production as well as con- sumption could do with a fifth of its workforce moving around between home industries in response to uncontrollable overseas markets. That makes five million.

The underground will not evaporate in response to castigation as evil law- breaking. Some of it is. Most of it is in the direct line of Wat Tyler's rebellion from Kent in 1381, the bloodless Glorious Re- volution of 1688 against the divine right of kings to tax (inter alia), and the declaration of independence by the British in the American colonies against taxation with- out representation. The instinct of the British against the arrogance of office thwarted Napoleon and Hitler. It should be cherished, not least because the present British Tax Revolt has been fomented by political misjudgment in over-taxing.

The British do not want to pay higher taxes for more of the same Welfare State. The opinion polls that find they do are seriously misleading all the political par- ties. Lord (Joel) Barnett, Chief Secretary to the Treasury under Wilson and Cal- laghan, has honourably conceded (Econo- mic Affairs, forthcoming) that it took Labour a whole year of over-spending in 1975 before it realised that the taxpayers would not foot the bills.

The attitude to the underground will have to change. It may add no more than 10 per cent or 20 per cent to the GNP but it envelopes more than one in ten or five of the populace. Tax rejection has become part of the culture. The British no longer regard what is legal as necessarily moral, nor what has been outlawed as necessarily immoral. How many taxpayers can say they have never understated their income or overstated expenses in earning it?

Legal repression will not suppress the underground: new ways will be found around new proscriptions, and they will be a step or two ahead of the new laws. Unfortunately for government, tinkering with taxes will not evoke much response either: habits (skills? ingenuities?) will not be abandoned except for sizable cuts in taxes.

Uniil then the solution may have to be an amnesty for all (except the criminally inclined). After all, the underground large- ly comprises the most adventurous, risk- taking opportunists, whose qualities could invigorate the respectable but too often complacent conformists who are more in- terested in the old Tory virtues of continui- ty, custom and tradition, and are generally fearful of change, than they are attracted to what I would call the Whig virtues of scepticism of authority, a preference for liberty over egalitarianism, and a predilec- tion for small government that knows its modest place in the affairs of men.

A final note of cheer for the Prime Minister. Her honest repeated confession of failure to reduce government expendi- ture could be unnecessary. If the under- ground has grown appreciably since the 1979 election, the proportion of taxes and government spending to real output may not have risen by much.

The Chancellor, or the Chairman of the governing party, might ask the officials to catch up with the economists who have been estimating anything from 5 per cent to 30 per cent for the OECD under- grounds. Better still, since officials may not want to discover too much that has eluded their scrutiny, perhaps un-officials could be better placed to secure the Prime Minister her third term.