The crumbling social contract

The crumbling social contract

15 Mar 2017


The Occupy protesters (what was it they were protesting about again?) used to chant “We are the 99%”. The 1% were portrayed as the selfish and/or crooked people who had appropriated most of the wealth. It is demonstrably easy to be part of the 99% – in fact, it’s darned hard not to be. Rarely had so many ever been against so few.

The trouble with being part of a 99% majority is that it is difficult to be focused. Even the French revolutionaries of 1789, who had pretty much the same numbers on their side, could not agree on their objectives and ten years later succumbed to dictatorship (by a chap named Napoleon).

But the recent UK budget, delivered by the harassed Chancellor, Philip Hammond, highlighted one point on which close to 99% of politicians, lobbyists and commentators are agreed. They all have limitless opinions about how public money should be spent but next to no constructive suggestions about how that spending should be funded.

There is no responsibility for funding that is commensurate with the responsibility for spending. This seems unfair because the latter offers all the joys of patronage and moral superiority and the former, as Mr Hammond might agree, is like having toothache in a land of no dentists (whose absence is widely attributed to your own austerity policy).     

I believe that most citizens are supportive of the idea that they should pay their fair share of taxes. But what weakens their support is any suggestion that the government is misusing their money, either by waste and incompetence or by channelling it to family and friends or by funding causes with which they do not agree. (The 2016 EU referendum ticked all those boxes for many people).

There was a great experiment in California in the 1970s that showed what happens when people revolt against their social obligation to pay taxes.


Essentially, Proposition 13, passed overwhelming in a referendum in 1978, imposed severe restrictions on the ability of local Californian politicians to raise taxes. Its genesis was the Howard Jarvis Taxpayers Association.

The US has a history of taxing real estate that goes back to the 18th century. This is a surprising fact for such an ostensibly capitalist nation because property tax is basically a wealth tax which is normally the dream of distinctly left wing politicians. One of the problems with taxing assets is that sometimes people are asset rich and income poor, as discussed here.

This is what happened in California. In the 1960s there were some scandals concerning alleged bribes by businesses to have their real estate undervalued for tax purposes and in response a flat 1% rate was imposed on the owners of homes and businesses alike. And then a boom in real estate prices started in the 1970s which meant that annual property tax bills were rocketing.

And then along came Howard Jarvis. Jarvis was an Orange County businessman who had run unsuccessfully for Mayor of Los Angeles. He felt that “arrogant politicians and insensitive bureaucrats” were raising too much money from property tax. And he had a point. California built up a large budget surplus. Jerry Brown, the Governor of California, though a Democrat, was a fiscal conservative who seemed very comfortable watching the reserves mount. Jarvis managed to raise enough signatures to force a referendum to freeze property taxes at 1977 values.

(Please see this footnote* for fun facts about Jerry Brown and Howard Jarvis).

Proposition 13 passed easily with 63% voting in favour. Not only were property taxes frozen at 1977 values but any state or local taxes thenceforth needed to achieve two thirds voter approval.

The immediate result was a triumph for a populist republican/hippy alliance. In response, Governor Jerry Brown cut State spending and spent rather than hoarded the budget surplus. And people were able to afford to stay in their homes as property values continued to climb.

An important point to note is that when properties changed hands the taxable value was brought up to date (with a cap of 2% per year from 1977). So new buyers had to pay higher taxes. Home owners were obviously incentivised to stay where they were and were later allowed to carry their tax freeze with them if they moved locally. Forty years later, some home owners are still benefitting.

It didn’t take long for the downside of Proposition 13 to reveal itself. The Californian State began to find itself badly underfunded. Spending on schools, emergency services and other public amenities fell sharply. By the financial crash in 2007/8, many districts of California were effectively bust. As Michael Lewis writes in his book Boomerang, the one obligation on which they wouldn’t or couldn’t default was retirement benefits. So the numbers of public sector workers – teachers, firemen etc – were slashed in order to pay the generous pensions of their retired predecessors, many of whom had moved out of the State.

Proposition 13 is an illustration of what happens when the relationship between the taxpayers and the government deteriorates. Mark Paul, who co-wrote a book called California Crackup has identified “a vicious cycle of contempt” created when….

“public distrust of lawmakers leads voters to make major policy decisions via ballot initiative. Ballot box budgeting, in turn, frustrates lawmakers, tying their hands and making it difficult to solve pressing problems, leading to poor governance and angry voters, who return to the ballot box to pass more laws”.


The Conservatives, who had been in coalition with the Liberal Democrats since 2010, were clearly rather pessimistic about their chances of winning an outright majority in 2015. So they channelled the spirit of Howard Jarvis and promised not only a referendum on the EU but also a five year freeze on direct and indirect personal taxation. They were appealing to the many who thought that European politicians and bureaucrats were dreadful and to the sizable number who thought that UK politicians were no better.

Looking back it appears as a rather craven and desperate manifesto and it has arguably taken the legs from today’s government as a result. First it has bequeathed the task known as Brexit and secondly it has embedded the idea that raising taxes is a dirty business.

Here is an extract:

“Our approach is focused on reducing wasteful spending, making savings in welfare, and continuing to crack down on tax evasion and aggressive avoidance. This means that we can commit to no increases in VAT, Income Tax or National Insurance.”

To paraphrase: if the government stops excessive spending and cracks down on people who are unfairly taking advantage of the system, it will not need to raise your taxes. The implication is that government by nature tends to be incompetent and cannot justify taking more in tax from voters. It is arguably inviting the vicious cycle of contempt.

And so it came to pass in March 2017 that the UK Chancellor, innocently or naively, attempted to raise National Insurance payments for the self-employed on the grounds of “fairness”. It certainly wasn’t on purely financial grounds because the net annual amount raised by the measure would be £145 million which pays the interest on the UK’s debt for 27 hours 37 minutes. In the greater scheme of things it is a trivial sum.

I am sure I remember a time when the reporting of a budget was limited to an analysis of who was being “hit” by the accepted perpetual need to raise revenues for public spending. It is only relatively recently that the Chancellor’s budget has been treated as the opening speech in a free-for-all debate. A debate, moreover, in which the most damaging criticism is likely to come from within his own party.

Politicians sense that the implicit contract between the tax-paying citizens and the tax-levying administrators has broken down. This is extremely inconvenient at a time when official national debt is 85% of GDP (having been 40% at the start of the financial crisis). There is surely some causation here. The worse the debt gets the less the politicians are trusted. The vicious cycle of contempt.

Despite the near unanimous denouncement of Philip Hammond, I suspect that the public is quietly aware of the fact that he has been cynically abandoned by the political mob that is only interested in associating itself with popular spending decisions. As I wrote recently, the number of adults who are net takers from the state now exceeds the number who are net contributors. It is quite important to keep the paying minority on side.  


So, our politicians seem to be stuck with “ballot box budgeting” in which every supposedly responsible or difficult decision is liable to be ducked for fear of the electoral consequences. Meanwhile, the public liabilities will continue to mount and the accusations of austerity and underfunding will be unceasing.

If our experience continues to mimic the Californian experience the electorate will display yet more temperamental displays of dissatisfaction. In 2015, Scotland sacked the Labour party and England largely sacked the Liberal Democrats. In 2016 the UK sacked Europe. If the Conservative government continues to hide behind the Bank of England (which has just seen it deputy governor effectively sacked by a morally righteous committee of politicians) I suspect that the electorate will come to despise it for its spinelessness. (As I am about to publish, Mr Hammond has just dropped his National Insurance proposal).

But for the time being, the Bank of England is still up. Its job is to stop interest rates from rising. Fortunately, communicating nothing at length and doing nothing is work at which the Bank excels.


I have been trying to buy in to the rather common belief that interest rate rises are only a matter of time. I have been unable to. I seem to remember that the point of interest rate increases used to be to calm economic growth and – by implication – inflation by making borrowing more expensive. Yet anyone looking for signs of exuberance will be pressed to see much difference between the UK economy and a dead hedgehog.

We have mountains of public and private debt, future care and pension liabilities that are practically beyond calculation and the lowest interest rates in the history of mankind. Anyone who doesn’t realise that there is a symbiotic relationship between this dodgy triumvirate needs to think again. (I’m not sure if you can have a symbiotic relationship between more than two things but let’s pretend you can. Or let’s invent the word symtriotic. I’m easy either way).

Here is a picture of the yield on two year UK government bonds from June 2008 to now. Remember when the financial crisis struck and rates were cut in order to save financial institutions? Then they were cut again to stimulate borrowing. How’s that going? Rates are now at a new low. That’s 0.06% in case you were wondering.  


People might tell you buy bank shares to play interest rises. I wouldn’t bother.



  • Jerry Brown was the 34th Governor of California at the age of 36 and is now the 39th at the age of 78. In 1979 he was the subject of a song, “California Uber Alles” by the Dead Kennedys, which accused him of being a hippy fascist. (I didn’t understand it then and I don’t understand it now). In 2013 he finally brought California’s budget to surplus. Politicians, it can be done!
  • Howard Jarvis has a place in movie history through his one and only role as the taxi passenger in Airplane! The driver (who is also the pilot who eventually saves the plane) starts the meter and then says he’ll be back in a minute. You see the meter ticking up over $100. Eventually Jarvis says “Well, I’ll give him another twenty minutes. But that’s it”. This was a very esoteric joke understood only by those who were familiar with Californian politics. 

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