Tories must face the taxing realities
Where do the Conservatives stand on the issue of tax? With the increased possibility of a Conservative Government in power by next June, Dr Eamonn Butler looks at how Cameron could deal with the mess we find ourselves in.
Another week, another Tory tax pickle.
Last week, David Cameron said that the top rate of income tax might have to go up to 45 per cent. His core supporters were not best pleased – add national insurance, and top earners would be seeing two-thirds of their incomes disappear in tax.
This week, Ken Clarke put his Hush Puppies in it, saying that the Conservatives might abandon their pledge to scrap inheritance tax for most people. That didn’t go well with the core voters either. Nor with the millions of middle-class folk who see Gordon Brown grabbing 40 per cent of the family home when mum finally shuffles off.
Tax has troubled the Tories ever since David Cameron became leader. The focus groups told them firmly that the Great British Public simply doesn’t believe that you can cut taxes and improve public services at the same time.
Cameron was desperate to show that his party was caring, concerned, and committed to public services. So he and his Treasury spokesman George Osborne refused to talk tax cuts, however much their voters grumbled about it.
But with the threat of a snap election in autumn 2007, Osborne had to say something about tax. So, at the Conservative Conference, he muttered that, just possibly, and on a good day with a fair wind, he might, maybe, just think about potentially ending inheritance tax for anyone who wasn’t actually a millionaire.
That produced an immediate surge in Conservative poll ratings that took the leadership completely by surprise. They started to see the wisdom of keeping their core supporters sweet. And yet Ken Clarke’s gaffe shows they are still in two minds about tax.
Their problem is the huge hole in the public finances. Conservatives don’t like taxes, which they think stifle the work ethic and economic growth. But they don’t like governments being in debt either.
And this Government is in debt up to its ears. Taxes have gone up by half (in real terms) since 1997, but public spending has expanded even faster.
Gordon Brown has plugged the gap with borrowing, and then more borrowing – so much, in fact, that the International Monetary Fund has been warning him about it since 2003.
It’s profligacy, not prudence, and it’s left us in the world’s fifth largest public debt hole. The Chancellor, Alastair Darling, says that he owes 41 per cent of GDP – £41 for every £100 we earn. But then he and Gordon Brown have taken on lots of other commitments that he doesn’t mention.
I researched the figures for a new book, The Rotten State of Britain. They are truly staggering. There is the cost of all those new schools and hospitals, paid for on tick under the Private Finance Initiative. Guarantees to Northern Rock and Bradford & Bingley, plus other massive bank bailouts. A £21bn guarantee on Network Rail’s borrowing. A £70bn bill for decommissioning nuclear power stations. Those alone more than double the Government’s debt to 89 per cent of our national earnings.
But dwarfing all of these is £1,000bn of pension promises to public-sector workers, and even more for the state pension promised to every retired person.
All in all, I figure that the Government actually owes five times what Alastair Darling claims – a real national debt of £275,000 for every household in Britain.
Getting us out of a debt hole that size won’t be easy. The Brown-Darling policy of simply spending and borrowing even more in the hope of staving off the evil day is a bit like trying to cure a hangover by hitting the bottle all over again.
The Conservatives’ poll lead makes them pretty sure that, sometime around June next year, they will find themselves saddled with this problem.
The only ways of plugging the borrowing gap are to spend less, or tax more – or both. But they are anxious not to be branded as heartless cost-cutters, and don’t want to raise taxes either. Hence their confusion.
My advice would be for them to stick to their principles. They should say firmly that it was big government, big spending, and big borrowing that got us into this mess – and only less of all that will get us out. That Keynesian public works schemes actually cost jobs rather than creating them. That Brown’s cheap-money boom was a disaster and that we need sound money that keeps its value. And that if we are to create jobs and rebuild, we need less regulation, not more of it.
Cameron worries that bringing the public budget back under control will mean massive disruption and perhaps unrest, as it did in the early 1980s.
He’s right. But then the painful adjustment of the early ’80s was followed by a decade of enormous and real prosperity as the economy righted itself. The hangover cure will be unpleasant. But it is the past excesses that make it inevitable.
To order a copy of The Rotten State of Britain by Eamonn Butler from the Yorkshire Post Bookshop, call free on 0800 0153232 or go online at www.yorkshirepostbookshop.co.uk. Postage and packing is £2.75.
Dr Eamonn Butler is director of the Adam Smith Institute. His new book, The Rotten State of Britain, is published by Gibson Square, price £12.
Published in the Yorkshire Post here.
Nanny state Britain is killing common sense
Regulators may have our best interests at heart but whatever happened to looking out for yourself?
Thank goodness. At last we live in a world committed to saving workers from industrial injuries. Like deafness resulting from working in noisy factories. The 2005 Control of Noise at Work regulations promised just that.
Trouble is, the crowd noise at Old Trafford quite often exceeds the regulations’ 90-decibel limit. So Sir Alex’s boys ought to be wearing earmuffs. And when the London Philharmonic strikes up the 1812 Overture, they should do the same.
But regulators are reasonable people, and have given the arts and entertainment sectors two years’ grace to solve their problem. Their problem? It’s the regulators’ problem. When bureaucrats in Whitehall dream up general rules that are just daft in particular circumstances, they should say sorry, and end the damage there and then.
The rules may be simple but simple rules don’t fit a complicated world
But they don’t. The Care Standards Act 2000 forced the closure of hundreds of care homes whose layout doesn’t match their pedantic standards. So if your granny’s room is only 14.0 square metres instead of the 14.1 specified, she’ll have to move – or go back to an NHS ward where she has no room at all.
The Childcare Act 2006 makes nursery providers sign up for a 148-page book of ‘education’ guidelines. All the staff need criminal record checks, of course – you can’t just leave your kids with people you trust. Student flats are now scarcer and costlier because landlords now have to fill out a 32-page form and cough up a £1,000 registration fee. Many find it easier not to bother.
How did we get into this mess? Our government authorities aren’t bad people. They want us to be safe. And they try to make the rules simple. But simple rules don’t fit a complicated world.
They also fear that they will be sued when accidents happen. You’d think firefighters would be pretty nifty with ladders, but they’re not allowed to use your stepladder to fit a fire alarm in your flat. That contravenes the working at height regulations. Don’t even suggest that they stand on a chair. So just put the alarm back in its box and hope you don’t have a fire.
But of course it’s us, the taxpayers, who have to pay for the compensation culture. Our education authorities shell out £2m a year in accident claims – like the £5,000 pay-out to a kid whose finger was hit by a cricket ball, £13,000 to one who tripped up, and even £6,000 to one who was injured while breaking into the school one night. And that’s chicken feed compared to the £600m paid out by the NHS in negligence claims.
It seems we all thing we have a right to act stupidly, while others bear the cost. A caretaker sued his school for £50,000 because he fell off a stepladder – although he’d been using stepladders for 30 years and had been given safety training. Whatever happened to looking out for yourself?
The determination not to be sued means that public bodies have no concept of what constitutes a reasonable risk these days. So the organisers of a Christmas party in Embsay village hall were told they needed a full risk assessment, and nut allergy warnings on the mince pies. Schools have banned playground football. Clowns in Zippo’s circus couldn’t use trumpets in a three-minute sketch because they’d need a music licence. Manchester taxi drivers cancelled their annual outing for needy kids because each cab would need a risk assessment, each child would have to be accompanied by an adult, and each adult would need a six-week criminal record check.
So in the cause of trying to make our lives 100 per cent safe, the regulators reduce our amenity, kill off village life, encourage us to take silly risks, and rob our kids of their childhood. Frankly, it’s the regulators who should be wearing earmuffs, because the rest of us should be shouting abuse at them as loudly as we can.
Believers in free markets are fighting back
“If you bound the arms and legs of gold-medal swimmer Michael Phelps, weighed him down with chains, threw him in a pool and he sank, you wouldn’t call it a ‘failure of swimming’. So, when markets have been weighted down by inept and excessive regulation, why call this a ‘failure of capitalism’?”
That view, expressed by the George Mason University professor Peter Boettke, found much favour among the free-market eggheads who assembled in New York this weekend to discuss the financial crisis. Up to now the Keynesians have made the running. Greed, they say, has brought down the world economy. Only massive public spending can revive it. And with the Masters of the Universe now gasping on the floor, the G20 summit in April will give them a final kick in the tax havens. That’ll teach them.
But now the believers in free markets and small government have regrouped. The meeting was called by the Mont Pelerin Society, founded in 1947 to preserve liberal ideas. Early members included Milton Friedman, F.A. Hayek and George Stigler. Their view – as expressed by The Ascent of Money author Niall Ferguson – is that capitalism isn’t dead, though the global banking regulations embodied in Basle 2 should be. It took regulators ten years to perfect Basle 2, but far from making things safer for bank customers, it pushed banks to the brink of ruin.
When the banks discovered that their “assets” were riddled with junk, everyone ran scared. Nobody knew exactly how “toxic” it all was, so the banks couldn’t unload it on to anyone. Their “assets” became worthless. Under the Basle rules, they had to stop lending. Hello, credit crunch.
“This is a balance-sheet crisis,” the billionaire and former presidential candidate Steve Forbes told the gathering. “If you had to sell your house today, you wouldn’t get much for it. That doesn’t mean it’s worthless.” Banks are largely solvent – it’s regulation that threatens to bankrupt them.
“We need to sell off, split up or close down the zombie banks,” says Bill Beach, senior policy boffin at Washington’s Heritage Foundation. Next, he says, we need to encourage business, not load it, like Michael Phelps, with burdens. That means lower taxes, particularly business taxes, and less of the regulation that discouraged firms employing people.
Occasional crises are the cost of the prosperity that entrepreneurial capitalism brings. Try to eliminate risk, and you eliminate entrepreneurship itself.
A Labour-made crisis
Yes, Sir Fred Goodwin’s pension is a scandal. How can someone who brought his company to near collapse walk away, aged just 50, with £703,000 a year? But would I tear up the contract? No, I wouldn’t. A deal is a deal. If the minister, Lord Myners, was foolish enough to sign it – without even giving himself a cooling-off period, which of course the banks have to give their customers – then I’m afraid that he and taxpayers are stuck with it.
What revolts me more is Harriet Harman’s declaration that, whatever the legal position, Goodwin’s pension can’t survive the “court of public opinion”. I don’t see Harman and friends deferring to the court of public opinion. If they did, they’d all have resigned long ago, probably when Blair took us into Iraq.
People should not be robbed of their lives, liberty, property, or even their pensions by a “court of public opinion”. That’s something for a court of law. An eagerness to replace the rule of law by this rule of public prejudice is one of the most gut-wrenchingly illiberal features of this government.
Sir Fred Goodwin made some big mistakes. Buying the Dutch bank ABM Amro was one. This pig-in-a-poke was stuffed full of US sub-prime junk that cost the Royal Bank of Scotland £16.2bn. But, until then, everyone hailed Goodwin as a financial genius. He made the RBS a major economic force, employing 180,000 people worldwide. It was the backbone of the economy, particularly Scotland’s economy. In 2007 it paid £1.7bn in tax. A high-spending chancellor must have been grateful.
If Goodwin had stood on the brakes back in 2007, I’m sure he’d have been out on his ear with a pension of tuppence. But back then, the government was pouring rocket fuel into the economy, and the sky seemed the limit. Of course it all exploded. But that’s down to Gordon Brown’s imprudence, not Goodwin’s.
There certainly is something wrong about Goodwin’s pension, and the other astronomical sums that corpora-crats pay themselves. It’s the fact that company law gives shareholders – the real owners of Britain’s businesses – far too little say. So Goodwin is rewarded, while people who loyally invested in his business see their shares fall by nine-tenths. But that’s something the lawmakers must sort out.
While they’re at it, politicians should sort out their own pensions scandals. They’ve promised hugely generous pensions – usually two-thirds of final salary, index-linked, of course – to more than five million police, judges, mandarins, BBC staff and other state employees. These civil-service pensions cost taxpayers more than £20bn a year. That’s a total liability of £1,261bn, which works out to a £47,998 debt on every household in the country.
Why is council tax so high? Partly because we’re paying for all those retired council officers. Why is Britain’s policing so feeble? Well, much of the police budget goes to pay the pensions of 140,000 retired officers rather than the wages of the 165,000 serving ones. Some forces actually pay out more in pensions than they do in wages.
A top civil servant like the head of the Department of Work and Pensions – the person in charge of paying married couples their state pension of just £145.05 a week – can expect to retire with an inflation-proof pension of 18 times as much, £138,000 a year.
Nice work, if you can get it. But most of us can’t. In 1997, Britain’s private company pensions were a huge success, worth more than the rest of Europe’s put together. Gordon Brown thought they could well afford his technical “dividend credits” manoeuvre that netted him £5.3bn and rising. But over the last dozen years, that’s amounted to £175bn taken out of the pockets of pension savers – a tax of £16,600 on every saver.
Today, just half of the 100,000 pension schemes of 1997 still exist, and few of those are taking on new members. Less than half of private-sector workers are now paying into a pension. With the economy suffering, this “public affluence, private squalor” is causing real resentment. No, if you want to make money these days, the only thing to be is an MP. You can fiddle your expenses, employ your family and buy a second home at taxpayers’ expense without even facing suspension, never mind jail. And the final-salary pension scheme is, naturally, fabulous. Even beats being a banker, doesn’t it?
We’ve all been made criminals
What’s frustrating about our slide into a police state is that most people haven’t even noticed it, while the rest have actually welcomed it. Sure, 9/11 and the London bombings leave no doubt that terrorism is a real threat. But then the sweeping powers we’ve given our police and politicians to deal with it are an even bigger one.
Ordinary, upright citizens are now spied on, stopped and searched, arrested at gunpoint, DNA-swabbed and criminalised, for no good reason other than that some officer of the state has the power to do it, and is incentivised to do it.
The ink was hardly dry on the Terrorism Act 2000 before it was used to arrest Dundonian Sally Cameron, 34. Her crime wasn’t some conspiracy to blow up Dundee; it was daring to walk along a cycle path. Two squad cars roared up on her and she was carted off to the cells.
Then octogenarian Walter Wolfgang, who had escaped the Nazis and become a Labour activist in Britain, was arrested under the same law for merely heckling Jack Straw at a Labour party conference. That’s the Jack Straw who wrote last week that his party had extended freedoms, not curtailed them.
Really? The Terrorism Act allowed the government to designate areas where the police could stop and search suspects at will. Fine, you might think, if they see people acting suspiciously outside nuclear power stations. But no. Ministers instantly declared the whole of London a stop-and-search area. Now thousands of law-abiding folk are stopped and questioned each year – even a cricketer who was asked to explain why he was carrying a bat, and an 11-year-old girl, stopped and told to empty her pockets.
Another octogenarian, John Catt, was picked up by the cameras that monitor every car going through the City. He was on police files because they’d nabbed him once before – outside the same Labour conference – for wearing a T-shirt saying George W Bush and Tony Blair were war criminals. Could be offensive, they said.
Charlotte Denis, 20, was arrested at a game fair on the same charge. Her “crime” was to wear a “Bollocks to Blair” T-shirt. She refused to remove it, having only a bra underneath, so was nicked.
Researching a book, The Rotten State of Britain, I struggled to work out how we had got into a state that makes criminals of us all. It’s not that politicians want to control our every move. Rather, they demand wide powers to deal with crime, believing they will use these appropriately. But give people power and they use it.
Particularly when they are incentivised to use it. Police commanders can get up to £15,000 in performance bonuses, depending partly on how many people they spot-fine, charge or caution. Officers have monthly targets; they do not want to prevent crime but to make criminals of us.
It’s much easier to pin a criminal record on someone like bus driver Gareth Corkhill for overfilling his wheelie bin, than it is to catch terrorists. And yes, local councils use antiterrorist powers to snoop on us, even for overfilling our bin.
A decade ago the police could arrest us only for serious crimes. Now they can arrest us for anything. Swinton man Keith Hirst, 54, was accused of dropping an apple core, refused to pay a spot fine – you can be fined by police and 1,400 other officials without any legal process – and got cuffed and held for 18 hours in the cells.
You’re not even safe in your home. In the past 12 years, officials have been given 550 powers to enter your house: to check if your pot plants have pests, your hedge is too high, confiscate your fridge if it doesn’t have the right energy rating, and yes, photograph and seize your rubbish. Resist, and it’s a £5,000 fine. Your name, address, and even your DNA will be put on the police database. Even if you’re cleared, you’ll have a fight to get it off. That’s why our DNA database is the world’s biggest.
We’ve done the terrorists’ work for them and surrendered our freedoms. But at least there’s now a debate, like this weekend’s Convention on Modern Liberty. The former MI5 chief Dame Stella Rimington says we now have more to fear from our police state than from terrorism. The information commissioner Richard Thomas complained that the surveillance state was making suspects of us all.
What’s to be done? We need leaders farsighted enough to place limits on their own power. They must revive the independence of parliament, the civil service, the courts, the press and local government as constitutional safeguards against central control.
We need locally elected police chiefs, paid to cut crime rather than harass innocent people; councils that decide and pay for their own priorities, rather than Whitehall’s; the scrapping of spot fines and random searches; and human rights law in favour of due process, with trial by jury, presumption of innocence, habeas corpus and the other ancient rights that protected us from the arbitrary power of our leaders.Then we’d have some hope of making the state our servant again, rather than our master.
Has Keynes trumped Adam Smith?
The problem today is Keynesian-style policy, the darling of the establishment politicos and media giants: big government solutions, deficit spending, easy money, bailouts. Keynes has suddenly trumped Adam Smith. And that’s dangerous.
One day last week, I walked into the largest Barnes & Noble bookstore in New York and saw a big display table up front with all kinds of books on John Maynard Keynes and Keynesian economics. One book, The Return of Depression Economics, was written by Paul Krugman, the caustic New York Times columnist who just won the Nobel Prize.
Another book was called The Case for Big Government by Jeff Madrick, the editor of Challenge magazine. I can understand writing a book in support of good, efficient, strong, and productive government, but “big” alone? Most Americans prefer the motto “cheaper and better.”
The biggest surprise at Barnes & Noble was to see my own book, The Big Three in Economics, prominently displayed along side all the Keynesian and Marxist books. It has suddenly become my most successful book.
But mine was the only book there that took a dim view of Keynes and Marx and their solutions to the financial crisis (always more government, more taxes, and more regulations). For my money, Adam Smith and his followers (Ludwig von Mises, Friedrich Hayek, Milton Friedman, Murray Rothbard) deserve to be on top of the Totem Pole of Economics.
Unfortunately, Keynes is all the rage now. The British economist became famous in the 1930s for advocating going off the gold standard, running deficits and bailing out troubled banks with easy money as a way to end the Great Depression.
Today’s politicians, from George Bush to Barack Obama, have suddenly become Keynesians during this financial crisis, spending money they don’t have in a vain effort to right the ship. Even Newsweek has gone so far to say, “We are all socialists now.” Alan Greenspan, the ex-student of Ayn Rand, now favors nationalization of the big American banks Citibank and Bank of America.
Every investor and gold bug should know the enemy: Keynes, the advocate of big government and the welfare state, and Karl Marx, the radical who advocated outright state socialism and total central control of the means of production.
After World War I, Randolph Bourne observed, “War is the health of the state.” Today he might say, “A financial crisis is the health of the state.”
It looks like modern-day statists are getting their wish. We’re getting big government, good and hard. Adam Smith and Milton Friedman are out of favor, while John Maynard Keynes, the patron saint of bailouts, inflation, and the welfare state, is making a comeback with a vengeance.
The tentacles of the leviathan state are growing by leaps and bounds. In 2009, global governments will be the largest shareholders in commercial banks, reversing 20 years of retreat by the state. The costs of entitlements are exploding upwards, and Congress hasn’t had the courage to address future liabilities. Social Security and Medicare are government-sponsored Ponzi schemes that will make Bernie Madoff’s embezzlement look like a picnic.
The late management guru Peter Drucker said, “Government is better at creating problems than solving them.” In fact, wrote a cynical Ducker, government has gotten bigger, not stronger, and can only do three things well — taxation, inflation, and making war. According to Drucker, the state has become a “swollen monstrosity….Indeed, government is sick — and just at a time when we need a strong, healthy, and vigorous government.” (He said all this in 1969.) If you want to solve problems, he counseled, you must turn to business and the private sector.
But where does one get the straight scoop on Keynes, Marx, and their nemesis, Adam Smith and the followers of free-market capitalism?
I have no apologies for where I stand on the issue. In writing The Big Three, I commissioned a Florida woodcarver, James Sagui, to create “The Totem Pole of Economics.” (The Tolem Pole of Economics is shown on the back cover of the book.) Clearly, my hero is Adam Smith, the author of The Wealth of Nations, published in 1776, a declaration of economic independence.
Adam Smith, the 18th century philosopher, is on top of the Totem Pole for his advocacy of a revolutionary new doctrine which he called a “system of natural liberty,” what we might call laissez faire or free-market capitalism. He used the “invisible hand” to symbolized how the private actions of individual entrepreneurs would lead to the public good.
Today’s advocates of Smithian economics have real solutions to the crisis, as I’ve outlined in previous HUMAN EVENTS columns: suspend “mark to market” accounting rules, make the Bush tax cuts permanent, slash the corporate tax rate, and mostly importantly “do no harm.” Also, it wouldn’t hurt to take a look at the Canadian banking system, ranked #1 in the world in soundness (US is #40) for its conservative reserve requirements and nationwide branching. (Not a single Canadian bank has failed in either the Great Depression or now.)
Keynes is ranked below Adam Smith, because he supported big government and the welfare state as a way to stabilize the crisis-prone capitalist economy, the “middle ground” between laissez faire and totalitarian socialism. But as we have seen, Keynesian activism has led to much mischief in the world today, and countries that have adopted his bureaucratic, regulated mindset have witnessed “slow growth” and “stagflation” style economies.
And Marx is the “low man” on the Totem Pole. His radical solution, government ownership and control of the production, distribution and consumption of goods and services, would be, as Hayek says, “the road to serfdom.”
Adam Smith and his “system of natural liberty” have come under attack many times by his arch enemies, the Marxists and Keynesians. But Smithian economics has nine lives, and has always managed a comeback. With your help, Adam Smith will return.
Click here for a copy of The Big Three in Economics.
The rise of Mugabenomics
Of course, Alastair Darling has been denying for the last month that he’s not going to print money to get us out of this jam. He doesn’t want people to suspect that we are doing a Zimbabwe or a Weimar Republic – turning out so much cash that it soon becomes worthless. That would ruin savers and truly mess up the economy. Indeed, the mere threat that the government would risk it could make things worse – it would suggest that the situation was even worse than we feared, that the government was no longer creditworthy, and that everyone should sell Britain’s currency before it’s too late.
So Alastair Darling might just like to hang on to the jargon ‘quantitative easing’, which he’s now given the Bank of England the green light to do – because it masks the inconvenient truth that, yes, the government is indeed printing money.
Another reason why that’s worrying is that it’s a last-ditch remedy. We’ve tried cutting interest rates to stimulate things. Now they’re rock bottom, but people still aren’t borrowing to buy new cars or bigger houses, and the banks aren’t exactly helping either. So like a cancer patient who’s tried everything and resorts to experimental drugs, we’re now resorting to experimental financial cures.
Of course, these days it is nothing so crass as just inking up new tenners. Instead, the Bank of England will press cash into people’s hands simply by buying assets from them. In practice, it simply buys assets like shares and mortgage contracts from the banks. That gives the banks cash they can lend to the rest of us. We go out and spend, and the economy revives. QED.
The Americans have been doing this for quite a few months already, though there is little sign of borrowing getting easier or spending going up. Japan’s experience isn’t heartening either: in response to the earlier crisis there, the central bank spent furiously and ended up with seven times the bank assets it started with, but nobody’s really sure it made much difference.
It’s possible that America and Japan simply haven’t done enough. In each case, the size of the boost has been not much more than 5% of these nations’ income – maybe not enough to convince people that the hard times are over. But the risks of over-egging it are enormous.
The Bank of England already buys bank assets, but usually it only buys the best. Now it’s proposing to buy a lot more, and buy much dodgier ones. So there is a fair chance that the Bank will be spending our money and ending up with a lot of worthless shares and paper promises. Thanks, Alastair.
The most serious threat, though, is the re-emergence of inflation. That’s not the problem right now, when prices are falling. But they’ve fallen rapidly, in the wake of a real drop in confidence about the future. What worries policymakers is that confidence could return just as rapidly. Then we’d all rush out to spend that extra cash the Bank’s given us, and prices would simply shoot up.
What worries me is not that. It’s whether our authorities can actually rein things back in again. Governments and central bankers rather like a bit of inflation: all that extra money makes us feel prosperous, encourages us to spend, and boosts business. But like a drug, the high you get from inflation only persists as long as you take larger and larger doses of it. And larger and larger doses are ultimately destructive. So eventually you have to kick it – and that makes you feel bad for a while. But governments don’t like making us voters feel bad, for obvious reasons.
The problem with ‘quantitative easing’ is that it could deliver a really big dose of inflation, and coming off a really big dose of inflation would make us feel particularly bad for some time. Do our political leaders really have the steel to curb that excess, or will they let us drift into the destructive high-inflation low-output ‘stagflation’ of the 1970s? Well, what do you think?
Money is an incredibly powerful tool. It shouldn’t be used to create a fake boom – as it’s been used in Britain and America for the last fifteen years – and it’s far too potent for economic fine-tuning. This downturn is exceptional, so maybe we should send it to work right now. But only if we believe ourselves strong enough to deal with the consequences, which could be highly destructive if they are not dealt with firmly.
Madsen Pirie on Platform sets out his manifesto for Britain
Anyone who supposes that a dozen years of Gordon Brown’s vandalism can be put right by tweaking a few policies and running things rather more efficiently is mistaken. The parlous state of Britain requires a jump-shift in policy rather than an improved continuity. Proposals which lie beyond the box of the commonly acceptable might not make for good election manifestos, but they could mend a broken economy and a broken society.
My Adam Smith Institute colleague, Dr Eamonn Butler, detailed in his book, The Rotten State of Britain, how bad things have become, and how the optimistic promises of 1997 failed to bring results. The UK, once a model low tax economy now ranks amongst the heavily taxed ones. The pensions system, then the envy or Europe, now faces an unfillable black hole. Where we were promised “education, education, education,” we have lower social mobility and more children leaving school without any meaningful qualifications. In place of the comparatively free society we enjoyed, we now have a society of snoopers, with severe restrictions on our freedom of speech, of assembly, and of the right to peaceful protest.
The counterpart of this critique is a programme of action to set Britain back on the path to prosperity and progress. This week the ASI publishes Zero Base Policy, setting out a shopping list of 33 proposals to put things right.
At the top is tax and the economy. People who earn just over £6,000 pay income tax. This is half the minimum wage and less than a quarter of the average wage. Taxing with one hand means we hand out benefits with the other. There is a word for this: madness. The ASI call is for the low paid to be taken out of income tax altogether, with a threshold for them of £12,000 a year.
Higher up the income scale there is a plethora of rules, qualifications, exemptions and allowances that have doubled to over 10,000 the pages it takes to explain them. The ASI call is for the upper threshold for the 40% rate to be raised in stages to a level at which nobody pays it. This would achieve a single income tax rate of 20%. The government will immediately demand to know what spending cuts will for this, but the answer is that it will pay for itself. More revenue will be raised under the ASI proposals because the tax base will expand massively. Not that there are no savings to be made. Our estimate is that efficiency savings and the cessation of unnecessary programmes could raise at least £100bn.
The highly unpopular Council Tax should be replaced by local sales taxes and locally set business rates, with local budgets requiring electoral approval before they take effect.
Civil liberties are not so far gone that they cannot be saved. We call for a one-year Judicial Commission to review them (in public) and make recommendations. Meanwhile, terror laws should be limited to suspected terrorism, and public surveillance restricted to police and security services only.
The chance for the biggest difference lies in education. It could be the ‘council house sales’ of the next government if it gives parents the right to spend the state educational allowance at any school which is non-selective and charges no additional fees. This is the highly successful Swedish model which so rapidly gained mass support that its opponents abandoned plans to repeal it. It must also be made much easier to start and run new schools, so they can proliferate rapidly as they did in Sweden.
Narcotics remains a controversial area, but it is not controversial to say that current policies have failed. The calls for ‘tougher action’ are calls to do more of what we already know does not work. Addictive narcotics should be medicalized, made available for free consumption at high street clinics subject to medical examination and supervision. Recreational drugs should simply be legalized, subject to restrictions on their production and sale. These simple measures would eliminate a large proportion of UK crimes, and curb the violence of drug gang turf wars.
There are more radical proposals in the ASI shopping list, but right at the end is a call for MPs of English constituencies to constitute the English Parliament, meeting in the Palace of Westminster, choosing a First Minister, and exercising the same powers as those of the Scottish Assembly.
The ASI list is innovative and far-reaching, but it does offer a chance to undo the damage inflicted over the years, and to transform Britain permanently. We do not expect all of them in the first term of the next government, but a start could and should be made.
Published on conservativehome here.
How to promote the free market in 2009
2008 was not an easy year for defenders of the free market. The credit crunch, the banking crisis, and the beginnings of a recession all fuelled the belief that markets are inherently unfair, unstable and destructive. It also gave those on the left the opportunity to resurrect big-state interventionism and, particularly, the economic doctrines of John Maynard Keynes. The idea that government should do less and spend less is, sadly, viewed with suspicion at the best of times, but in an economic downturn it is seen almost as heresy. Every politician feels compelled to ‘do something’ regardless of its consequences. This tendency is reinforced by the 24-hour news media, with its insatiable thirst for new initiatives and dramatic announcements. And so the free market – perhaps for the first time in decades – is on the back foot.
And yet worrying as this is, it also poses an opportunity for defenders of freedom – and particularly those in the think tank world – provided we approach it in the right way. For starters, there is great potential for offering compelling media commentary that runs counter to common wisdom. Markets need defending, and we are the people to do it. We need to ensure that no expansion of government goes unopposed, that no leftist economic fallacy goes unchallenged, and that our ideas reach the widest possible audience. In short, the current economic and political climate gives us the chance to get exposure, be controversial, and get attention. Certainly, there are some people who will never be convinced by our arguments, but there are also huge numbers who would embrace our point of view if only they heard it. That is the challenge in 2009.
What are the key arguments we should be making? Well, the foremost challenge is clearly to oppose Keynesianism and, more specifically, the idea that government can and must ‘stimulate the economy’. There are a number of points here:
(1) We need to make people realize that government spending cannot boost the economy, for the simple reason that every pound it ‘injects’ must first be taxed or borrowed from somewhere else. The government cannot create purchasing power out of thin air. Tax takes money out of the private sector economy. Borrowing does the same. And if the government resorts to printing money, they will succeed only in reducing the value of that already in circulation. [1]
(2) The fact that government cannot create new purchasing power, means that the case for government stimuli rests on the idea that politicians can allocate money better than the market can – an idea that has surely been tested to destruction. We already know that ‘priming the pump’ simply creates temporary and artificially high demand in certain sectors (generally inefficient ones), at the expense of others (typically ones that actually create wealth). This is followed by dislocation and unemployment when the artificial demand inevitably ceases. The abject failure of a series Japanese stimulus packages in the 1990s backs this case up – all their debt-financed infrastructure spending accomplished was to run up debts amounting to 180 percent of GDP.
(3) Debt is a particularly potent issue, and one which people instinctively grasp. Borrowing enormous sums to prop up an economy that has been thrown into crisis by too much debt and too much credit is widely and correctly seen as absurd – not to mention deeply unfair on future generations. It is also unclear that this is really what Keynes advocated. He believed that there should be high taxes, low spending and budget surpluses in boom years (in order to restrain demand and check inflation), followed by tax cuts and increased public spending to boost demand (avoiding deflation) and increase consumer confidence when the economy turned bad. We can argue with some justification that the government can’t have it both ways: high spending and deficits whatever the economic weather! There is also the point that failing to control the public finances now will actually decrease business and consumer confidence, making things even worse. Nick Bosanquet calls this ‘toxic Keynesianism’ – a useful soundbite.
So opposing the Keynesian-revival is probably the key economic task for defenders of freedom in 2009. But is also important that we continue to make the case that it was not unbridled free markets, but rather interventionist governments which caused the 2008 crisis. Interest rates that were held well below the neutral level for far too long caused a boom of cheap credit, fuelling a gigantic asset bubble, which subsequently burst with predictable consequences. Social policy added fuel to the fire: the US Congress’ Community Reinvestment Act and taxpayer backing for Fannie Mae and Freddie Mac were a key driver of the sub-prime mortgage crisis that brought the financial system to its knees. And then there is the complete failure of the regulators to do the job they were paid to do. Legalistic, box-ticking regulation led to the micro-management of firms’ business – and the diversion of enterprise into riskier areas – while completely ignoring the big picture. Perhaps we do need a different kind of regulation, or smarter regulation, but we certainly do not need more of the same.
Of course, it is not enough to simply argue against things: we also need a positive agenda. Unlike politicians, we should not claim that there is anything government can do to directly end the recession. However, we should be arguing for reforms that will make it easier for businesses and individuals to work their way out of the recession. In other words, we should be advocating policies across the board to raise productivity and increase the UK’s economic competitiveness. That means sustainably lower taxes on work, production and investment, balanced by spending restraint rather than increased borrowing. It means reforming the public sector so that it is not such a drain on resources. It means simplifying and reducing the regulatory burden that hampers small businesses. It means addressing infrastructure bottlenecks and liberalising the UK’s highly restrictive planning system. No one policy is a panacea, but the right combination could make a real and lasting difference. The important thing is that we come out of the recession stronger than we went into it – not saddled with debts that will take a generation or two to pay off. [2]
Finally, we should also realize that the economic crisis has sparked a renewed interest in the theories and ideas of the great free-market thinkers – particularly those of the Austrian School. With economics in the news so much, now is the perfect time to educate and engage a new generation in the concepts that lie behind free markets and the free society. It may not change policy now, but in the long-term winning the war of ideas is the most vital task that advocates of liberty face.
[1] See Why Government Spending Does Not Stimulate Economic Growth by Brian M. Riedl, Heritage Foundation (November 2008)[2] See The hole we are in and how to get out of it by Dale Bassett, Professor Nick Bosanquet, Andrew Haldenby, Lucy Parsons & Elizabeth Truss, Reform (November 2008)
What Alistair Darling should have done
Alistair Darling was widely expected to announce a package of tax cuts in his pre-budget report this week, in an effort to stimulate the economy. And a few people actually seem to think he did. In reality though, the Chancellor’s so-called tax cuts were little more than a political smokescreen, a ploy designed to wrong-foot his Conservative opponents and obscure his real agenda – more spending, more borrowing and more tax.
Look at what he proposed. First up, we’re going to get a temporary reduction in VAT to 15 percent. Isn’t that fantastic? A whopping 2.5 percent off! No doubt it will accomplish what high streets full of half-price sales and buy-one-get-one-free offers couldn’t, and get people spending again. Of course, it has also been reported that the Treasury’s figures depend on VAT rising to 18.5 percent in 2011, to pay off all the debt Darling plans to rack up. Thanks, Chancellor, but no thanks.
At least that was an actual tax cut though, if only a temporary one. Most of the measures the government is spinning as tax reductions are nothing of the sort. So the retrospective vehicle excise duty rise is going to be phased in now? Let’s call it a tax cut. No increase in the corporation tax rate for small businesses? Sounds like a tax cut to me. Oh, and the low-income households hit by the 10p tax debacle are going to continue getting their rebate? A tax cut if ever I saw one!
That’s still more than I can say for Darling’s plan to create a new higher-rate tax of 45 percent for those earning more than £150,000. I suppose it’s about time someone tried taxing the rich until their pips squeaked again, but we already know what the outcome is going to be. Most wealthy people will call their accountants and work out how to avoid the increase, while others will just move offshore. Either way, the Exchequer is more likely to lose out than see any increase in revenues.
Then there is the 0.5 percent rise in National Insurance Contributions for both employees and employers, which the Institute of Fiscal Studies has already confirmed will make anyone earning more than £19,000 per annum worse off. For the employee, this is an income tax rise in all but name. And as for the employer, their National Insurance Contributions are a perverse tax on jobs even at the best of times. Making it moreexpensive to employ people is precisely the opposite of what the government should be doing, especially with unemployment predicted to reach 2.9 million by 2010.
But like I said, that’s all just window-dressing. The real story here is that the government’s budget deficit will hit 8-9 percent of GDP over the next couple of years, as the government borrows up to £120bn per annum to fund its profligacy. Public sector debt is likely to top 60 percent of national income (so much for the long-cherished 40 percent ceiling), and even that figure excludes obligations incurred under the public finance initiative (£180bn and counting) and unfunded public sector pensions liabilities (now in excess of £1tn). The taxpayer already shells out £30bn a year servicing government debt, but that’s nothing compared with what’s to come.
And to what end? Are we really meant to believe that public spending is going to stimulate the economy? We’ve tried it before and it doesn’t work. ‘Priming the pump’ simply creates temporary and artificially high demand in certain sectors (generally the inefficient ones), at the expense of others (typically, the ones that actually create wealth). This is followed – as night follows day – by dislocation and unemployment when the artificial demand ceases.
You think borrowing money to renovate schools and hospitals is going to boost the economy, Chancellor? Dream on. Japan spent the nineties trying to kick-start their economy with infrastructure spending and it accomplished nothing except running up debts amounting to 180 per cent of GDP. In the US, massive spending hikes in the 1930s, 1960s and 1970s all failed to increase economic growth rates. And let’s not forget 1970s Britain.
Instead of resurrecting Keynes, Darling should have taken the pre-budget report as an opportunity to put some money back into the struggling private sector economy, where it actually stands a chance of being productive. He could have done this very easily by raising the personal allowance – which currently stands at £6,035 – to £12,000 for every taxpayer. At a stroke that would take 7 million low-paid workers out of income tax altogether, and ensure that no one earning the minimum wage or less would pay income tax at all.
To the average worker, this would be like getting an extra £1,730 a year in gross pay, leaving them £100 per month better off and reversing the substantial falls in disposable income that have occurred over the last 12 months. Indeed, had the Chancellor been feeling prematurely festive he could even have given this measure retrospective effect for the current tax year, which would have meant a one-off ‘Christmas rebate’ of £1,800 for a typical dual-earner family, and another £200 per month thereafter.
Assuming that the higher-rate threshold was kept where it is, and not raised in line with the personal allowance, such a measure would cost the Exchequer around £18.9bn a year in lost revenue – not an inconsiderable sum, but not an overwhelming one either. There would certainly be no need to increase government borrowing to do it: simply forcing government departments to stick to their budgets would save £14bn a year, while cutting quango budgets by 10 percent would save a further £6bn.
Needless to say, that analysis ignores the dynamic effects such a tax cut could have. By freeing up an extra £19bn to be spent or invested in the private sector economy, it could boost growth (or prevent contraction) and therefore increase revenues (or prevent them falling). Raising the personal allowance would also strengthen incentives to work, help to eliminate the ‘benefits trap’ and make low-paid jobs more economic – greatly increasing opportunities for the unemployed.
Of course, even if it didn’t do any of those things, raising the personal allowance would still be worth it, just because it would make everyone’s day-to-day lives that little bit easier. In the face of a recession, isn’t that what government should be aiming for?
Click here to download the ASI’s briefing paper on why the personal allowance should be raised and how to do it.