7 June 2018
The fate of the UK family silver
What would you do with £400 million?
by Frank O’Nomics
Fancy paying some extra Council Tax to help your cash strapped borough? I thought not. How about giving the state a slug of cash to help the ease the burden of the National Debt? From most the response will be the same, assuming it is possible to overcome incredulity at such a suggestion. The recent announcements from both Westminster and Islington Councils that they would be giving wealthy residents the chance to overpay their Council Tax seems largely to be based on wishful thinking, or a desire to make a point about the disparity in the tax burden between rich and poor. Yet there is a precedent that goes back less than 100 years, where wealthy people did willingly give money to the government in the cause of repaying the National Debt. Not only that, but amazingly the money donated is still held in a fund for that very purpose. The size of the fund has grown to £400mn, and now the attorney general wants to get his hands on it. The question is – should he be allowed to have it?
The National Fund for the Redemption of the National Debt was set up in 1927, with charitable donations from those who sought to help defray the great cost of the First World War. The National Debt rose from £650mn in 1914 to £7bn by the end of the war and a number of wealthy donors (mainly Scottish Presbyterians) together with veterans and the families of the bereaved gave generously to create a £500,000 fund. It might seem reasonable to some that this money is now used to reduce the National Debt, but there are some issues with this. First, why use it now, when there have been much bigger debt crises in the past (such as in 1978 when we went cap in hand to the IMF)? Second, is spending the money to reduce, rather than repay, the National Debt in the spirit of the original donations?
In the scheme of things, the £400 million that the fund has now grown to is pretty insignificant when compared to the size of the National Debt, which currently stands at £1.77trn. The rate of growth of our debt has slowed in recent months and looks like coming in somewhere below recent OBR forecasts. This has encouraged some commentators to contemplate tax giveaways in the next Budget. While the Chancellor may want to achieve a balanced budget by 2020, that is a long way off actually repaying any debt.
Successive governments have been content with the size of our debt, as long as it increases at a slower rate than GDP. If there is no appetite for longer-term frugality to repay it, it seems somewhat disingenuous to blow the legacy. £400mn, when compared to the rise in debt in April of £7.8bn, covers less than 2 days of that increase, or just 0.0002% of the total debt figure. It is fair to assume that those who gave to the fund might be a little disappointed in what it ultimately achieved.
There are a number of alternatives to throwing the money into the black hole of debt repayments. The first is to leave it invested in a fund. One could argue for a more adventurous risk profile, and a number of people have produced interesting estimates of how much more the fund could ultimately be worth. Tim Harford has calculated that, if the fund were to increase at a rate of 3% greater than GDP, it would grow to cover the national debt after around 3 centuries. Such calculations are nothing more than a bit of fun but, given that the fund has already been in existence for one third of that period, there is still a point to be made. The other alternative is to give the money to other charities. Given that the initial money was in the form of charitable donations this would seem appropriate. The obvious recipients would be armed forces charities, given that man’s inhumanity to man created the need for the original fund. If the £400mn was invested in a permanent endowment it could potentially generate £10-15mn of grants for charities every year in perpetuity, which would seem a much better, and lasting, use of a legacy inspired by true altruism and patriotism.
Any additional council tax raised in Islington will be put into the Fairer Islington Fund, a charitable body that will provide early intervention and prevention service to local residents. It would be nice to think that they will raise a reasonable sum, but I suspect otherwise, given that in Westminster just 2% (350 residents) of those regarded as wealthier households paid the suggested £833 additional tax. Why not focus on using cash that was previously given for the greater good for exactly that – helping those that most need it. As we come towards the 100-year anniversary of the end of WW1, there is an opportunity to use some money, which was generated at the time, to help correct the problems it created. It would be a great shame to miss that opportunity.