A Better Approach to Using Fiscal Policy to Achieve Social Aims—Social “Tilting”

Despite the parlous state of Government finances many aspiring claimants continue to queue up to demand their “fair” share of industry bailout money.  Often emotive language is used, suggesting that a failure to act threatens the free world, or words to that effect.   In a 3 February 2009 post on our Social Business Blog we noted that our own social enterprise sector has also pleaded repeatedly for and received Government cash.  I am not convinced that taxpayers have received “value for money” thus far.

Politeness and space prohibit me from detailing examples of waste.  I just am not sure the Government’s approach is likely to succeed.  At present, these include three prongs: social fund creation (e. g. Bridges), direct grants for specific projects and subsidies of certain kinds of activities (e. g. Community Investment Tax Credit).

A detailed critique is not possible.  However, my impression is that the first two give the Government control, which may interest them, but may not best serve the sector and leaves the process open to claims of favouritism.  The first and third have the effect of increasing the supply of funds, which may have the unfortunate side effect of dampening investment returns as the supply of capital exceeds the opportunities.  This is similar to the Government’s subsidy to the mainstream venture capital industry in the form of favourable tax treatment on VCTs, which may have reduced overall returns.

Most critically, these schemes reward activity over results.  We would shift the balance by changing the tax code to reward beneficial social outcomes.  In other words, for those companies which generate positive social externalities would secure a tax credit.  For example, if a company reduced CO2 in the environment, the credit could equal a portion of the savings generated (reflecting the resulting reduction in Government expenditure to comply with climate change treaties).  Such a system could also apply elsewhere.  Imagine a social business, such as the HCT Group, which spends some of its profits to transport the disabled or aged in its communities.  The tax credit paid to HCT would directly reflect a reduced need for Governmental costs.

This scheme might diminish the Government’s control over how to achieve positive social outcomes, but I see this as no bad thing.  Moreover, the scheme could be limited to areas where the Government is already committed to expenditure.  The level of spending would be identical or even lower, given that only a portion of the savings would be credited.

By paying for results, instead of activity I believe we would all see greater value for money.  Another powerful benefit would come from the capital markets anticipating the impact of the credit.  Thus, companies generating social benefits would see their cost of capital fall.  We would also advocate fiscal policies which penalize firms that create negative externalities, such as polluters—so this would raise their cost of capital.  This is already taking place but should be accelerated.

Many questions remain as to how to implement such a system.  However, it would render Government fiscal policy more efficiently targeted and less prone to manipulation.  Companies creating social benefits would be helped while those which cause harm to society would suffer.  What could be wrong with that?

First Published in Third Sector in April 2009.