The Economy and Taxation

Cambridge’s high-tech industry

Cambridge’s development, from a small Fenland market town to the globally-known city it is today has always been fuelled by knowledge and information. Originally this came just from the one University, but has now spread out to include both Universities, the biomedical campus around Addenbrooke’s, the spin-out companies on the Science Park, and the companies attracted to Cambridge because of its environment and workforce. These companies fuel the economy here, and have allowed the City to escape the worst of the recent financial meltdown.

They have also been responsible for our electoral success in much of Cambridge. The influx of well-educated high-tech workers, who generally vote Lib Dem, has changed the demographic in much of the east of the city, especially in areas such as King’s Hedges near the Science Park. They hear our liberal green messages, think about them, and approve.

I have extensive personal experience working in the various aspects of the knowledge economy. As a research scientist, I frequently come into contact with companies in and around Cambridge. I set up my own biotech company, based in St John’s Innovation Centre, and which was awarded a DTI ‘Smart’ award for innovation. Prior to that, I worked for a financial software company, giving me an insight into the IT-driven industry, as well as the financial markets and risk management.

Banks and bonuses

The cycles of boom and bust never vanished, despite Labour’s rhetoric, and the last decade saw the growth of a massive bubble economy, built largely on debt and driven by the banks. In particular, I see the collapse as a massive failure of risk management. It is no satisfaction to highlight how Vince Cable foresaw this!

Drastic action had to be taken in order to prevent wide-spread banking collapse, and I do not object in principle to part-public ownership of banks, especially since we may be able to make an overall profit from this deal. However, using taxpayers money to intervene must come at a price. The economy needs funds to move again, and needs banks to build up their capital reserves so that further support is not required. What it needs rather less is large bonuses to be paid out. I accept that there is an element of performance-related pay in the system, and so would not ban all bonuses, but they should be heavily curtailed, particularly among the better paid, and should be related to longer-term performance, not just the ability to make short-term gains using tax-payer subsidised credit.

An interesting article just launched by nef, the new economic foundation, with whom I am working on community wellbeing issues, examines in detail the social and financial value of bankers to the economy, compared to some other professions – they conclude that bankers destroy 7 pounds of social value for every pound generated. While this analysis is controversial, it does look at a broader spectrum of values than simply finance. The full report is available here.

Green jobs

What then is the future, if banking and the broad service industry is not sufficient to sustain our economy? How do we respond to the pressures of climate change and the need to avoid carbon-emitting industries?

Fortunately, there is an excellent answer to this, and one that Cambridge is already embarking on. Green jobs. Researching, implementing and manufacturing environmentally sustainable goods and products is something we are well equipped to do, and indeed many companies in Cambridge are already doing. This includes companies ranging from Cambridge Consultants, whom I know well and are developing a range of ‘Cleantech’ technologies, to the automotive company Ricardo, who are developing ‘sentient’ hybrid electric cars that drive more efficiently by being aware of their surroundings, and are leading an EU-wide project (‘SARTRE’) to improve the fuel efficiency of trucks.

My own work links in with some of these concepts. Strange though it may seem, DNA is an excellent building block for nanotechnological devices. It is cheap and non-toxic, and uses basepairing to self-assemble itself into almost any desired shape. I have two research projects aimed at using it to assist with solar energy collection. One of these is looking at the possibility of using a particular form of DNA as wires to channel electricity efficiently, and simplify the construction of photovoltaics. The other uses DNA as a template to self-assemble nanoparticles which can capture light very efficiently and conduct it through a solar cell.

A transition to a zero-carbon economy will require investment and manufacturing, and Cambridge is ideally placed to benefit substantially from this – as Cambridge’s MP, I would stand up for this, and encourage companies and entrepreneurs here to move towards green employment.

Taxation

This country suffers from a highly complex tax system, which leads to people paying very high marginal rates of tax on relatively low incomes. This is then coupled with a baffling tax credit system, the confusion of National Insurance, and many special cases and loopholes, to produce an overall package which is expensive to administer (especially if the costs of avoiding tax are included), and much less progressive than it ought to be.

I have argued for many years that we need to simplify the tax system and lift the level at which people start to pay tax. I was delighted when Gordon Brown announced in 2007 that he was going to scrap the 10% starting tax rate, as I had campaigned actively for that. However, I meant scrapping it by reducing it to zero, rather than putting it back up to the full rate.

One area where marginal tax rates are a particular problem is at the very bottom end of the income scale, particularly with people who are on benefits. If they do work, the benefits are significantly reduced, leaving them only slightly better off than if they didn’t work. There are some very interesting arguments for having negative tax rates at very low income, so that such people would be encouraged back to work. One might offer, say a 10% tax bonus, which would gradually be reduced as their income increased. I suspect such an approach would save a considerable amount of money on benefits, as well as getting people back into work and reducing long-term unemployment. However, there are a number of technical issues surrounding it, which would have to be addressed before it could be implemented.

Council Tax

Council Tax is unfair, inefficient and expensive. Under the Council Tax regime, people on lower incomes are forced to pay a higher percentage of their income as Council tax. I have encountered many people in Cambridge who faced charges well in excess of 10% of their income. It is particularly hard on pensioners and other people on low fixed incomes, because it rises faster than the rate of their pensions. It also forces Counci ls to make the impossible call where services provided for the most needy can only be paid for by billing those very people by disproportionately high amounts. Worse, it is expensive – it costs over 500 million pounds a year to run the system, along with the intricacies of Council Tax benefit. This is simply wasted money.

I absolutely support proposals to replace this outdated tax with a fairer income-based tax, so that people who earn less do not end up paying a higher tax rate than those who earn more. It will be both fairer and cheaper to run, as it won’t need a separate collection system from national income tax.