THE BLOG
23/02/2015 11:13 GMT | Updated 25/04/2015 06:59 BST

Should the HSBC Scandal Spell the End For Trickle Down Economics?

Unless our governments begin to pursue methods of wealth redistribution that work in the 21st century, we will continue down a path where the vital economic contributors at the bottom and middle of the ladder are squeezed out of the economy, as our wages continue to be eroded and our debts continue to balloon.

The news that HSBC, one of Britain's largest banks, has helped thousands of its clients avoid and potentially evade tax in the UK through the use of its Swiss Private Bank, has dominated the agenda in Westminster over the past fortnight.

One could be forgiven for thinking that the only significance of the scandal was its provision of ammunition for the successive bouts of political mudslinging between Labour and the Conservatives, with both parties spending the past fortnight accusing each other of having links to "dodgy" tax avoiding donors. The greatest significance of the scandal and the resultant political fallout, however, has arguably been that the whole fiasco has provided a pretty damning indictment of the premise of "trickle-down economics".

Trickle-down economics is a term popularised during United States' Reagan administration of the 1980s and is based on the premise that by relieving economic constraints on high earners and big business, national prosperity as a whole will increase, as it allows their wealth to trickle down throughout the economy. The philosophy was the nucleus of the laissez faire economics that became popular throughout much of the West during towards the end of the 20th Century and has been prominent ever since, as governments have pursued supply side policies such as tax cuts and deregulation as the key methods of boosting economic prosperity.

However, the recent HBSC scandal has exposed some of the fallacies behind this school of macroeconomics, and revealed that much of the wealth at the top has stopped trickling down the economic ladder, and is instead evaporating into thin air and reconverging in offshore tax havens in Switzerland and Turks and Caicos. What's more, comments from several high profile business figures have exposed a mentality that favours allowing as much wealth as possible to build up at the top of the economy, with only the bare minimum trickling back down the ladder. The Tory Peer and former Hedge Fund manager Lord Fink's comments that "everyone does a bit of tax avoidance at some level" revealed just how widespread this kind of mentality is.

While a much less politically contentious issue, the record £5.14bn deal signed for the Premiership television rights and some of the Premier League's chief executive Richard Scudamore's subsequent comments highlight yet more of the flaws behind 21st Century trickle down. When asked whether the riches from the TV deal should be redistributed to ensure that stadium staff received a living wage, Scudamore responded that it "was not clubs' responsibility" to pay staff a living wage. Scudamore's comments provided an example of one of the key failings of laissez faire economics, namely that it is based on the assumption that companies making big profits have the desire to pass this wealth down to the ladder to their employees, an assumption that Scudamore's comments prove, is very frequently incorrect.

Such reluctance to allow increased revenues to trickle down to middle and low level employees is not unique to the professional football. Research from the think tank High Pay Centre has shown that executive pay has grown to almost 180 times that of the average employee, compared to an average of around 60 times average worker pay in the 1990s. Additionally, research form the Resolution Foundation suggest there are more people in low paid work than ever before, despite the fact that the UK has recently been enjoying a level of economic growth that is the envy of much of the G7. This combination of corporations who do not see paying their staff a living wage as a responsibility that lies with them and paying tax as a venture that is purely optional, has counterproductive effects on public finances, as the government continues to spend huge sums on in work benefits, all the while suffering from a dearth in tax revenues due to widespread tax avoidance.

This is not to say that the ideas behind trickle down or laissez faire economic are fundamentally flawed or that we should return to the protectionism and sky high tax rates of the past. What is clear, however, is that the trickle down philosophies that proved so popular during the 1980s have outlived their practicality in an increasingly globalised economy which allows the wealthiest companies and individuals to retain the lion's share of wealth for themselves more easily and efficiently.

The past fortnight has provided a wakeup call to the fact that too much of our economy's wealth is being concentrated at the very top, and unless our governments begin to pursue methods of wealth redistribution that work in the 21st century, we will continue down a path where the vital economic contributors at the bottom and middle of the ladder are squeezed out of the economy, as our wages continue to be eroded and our debts continue to balloon.